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Investors Bancorp Inc (ISBC)
Q1Â 2019 Earnings Call
April 25, 2019, 11:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good morning, and welcome to the Investors Bancorp, Inc. First Quarter 2019 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.
We'll begin this morning's call with the company's standard forward-looking statement disclosure. On this call, representatives of Investors Bancorp, Inc. may make some forward-looking statements with respect to its financial position, results of operations and business. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond Investors Bancorp's control, are difficult to predict and which can cause actual results to materially differ from those expressed or forecast in these forward-looking statements.
In last night's press release, the company included its safe harbor disclosure and refers you to that statement. That document is incorporated into this presentation. For a more complete discussion of the certain risks and uncertainties affecting Investors Bancorp, please see the sections entitled Risk Factors, Management Discussion and Analysis of Financial Conditions and Results of Operations set forth in Investors Bancorp's filings with the SEC.
And now I'd like to turn the call over to Kevin Cummings, Chairman and CEO of Investors Bancorp. Please go ahead.
Kevin Cummings -- Chief Executive Officer
Thank you, Gary, and good morning, and welcome to the 2019 first quarter Investors Bancorp earnings call. The company reported last night in its earnings release net income of $48.2 million or $0.18 per diluted share for the 3 months ended March 31, 2019. This compares to $57.9 million or $0.20 per share for the first quarter of 2018, and $33.3 million and $0.12 per diluted share for the quarter ended December 31, '18. It should be noted that the fourth quarter of 2018 reflects 2 noncore transactions in that period, which was a loss on the sale of securities of $25.6 million and branch closure costs of $2.2 million net of tax which result in a core earnings of $61.1 million or $0.22 per diluted share.
During the quarter, we continued to manage our capital via the buybacks of approximately 6.2 million shares for $73.7 million or at an average price of $11.88, and during the Board meeting this week, we announced our quarterly dividend of $0.11 per share. This quarter was a challenging quarter as our cost of deposits increased 16 basis points from the fourth quarter of 2018 and 71 basis points from the first quarter last year. Total deposits increased approximately $50 million in 2019 compared to last year's first quarter where we saw a significant decrease in deposits of $812 million due to the impact of the 2017 federal tax law and certain withdrawals of government deposits related to project financings. Over the last 12 months, deposits are up approximately $1.1 billion since the first quarter of '18.
Over the last 5 months, we have changed our retail leadership and have added new resources to our retail deposit and business lending teams. Bill Brown, our Chief Retail Officer, has been recruiting talent to enhance our production in the small business and middle markets. We have hired a senior lender and 3 loan officers to staff our Long Island team, and that group is housed in Melville, New York We recently hired Mike MacIntyre to be our Director of Business Banking. He is charged with building a team of bankers who will focus on business deposits. Mike joins us from a large global bank, and will complement Bill and our efforts to drive lower-cost deposits into the bank.
On the lending side, total loans grew $120 million for the quarter, with commercial loans growing $121 million. Commercial real estate exclusive of multi-family grew $66 million or 1.4%, and the business lending group team grew $41 million or 1.1 -- 1.7% for the quarter. Our asset quality remained strong as net charge-offs for the quarter were $4.1 million compared to recovery -- net recoveries of $1.5 million and net charge-offs of $2.3 million for the quarters ended December 31, 2018 and March 31 of last year. It should be noted that over the last 21 quarters, our total net charge-offs approximated $54 million during a period when our loan portfolio grew from $13 billion to $21.7 billion at March 31, 2018.
We take a proactive approach to our loan workouts, which have minimized losses during a period of significant loan growth. Commercial nonaccrual loans approximate $61 million at March 31 as compared to $65.9 million at year-end and $63.5 million at quarter-end last year. We have 1 relationship consisting of 9 multi-family loans totaling $32 million which are in the process of foreclosure, and we're in a situation where we've placed a receiver to manage the properties. These properties have been written down to net realizable value based on recent appraisals and will be resolved over the coming months with minimum exposure going forward. With an allowance coverage of almost 200%, a strong credit history and excess capital, we believe we are well positioned should the economy decline into next year, in 2020.
We continue to make investments in our digital and technology platforms. During the quarter, we rolled out a new customer management software, Salesforce, which will enhance our sales practice and improve the efficiency of our customer call-in programs. We also made significant progress in improving and upgrading our cash management projects -- products with an enhanced training of staff and product version upgrades. We are testing on-site in attorney's offices a new attorney escrow product and working with our business lines to roll out a new overdraft privilege product for small businesses and commercial checking customers.
It is a very competitive market for deposits in the Northeast, and we need to continue to change, improve and grow our people, products and processes. We have new leadership on the retail teams with Bill Brown and Mike MacIntyre; Dorian Hansen, our Chief Marketing Officer, joined us in late 2017; and Chris Plow (ph) recently joined us as our new Chief Technology Officer. These senior lenders will improve our products and operations. And as we continue to evolve into a stronger commercial bank, they will be very helpful to manage that effort. We believe that this path is the way to enhancing long-term value for our shareholders.
Now I'd like to turn the call over to Sean Burke, our CFO, who will give some commentary on our net interest margin and operating results for the quarter.
Sean Burke -- Chief Financial Officer
Thank you, Kevin. Net interest margin was 2.55%, a decline of 14 basis points from the prior quarter. Margin compression was more than anticipated this quarter due to lower prepayment and trust preferred security payoff income which tend to be less predictable from quarter-to-quarter. Excluding the impact of these 2 items, our net interest margin decreased 6 basis points from the prior quarter. From a loan and deposit growth perspective, the first quarter is typically a slower quarter for us. Loans grew $120 million while deposits increased $50 million. Our loan-to-deposit ratio at March 31 was 123%. Our provision for loan losses totaled $3 million for the quarter compared to $3.5 million in the fourth quarter of 2018. Noninterest income totaled $11.2 million for the quarter, a decrease of $860,000 from the fourth quarter on an adjusted basis. The decline was attributable primarily to equipment leasing-related income.
Noninterest expenses totaled $103.4 million, an increase of $1.2 million from the prior quarter. Excluding the branch closure costs during the fourth quarter, noninterest expenses were up $4 million from the fourth quarter. The increase was primarily driven by employee benefit and medical plans and payroll taxes. Our effective tax rate was 28.6% which increased compared to the prior quarter. Our effective tax rate in the prior quarter was positively impacted by the resetting of our deferred tax assets to reflect the increase in New Jersey state rates as well as a $1 million tax credit resulting from a $1.3 million charitable contribution to the state of New Jersey's Neighborhood Revitalization Tax Credit Program. Our asset quality and capital ratios remained strong. At March 31, our nonperforming asset ratios stood at 0.52%, a slight decrease from 0.55% in the previous quarter.
Now I would like to turn it back over to Kevin for concluding remarks.
Kevin Cummings -- Chief Executive Officer
Thanks, Sean. The operating environment is a challenge for banks like Investors as we continue to evolve to a full-service commercial bank. We believe that growing the bank organically and through prudent acquisitions have served us well as a public company and through our second step 5 years ago. Since our second step, we have grown over $10 billion in assets without an acquisition. We have improved our management team and built a regional bank with a franchise that goes from the suburbs of Philadelphia to North Jersey and the New York metropolitan area.
Back in 2003, when Dom and I joined the bank and the balance sheet was 80% securities, we made a conscious decision not to be a monoline lender but to change the direction and culture of this organization to become a commercial bank. It has and continues to be a great journey. We continue to be a positive force in our communities by being that regional bank that keeps community in banking. With our regulatory issues behind us, we are a stronger company today and better prepared to grow to the next level.
It certainly has not been easy or predictable, but we need to be patient and focused on meeting our long-term objectives. We strive to be a different bank, one that makes a difference with its employees, its customers and the communities that we serve. I'm very proud of what our employees do every day in our communities, volunteering their time and talent to make a difference. It will be this passion and purpose that will serve us well as we navigate through this current interest rate cycle. We are a stronger bank today than when we completed the second step 5 years ago.
On our executive management team, 11 of the 15 members are new to the bank since 2014. We need to execute on our plan and lead our teams with passion and purpose. This team, this leadership team, strives not just to be successful but to be significant. And when you are significant, you create something special. You create a legacy and a purpose. We are on that journey, and I must say, it's not easy, but if it was easy, anyone would do it. We have the team in place to meet our long-term objectives, and driving shareholder value for you, our owners, is that objective.
We appreciate your continued support, and now we'd like to open the lines for questions.
Questions and Answers:
Operator
(Operator Instructions) Our first question comes from Jared Shaw with Wells Fargo Securities. Please go ahead.
Kevin Cummings -- Chief Executive Officer
Hey good morning morning Jerry.
Jared Shaw -- Wells Fargo Securities. -- Analyst
Maybe just starting with the margin, the pressure this quarter was a little more than we had expected. Do you think that we're -- with the Fed pausing now, is the pain from deposit repricing pretty much behind us? Or is that going to stick with us through the next quarter at least? And then also, can you give an update on where new loan origination pricing was for the quarter?
Sean Burke -- Chief Financial Officer
Sure, Jared. This is Sean. It appears we're nearing an inflection point on margin and expect margin to remain relatively stable if the Fed remains on pause, with some modest compression taking place in the second quarter and possible expansion occurring in the fourth quarter.
And with respect to loan rates, and I'll let maybe Domenick comment on this, but I believe where new production is coming on at an average rate, around the 4.5% range, Jared.
Domenick Cama --
Jared, just a couple of comments also on the NIM, just to follow up on what Sean said. Just anecdotally, we are seeing that deposit pressure on cost is subsiding. We don't see as much pressure in our branches as we did during 2018. One of the other changes we made was eliminate any up long-term CD products so that anything that is higher-priced will carry a maturity that is much shorter, and so that should also take some pressure off the NIM.
In terms of pricing on loans, Sean's right. It's about 4.5% on average coming on. We're seeing a little more pressure on the commercial real estate side than we thought we'd see. Just talking to some of our lenders this morning, we found that it's not unusual, especially in the multi-family space, to be out there at 3 3/4, at 3 7/8. Our rate for multi-family today is 4%. So it shows that we're a little bit above the market, and it's reflected in our pipeline. So hopefully, that answers your question about rates.
Jared Shaw -- Wells Fargo Securities. -- Analyst
Yes. That's good color. And then on the prepayment levels, we've seen a couple other banks see lower prepayment levels. I mean with the rates sort of stabilizing here, do you expect to see, especially in the multi-family prepayments, stay low for a while? Or was this more of a first quarter phenomenon?
Domenick Cama --
Well, I think Kevin or Sean said earlier that first quarter is generally a lighter month for us on the loan side. However, this volume dropoff that we've seen in prepays we think also could be somewhat attributed to the potential for the New York City real estate laws that are being kicked around right now. Given the proposals to limit any potential rate increases going forward, there are some parties who historically or traditionally have invested in the multi-family space who are opting not to -- just taking a wait-and-see attitude.
So it's hard to say right now with one quarter, Jared. I think we'd rather see a couple of quarters there to tell us if this is going to be a trend or it's going to -- or it's just due to the first quarter low volume.
Jared Shaw -- Wells Fargo Securities. -- Analyst
And then finally, just for me. With some of the hires and the focus on trying to shift some of the strategy, how long will that take, do you think, to see -- to show up in the numbers in terms of really developing the non-CRE business lending and the business deposits? Is this something that, each quarter, we'll see incremental progress? Or is it going to take either more hiring or a little more investment and be more back-end-weighted in the year?
Domenick Cama --
Yes. I think that -- a couple of things there. When I look at our pipelines for commercial lending, this is the first quarter that I'll tell you that our commercial real estate pipeline is about $750 million and our C&I pipeline is $1 billion. So it's the first time that our C&I pipeline has exceeded our CRE pipeline.
On the hiring front, Kevin talked about some of the hires that have happened. But I looked at 2018 is when we really started to put the foot on the accelerator in terms of hiring. We hired 7 new C&I lenders in 2018. And so far, in the first quarter of this year, we've hired 6. And we filled a regional office in Melville, Long Island. We've put some strategic hires in our South Jersey office. And so I expect that you'll see the C&I production start to accelerate throughout the year. And in fact, when we look at our budgets and when we built our budget for 2019, C&I actually makes up about 50% of the overall production.
Jared Shaw -- Wells Fargo Securities. -- Analyst
Thank you
Operator
The next question comes from Austin Nicholas with Stephens Inc. Please go ahead.
Austin Nicholas -- Stephens Inc. -- Analyst
Hey guys good morning. Maybe just hitting back on the margin for a second. Can we maybe just walk through the, I guess the change from the, call it, 2.60% full year margin, down to the 2.50% full year margin? Is it really just what happened in the first quarter and the shape of the yield curve? And then I guess could you give us maybe some expectation for what the degree of inflection could look like as we exit the year in the fourth quarter on the margin?
Sean Burke -- Chief Financial Officer
Sure. And let me start, Austin, by saying we're not quite ready to revise our margin guidance at this time. As Domenick mentioned, we're only 3 months into the year. But admittedly, based on first quarter trends, I understand where you're getting your figures. And so just to walk through the margin compression, very similar story how we're getting from where we thought we were to where we are in the first quarter, and that is really driven by the choppiness related to prepayment fees and when they come in and the predictability of prepayment fees, and also on trust preferred security-related income, which is another one. It's very hard to predict when that's going to come, but I will tell you that we had TruPS-related income in '17, we had it in '18, and there's no reason to believe we won't have it in '19. It's just hard to predict when that is going to come in.
Austin Nicholas -- Stephens Inc. -- Analyst
Understood. So just to be clear, the net interest margin guidance of 2.60% for the full year, you're not officially adjusting that at this point?
Sean Burke -- Chief Financial Officer
No. I think we will be in a better position in the second -- from the second quarter with 6 months under our belt to really make a call on that. But again admittedly, based on where we are today and given current trends, achieving a 2.6% margin will be more challenging.
Austin Nicholas -- Stephens Inc. -- Analyst
Yes. Understood. Okay. Great. And then I guess on the -- maybe just on the expense outlook, you may have commented on this, I apologize if you did. But kind of that $420 million for the full year, any update on where -- how you're thinking about that number? And could you be a little bit below that?
Sean Burke -- Chief Financial Officer
Could we? It's possible. Again, even on that one, we're not ready to lower our guidance. But there is good visibility with respect to expenses, and we're definitely on track with respect to achieving that target that we set out.
Domenick Cama --
Yes. And Austin, if I can add to that, we -- while we saw the fourth quarter -- the first quarter come in at a level that could beat our number, we also continue to invest in our technology and our digital platforms. And so when we built the budget, we built it in a way that was intended to make those investments throughout the year. So as Sean said, it's a little bit early to modify our outlook there, but we'll certainly keep you posted as we go throughout the year.
Austin Nicholas -- Stephens Inc. -- Analyst
Understood. Okay. And then maybe just one last one on the tax rate. Any update on your expectations there just given some of the changes that are going on in New Jersey?
Sean Burke -- Chief Financial Officer
Yes. It's a good question. And 28.6% is our estimate for 2019 now. Our tax rate estimate for '19 is higher than we expected. It's driven due to the increase in the New Jersey state tax rate. Specifically the state has clarified its tax rules, which eliminated some benefit we were anticipating. So I know we've guided to this 27% area, and it's coming in closer to 28.5%, Austin. But I will say, we are actively looking at opportunities to reduce that tax rate, but I'd say the best number to use right now is 28.6%.
Austin Nicholas -- Stephens Inc. -- Analyst
Okay great. Thanks for taking my questions everyone.
Operator
The next question comes from Collyn Gilbert with KBW. Please go ahead.
Chris O'Connell -- KBW. -- Analyst
Good morning, This is Chris O'Connell filling in for Collyn. I do want to circle back quickly on the trust preferred income. So I think you guys have said last quarter that it's about $2.8 million. Did that drop down to 0 this quarter, or was there some balance there?
Sean Burke -- Chief Financial Officer
I believe it was closer to $3 million in the prior quarter. And you can actually see, the line item to look at, right in held to maturity securities, income related to held to maturity securities, you'll see this bump up in the fourth quarter, and that's related to that trust preferred security paydowns and payoffs. And to answer the second part of the question, yes, that income is 0 for the first quarter of 2019.
Chris O'Connell -- KBW. -- Analyst
Great. Thank you. And then looking a little bit more on the yields. On the borrowed funds, just wondering how that yield was able to stay kind of flat to down 1 basis point this quarter even if the average balance is coming up. Yes.
Sean Burke -- Chief Financial Officer
There's a timing component. We have a municipal deposit base here, and they come in and come out and different points throughout the quarter. And so that drives some of that variance that you're alluding to. But also, the brokered CD market, we have some brokered CDs that we avail ourselves to, and the cost on those has declined somewhat going from last quarter to this quarter. So it's helping to keep our borrowing costs in check.
Chris O'Connell -- KBW. -- Analyst
Okay. And those are held in the borrowings line?
Sean Burke -- Chief Financial Officer
Apologies. You are right. That's on the deposit line. On the borrowing side, we would not receive that benefit there.
Chris O'Connell -- KBW. -- Analyst
Okay. And just wondering -- go ahead.
Domenick Cama --
I was going to say, Chris, that because of -- Sean talked about the municipal deposit business that comes in and out, it's cyclical during the month. And so to the extent that the funds come in, it reduces our need to borrow. However, when it goes out, given again the expected cyclicality of it, the treasurer, the cash management folks will generally borrow shorter term to fund the balance sheet because they know that the municipal deposits will be in the next month, and then they'll pay it off.
Chris O'Connell -- KBW. -- Analyst
Okay, great. And then similarly, just on the cash balance, is that a similar kind of dynamic there? Or it's just fluctuations during the quarter where there's a little over 20 basis point reduction in the cash yield this quarter?
Sean Burke -- Chief Financial Officer
Yes. Same dynamic occurring there, Chris.
Chris O'Connell -- KBW. -- Analyst
Okay. Thank you
Operator
The next question comes from Laurie Hunsicker with Compass Point. Please go ahead.
Laurie Hunsicker -- Compass Point. -- Analyst
Hi thanks. Good morning. Just wanted to go back on the deposits here for a minute, just specifically looking at both the checking as well as the money market piece. And I guess your checking accounts were up linked quarter 21 basis points in terms of that cost. Do you all have any specials that you're running? Or how should we be thinking about those 2 lines?
Domenick Cama --
Yes, we have a CD special that we're running. It's a 7-month product that I talked about. And also, we are running a campaign for a new checking account called YourStyle Plus, and it's a relationship-based product, and we're offering an introductory rate that's tiered anywhere from 1 75 to 2 50 based on the balances. But the product is designed to offer benefits to customers when they have a certain amount of usage, when they have a certain amount of stickiness to them, like direct deposit, ACH payments, things like that.
Sean Burke -- Chief Financial Officer
Laurie, I'm just going to add on. On the interest-bearing checking line item is where we have the vast majority of our municipal deposits, and those are typically tied to sort of benchmark rates, and they're very high betas. And so we had a rate increase in December, and that rate increase is taking effect in the first quarter in the month of January. And so that is really driving the increase in that...
Laurie Hunsicker -- Compass Point. -- Analyst
That's the increase, OK. And those are right around $4 billion? Or do you have an actual number on those?
Sean Burke -- Chief Financial Officer
I don't have that actual number, but that is the right ballpark, Laurie.
Domenick Cama --
Yes, it's about $4 billion, Laurie.
Laurie Hunsicker -- Compass Point. -- Analyst
Okay. And so -- and those are -- I mean fair to say that, that's where it's costing about 1 8 right now?
Sean Burke -- Chief Financial Officer
Yes. Well, it's actually a little higher than that, Laurie. There's the other bucket that remains that drives the cost lower. So...
Laurie Hunsicker -- Compass Point. -- Analyst
Got it.
Sean Burke -- Chief Financial Officer
So I suspect that the remainder of what's in interest-bearing checking in is a pretty low rate. So the good news on the municipal deposits is if the Fed remains on pause, when we look out, there's $4 billion of deposits that don't require repricing, and that would be a huge benefit to us.
Laurie Hunsicker -- Compass Point. -- Analyst
Okay. Great. And then in terms of branch rationalization. Obviously, you closed 4 branches. Are there any branch closures on the drawing board this year? How are you thinking about branch rationalization?
Domenick Cama --
Laurie, there are no branch closures on the horizon at this point for this year.
Laurie Hunsicker -- Compass Point. -- Analyst
Okay. All right. And then obviously, you mentioned growth. You're past your regulatory hurdles. Kevin, can you just refresh us on how you're thinking about M&A here, how you're thinking about being an acquirer? Or are you just focused now on your own balance sheet without adding another bank to it? What's your thoughts?
Kevin Cummings -- Chief Executive Officer
Well, we're certainly out there in the market talking to people, looking at opportunities, but we want to be prudent and concerned with the tangible book value dilution. So I think there are certainly opportunities, and conversations are going on. We want to do what's best for shareholder value, and we'll continue evaluating that process.
Laurie Hunsicker -- Compass Point. -- Analyst
Great. Thanks for taking my questions.
Operator
The next question comes from Matthew Breese with Piper Jaffray. Please go ahead.
Matthew Breese -- Piper Jaffray. -- Analyst
Good morning. I apologize I hopped on late, so I don't mean to be repetitive if you've answered this. But I do know there's been some healthy consternation around the rent guidelines, Board meeting coming up in June and some of the impacts there. So maybe one, if you could provide some thoughts on what you think the outcome could be there. And then two, as it relates to the rent-regulated apartment segment, how much of your multi-family book kind of fits into what they're looking to change?
Domenick Cama --
Matt, on the rent changes that are being proposed, just talking about it this morning, it's hard to say that -- what that will be. Will everything that they're proposing be passed? We don't think so. We don't think that most of it will be passed. But having said that, and I know you said you missed the early part of the call, we did address this earlier on, is that we think it's impacting our pipelines and our volumes of business. We think that it's out there enough that it's given property owners and traditional investors in this space some time to pause and say, "Well, maybe I'm not going to buy the buildings that I expected to buy given the potential for these changes."
In terms of our own pipeline or portfolio and how many apartments we have that fall into these guidelines, it's -- I don't know the answer to that. It's hard to say because we don't really know what changes are going to happen.
Matthew Breese -- Piper Jaffray. -- Analyst
Understood. And well, maybe I could try it this way. Do you think there will be a meaningful impact to the underlying valuation of rent-regulated apartments as a result of this?
Domenick Cama --
I don't think so, Matt, and that's primarily because the valuations that we drive on the buildings right now are based on current NOI. And so we don't anticipate declines in NOIs going forward, just a deceleration of the increases in potential NOI going forward.
Matthew Breese -- Piper Jaffray. -- Analyst
Okay. And just one follow-up here. Could you just remind us -- if we think about your pipeline of multi-family, what kind of LTVs are you underwriting to? And how much protection -- and where I'm going with this is how much protection do you have from potential valuation changes from this?
Domenick Cama --
Well, on an underwriting basis, we underwrite to a 75% LTV unless the customer is trying to take cash out, in which case, we limit the LTV to 70%. When you look at the overall portfolio, we find that the average LTV is in the low 60s.
Matthew Breese -- Piper Jaffray. -- Analyst
Okay that's great color. That's all I need. Thank you.
Domenick Cama --
Thanks Matt.
Operator
This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.
Kevin Cummings -- Chief Executive Officer
Okay. Thank you, Gary. Look, the quarter wasn't what we expected with the net interest margin, with the inverted yield curve. It's been a difficult operating environment for companies in our situation, with our balance sheet. But I'll tell you, we have a strong pipeline on the C&I side and the business side. And with the changes in both our product and the people coming on board, we're still very optimistic for 2019.
I want to thank you all for participating, and I look forward to seeing you out and about throughout the year. Thank you very much.
Thank you very much, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Duration: 36 minutes
Call participants:
Kevin Cummings -- Chief Executive Officer
Sean Burke -- Chief Financial Officer
Jared Shaw -- Wells Fargo Securities. -- Analyst
Domenick Cama --
Austin Nicholas -- Stephens Inc. -- Analyst
Chris O'Connell -- KBW. -- Analyst
Laurie Hunsicker -- Compass Point. -- Analyst
Matthew Breese -- Piper Jaffray. -- Analyst
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