Investors Bancorp's (ISBC) CEO Kevin Cummings on Q2 2016 Results - Earnings Call Transcript

| About: Investors Bancorp, (ISBC)

Investors Bancorp, Inc. (NASDAQ:ISBC)

Q2 2016 Earnings Conference Call

July 28, 2016 11:00 AM ET

Executives

Kevin Cummings – President and Chief Executive Officer

Sean Burke – Senior Vice President and Chief Financial Officer

Domenick Cama – Senior Executive Vice President and Chief Operating Officer

Analysts

Mark Fitzgibbon – Sandler O’Neill

Dave Rochester – Deutsche Bank

Jared Shaw – Wells Fargo Securities

Laurie Hunsicker – Compass Point

Collyn Gilbert – KBW

David Bishop – FIG Partners

Matthew Breese – Piper Jaffray

Paul Gerard – Princeton

Operator

Good morning and welcome to the ISBC Second Quarter 2016 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this call is being recorded.

We will 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 filing with the SEC.

Now I would like to turn the call over to Kevin Cummings, President and CEO of Investors Bancorp.

Kevin Cummings

Thank you, Denise. Good morning and welcome to the 2016 second-quarter Investors Bancorp earnings call. The Company and the Bank had a strong quarter and finished the first half of the year in a strong position with respect to earnings and loan growth on target. We continued to manage the Company in a prudent manner and continued to execute on our business plan of diversifying our balance sheet and leveraging our capital, which we raised in our second step two years ago.

Our tangible capital ratio is now at 14.01%, which compares to 19.7% in June of 2014 and 16.6% last year. We have grown our balance sheet in a conservative manner from $17.5 billion at June 2014 to $21.7 billion at the end of this quarter. This organic growth without an acquisition has allowed us to continue to post solid earnings while continuing to make investments in our risk management structure, technology, and business lines at the Bank.

Earnings for the quarter were $44.4 million, or $0.15 a share, compared to $43.6 million in the first quarter, or $0.14 a share, and $46.14 in the second quarter of last year. For the six months ended June 30 this year, net income totaled $88 million, or $0.29 a share, versus $88.3 million, or $0.26 a share, last year.

In 2015 in the second quarter we recorded a non-core tax benefit relating to New York State taxes of $1.2 million, which resulted in earnings for the first six months of 2015 of $87.1 million. Due to our strong stock buybacks of approximately 10.7 million shares in the second quarter and 12.2 million shares in the first quarter, EPS for the six months ended June 30, 2016, is up 11.5%.

During the second quarter in early May we announced our acquisition of the Bank of Princeton, which operates 13 branches in the Princeton and Philadelphia markets. We believe this franchise complements our Roma GCF acquisitions completed in late 2013 and January 2014 and also gives us a foothold on the deposit side, on the retail side into the Pennsylvania market.

As discussed many times on these calls, our approach to our strategic plan is to use four key levers: organic growth that diversifies our risk and revenue streams, acquisitions that have reasonable earnbacks under five years, and stock buybacks and dividends. We believe we are executing well on our plan and are leveraging our capitals with shareholder interest in mind.

Our loan growth for the quarter was strong and came in at $494 million, or 2.9%. Year to date, our loan growth was $756 million, or 4.5%, which puts us on track for loan growth of $1.5 billion for the year. Commercial loans are up $570 million for the quarter, with multifamily growth of $382 million.

We continue to make inroads on the business lending side with year-over-year growth of $477 million to $1.8 billion, of which $160 million is growth in the current year 2016. These customers, business owners, and middle-market companies are a focus for us as they also give us a better opportunity to bring in deposits versus other lending opportunities. These business loans are owner-occupied commercial mortgages, lines of credit, ABL asset-based lending loans, healthcare loans, and other business credits for local customers in the communities that we serve.

We believe that this segment is an underserved market in the Metro New York/New Jersey region and provides a great opportunity for us as – provides a great opportunity to us as the regulatory environment continues to focus on CRE and especially multifamily exposure across our markets.

With respect to that credit risk, our credit quality remains strong as net charge-offs were minimal for the quarter at $1.3 million.

Our nonaccrual loans totaled approximately $100 million, or 57 basis points, of total loans and 86% of these nonaccrual loans are in the residential and consumer portfolio. The average loan size in this portfolio of residential and home-equity loans is less than $200,000 and that approximates $184,000. We continue to be prudent in our evaluation of these credits as we move them through the extended legal process that we face here in New Jersey to foreclose on these nonperforming loans.

On the commercial side, our nonaccrual loans totaled $13.8 million, or 11 basis points, with the majority of those loans in the CRE portfolio. This group of nonaccrual loans in CRE portfolio total $11.7 million and consists of 33 loans for an average loan of less than $400,000, around $355,000 per loan.

We finished the quarter with our allowance as a percentage of total loans at 1.25% versus 1.26% at March 2016. This relates to a coverage ratio to nonaccrual loans of 220% versus 206% at the end of March.

In light of the current low interest rate environment, which results in historically low cap rates in some of the markets that we lend, the heightened regulatory sensitivity with the announcement that came out in December of 2016 to CRE and multifamily concentrations and the competition that we face in our markets, we will continue to be diligent in our underwriting and credit risk monitoring. As mentioned on previous calls, we are making significant investments in our enterprise risk management infrastructure as we transition from a community bank to a larger regional commercial bank.

We will continue to enhance our risk management function to monitor and measure our credit exposures, but also meet the continued demands in areas such as model risk management, vendor management, the DFAST stress testing, compliance, and BSA. These investments in our risk management will allow us to continue to grow and expand our franchise in a prudent manner.

With respect to our franchise expansion, we opened three branches in New York in the second quarter in Maspeth, Queens; East North Fork, Long Island; and in Greenpoint in Brooklyn. Deposits increased 2%, or $225 million, for the quarter with all of that growth coming in core deposits, which grew from $10.8 million at March 31 to $11.2 billion, almost $450 million in growth. CDs for the quarter are down $224 million, which resulted from a runoff of our promotional special CD rate which we marketed at this time last year in 2015.

Business deposits continued to grow in the quarter as we expand our small business and middle-market penetration. For the quarter, business deposits are up $420 million and now total $3.3 billion at June 30, 2016. 92% of these deposits are core deposits with an average rate of approximately 28 basis points. We are seeing increased competition on both the deposit and loan front, but we will continue to expand our franchise and enhance our product offering.

Now I would like to turn it over to Sean Burke, our CFO, for additional commentary on our results of operations.

Sean Burke

Thank you, Kevin. I would like to briefly review some of our financial highlights for the quarter.

Our loan portfolio grew $494 million to $17.6 billion quarter over quarter, representing 12% growth on an annualized basis. Our pipeline of loans is strong and at June 30 stood at $2.3 billion. We have, however, tightened our credit screen to become more selective in what we book and pull through on that pipeline.

Deposits grew $225 million to $14.4 billion, the growth being driven by non-interest and interest checking products. Asset quality metrics remain strong with most metrics continuing to improve. Nonaccruals to total loans were 0.57% at June 30, down from 0.61% at March 31 and 0.68% at December year-end. Our allowance to total loan ratio was 1.25% at the end of the quarter.

Shifting gears to the income statement, net income for the quarter totaled $44.4 million and increased from $43.6 million in the first quarter, while EPS grew 7% from $0.14 talking $0.15 on a linked-quarter basis. Net interest income for the quarter rose 2% from the prior quarter to $157 million, driven by loan growth which was partially offset by a 1 basis point decrease in margin.

Prepayment penalty income totaled $5.9 million for the quarter versus $4.7 million in the first quarter. Provision for loan losses totaled $5 million for the quarter, which is unchanged from the first quarter.

Non-interest income totaled $11.5 million, an increase of $2.8 million from the first quarter. Factors contributing to the increase in the second quarter include growth in fee and service charges, mortgage banking activity, and financial product sales.

Non-interest expenses totaled $91 million, an increase of $3.9 million from the first quarter. The increase was primarily driven by compensation, benefits, and professional fees related to our risk infrastructure build to support our growth.

Our tax rate was 39% for the second quarter, which is in line with expectations. We’ve repurchased 10.7 million shares during the quarter at an average cost of $11.58 per share.

On that note, I would like to turn it back over to Kevin for some concluding remarks.

Kevin Cummings

Thanks, Sean. 2016 continues to be a transitional year for investors as we continue to grow organically and prepare for the integration of our Bank of Princeton acquisition. As mentioned many times on previous calls, we will execute M&A transactions that enhance shareholder value, have reasonable earnback under both the static and the crossover methods, and provide strategic value franchise expansion for the Bank.

The math is an important part, but we also consider the potential of the target. Our eight acquisitions since 2008 and the parameters of the Bank of Princeton transaction are a good measure of our views and our execution capabilities.

We believe in singles and doubles are the way to go, and like the Princeton transaction and our eight previous acquisitions, that’s really our views on M&A in this marketplace. As we continue to execute on our strategic plan, we will not venture away from our core business activities. They are: smart organic growth, M&A that enhances our franchise and shareholder value, stock buybacks, and dividends to our shareholders.

We will continue to invest in technology, risk management, and our people. We are a leader in the New York/New Jersey metropolitan area. We are the largest bank headquartered in New Jersey and we will continue to be a difference-maker to our customers and the communities that we serve.

I want to thank you all for your continued interest and support and investment in our company. Now I would like to open it up for questions. Thank you very much.

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. [Operator Instructions] And we’ve a question from Mark Fitzgibbon from Sandler O’Neill. Please go ahead.

Mark Fitzgibbon

Good morning. I wondered if you could help us think through the run rate for operating expenses. Is $91 million, do you think, a good run rate going forward for, say, third quarter?

Domenick Cama

I think, Mark, that is probably a good run rate for the remainder of the – actually it’s a good run rate for the remainder of the year. We continue to build our operational and risk management infrastructure.

Mark Fitzgibbon

Okay. Then, secondly, I think Sean said the pipeline was $2.3 billion. Could you perhaps breakdown for us what the mix of that pipeline looks like and maybe the average yields on it?

Sean Burke

In terms of the mix, Mark – this is Sean – multi makes up 35% of that pipeline, C&I 31%, CRE 27%, and the remainder residential.

Mark Fitzgibbon

And average yields are maybe up a little bit from Q2?

Domenick Cama

Average yields – Mark, average yields on the multifamily portfolio are about 3.70% and the C&I portfolio is just a touch above 4%.

Mark Fitzgibbon

Great, thank you.

Operator

And our next question is from Dave Rochester from Deutsche Bank. Please go ahead.

Dave Rochester

Good morning, guys. Just a quick follow-up question on the expenses. How much more in the way of expense do you expect as you are enhancing systems and whatnot?

Domenick Cama

How much of the expense is due to enhancing systems?

Dave Rochester

Yes, just in the run rate of $91 million, I was just curious how much of that is building out BSA-AML and whatnot, just the regulatory enhancements you’re making.

Kevin Cummings

I don’t have the exact figure in front of me, but ballpark is probably in the $3 million to $4 million range.

Dave Rochester

Perfect, thanks. Then can you just talk about your outlook on the NIM in the lower rate environment? Are you guys expecting a little bit further pressure here or, just given where you are seeing new money yields, are you expecting maybe for stability?

Domenick Cama

I think we always expect that we will see lower NIMs here, Dave, just again given the interest rate environment. As we put on new loans, we are putting new loans on at 3.25% with an average of that yield of 3.78%. That always speaks to lower NIM.

We’re hoping to control deposit costs for the remainder of the year. We think that that will help maintain some stability in the NIM as we are seeing some of these high deposit maturities mature and rollover into lower-costing deposits.

Dave Rochester

When you say…

Domenick Cama

I think it’s safe to say that we will probably be always in that 2.98% to 3.01% range for NIM.

Sean Burke

What I would just add to that, Dave, is I think margin – from our budgeting perspective, we have been pretty close; tracking a little ahead of that. I think the guidance that we gave was a margin for the year of around 3% and I think that’s going to hold. But we will, and we do, expect to see some margin compression.

Dave Rochester

You were saying new money yields was 3.25%. Was that just for the 5-1 ARMs and multifamily or is that all-in?

Domenick Cama

That’s the multifamily. The all-in is probably a little higher, but with about 45% of the closings being in the multifamily space, that’s having a negative impact. Even residential mortgages, average rates there are 3 3/8% to 3 1/2%, so that’s also having a dilutive effect on the margin.

Dave Rochester

And you were saying I guess the portfolio yield for C&I is around 4%. Is that where you are seeing new product come in as well?

Domenick Cama

No, the 4% is what we are seeing in new production.

Dave Rochester

New production, okay; got you. Great. All right, thanks, guys. Appreciate it.

Operator

The next question is from Jared Shaw from Wells Fargo Securities. Please go ahead.

Jared Shaw

Good morning. Just touching again on some of the enhancements that you are making to the systems. When I look at the growth of commercial real estate as a concentration of capital, that’s continuing to move up.

Once you’ve made – once you’ve finalized these investments, how much more growth do you think you could see in CRE and multifamily as a percentage of the portfolio on capital? Right now you were at it looks like over 3.25% – I meant, sorry, 325%. Would you be willing to take that up to like 500% concentration? What should we be looking at for a cap on the CRE?

Domenick Cama

I don’t think we are in a position to answer that question, Jared, at this point. Obviously, a lot has to do with our outlook on the market; has to do with our credit risk build and our infrastructure for risk management. And so at this point I am uncomfortable trying to give guidance on what that number could grow to.

Jared Shaw

Okay, I understand that. What about in terms of how long do you think it will take to fully implement these new systems so that at some point you could decide how high you want to take it? What’s the timeframe for rolling out all these new initiatives?

Domenick Cama

I think that we will probably be done close to the end of 2016.

Sean Burke

What I would add to that, Jared, is we’re making these investments quickly and rapidly and so you see the uptick in expenses for the quarter. Part of that is the pace that we are running at in order to do it quickly.

Jared Shaw

Sure. So then once we are into 2017, should we expect to see that professional line item go back to maybe more where it was in the high $2 million range on a quarterly basis?

Sean Burke

Yes, that’s a very accurate statement.

Jared Shaw

Okay. Then looking at the C&I loans, it looks like the growth there has slowed down a little bit compared to where we were last year. Is that more just a function of the market or is that a function of pricing? And at some point should we see – expect to see the growth rate on the C&I portfolio start picking up again?

Domenick Cama

Yes, and I think it was due to the market because the production and closings have picked up significantly already. As Sean mentioned, the C&I portfolio makes up about 35% of the overall pipeline. I spoke to the guy heading our C&I group this morning and, despite significant number of closings for the month, his pipeline has already gone back to where it was prior to those closings. So we are optimistic about the continued growth in that C&I market going forward for the rest of the year.

Sean Burke

A lot of times the first quarter is slow because you wait on financial statements to come in from a lot of these privately-held companies and it picks up in the second half of the year.

Jared Shaw

Finally, on the buybacks, should we expect to see or could we see that be completed in 2016, the current authorization?

Kevin Cummings

Part of that, Jared, there are some restrictions in terms of what you can buy back when you have a deal pending, and so we operate under those constraints. And so there are some limitations from that perspective. While we like the stock and continue to believe that it’s a good buy at the levels that we are trading at, we can’t be as aggressive as we may like to be.

Jared Shaw

You mean like a 10b-5 type program?

Kevin Cummings

No, not a 10b-5. There are restrictions after you announce the transaction. You have to follow the same pattern prior to the acquisition announcement, and so you are really not allowed to deviate in a meaningful way from your pattern prior to the acquisition announcement. Even if we saw a dip in the market and we wanted to buy it back at very aggressive levels, we would be unable to do that.

Jared Shaw

Okay, got it. Thank you.

Operator

Our next question is from Laurie Hunsicker from Compass Point. Please go ahead.

Laurie Hunsicker

Thanks, good morning. I wonder if we could just go back to margins. As I look at your 3.04% for the quarter you had outsized prepayments; it takes me down to a 2.93%. So as we think about the margin for the back half of the year, it could theoretically be running in that close to 2.9%, mid-2.9%s run rate?

When you talk about margin pressure – that would still bring you to a, round numbers, of 3% for the full year. How should we be thinking about that with the prepay income in there?

Kevin Cummings

So I think the number 2.93%, that’s if you strip out all the prepayment income. We don’t think that’s going away entirely, but you are right in the sense that some of our margin is being driven by – from quarter to quarter is being driven by prepayment penalty income increase quarter over quarter. But the guidance that we are giving in terms of margin around that 3% area is inclusive of prepayment penalty income.

Laurie Hunsicker

Okay, great. And then in terms of loan-loss provisioning, you still have been putting on great growth. At what point – or maybe how do you think about your reserves to loans? How are you looking at that? Do you all have a target?

Kevin Cummings

No targets, Laurie. I think there’s – we follow the accounting guidance and you really don’t have latitude what you do there. We continue to believe that our allowance is appropriate and as we – if we see asset quality continue to improve, I think you will see our allowance kind of hang in the same ZIP Code that it’s in.

If we were to see losses pick up, you are going to see provisioning expense that might pick up along with that. But right now, as you’ve seen our non-performers and asset volumetrics improve, you’ve seen a slight decline in the allowance coverage as a percent of total loans.

Laurie Hunsicker

Okay. Then moving over to de novos, you’ve done six this year. Are you guys still on track to do 10 to 14 this year, total?

Kevin Cummings

Yes.

Laurie Hunsicker

Then what about 2017? Do you have any plans for de novos then, or is it stepping back?

Kevin Cummings

We do, but it’s too early to determine exactly how many de novos we will have.

Sean Burke

But can I add? It’s below the number that we have targeted for this year.

Laurie Hunsicker

Then I guess, if we rewind back to 2015, to date you have done about a dozen of these de novos. Do you have what that has brought in so far in deposits?

Or do you have how you are tracking these de novos? Do you have any data points you can share with us on some of the newer ones that have opened? How they performed? If they’re breakeven?

Kevin Cummings

I don’t have the branch totals in front of me, Laurie. I can certainly – we can look into that but generally what we see is in the first year our branches are generally generating about $20 million in deposits. Sort of $15 million to $20 million in deposits in the first full year and you will see that continue. So by, let’s call it, year three you are kind of in the $50 million to $60 million range in terms of total deposits.

That trend has held true for the newer branches that we are putting on as well. I’d have to dig into all the individual numbers to really understand, but I think those comments really hold with respect to all the new branch activity.

Laurie Hunsicker

Okay, okay. Then I guess how do you think about – or I guess, Kevin, back to your comment on you believe in singles and doubles with respect to acquisition.

Can you just update us in terms of what is the sweet spot of franchises you’re looking for? Is it more along the lines like Bank of Princeton, $1 billion in assets? What’s the range that you are potentially entertaining?

Kevin Cummings

Certainly deals of $1 billion, but really deposit-rich organizations that enhance the deposit franchise. And it could be anywhere from $1 billion to $5 billion. And looking in the – not going down to Florida or anything like that; that are contiguous to our geographic franchise.

Laurie Hunsicker

Obviously you had mentioned before with the real focus on Philly. Philly is still a focus; Long Island is still a focus. Would you go outside of that? Would you come further south? Would you head up into New England? How do you think about that?

Kevin Cummings

I think certainly that are contiguous to our franchise. That means I’m not going to Washington DC or Boston.

Laurie Hunsicker

Okay, great. I will leave it there, thanks.

Operator

Our next question is from Collyn Gilbert from KBW. Please go ahead.

Collyn Gilbert

Thanks. Good morning, everyone. Just to go back to the loan discussion and the pipeline mix that you are seeing and then how that compares to what we saw in the second quarter, is it just – you guys spoke to this a little bit, but I just want make sure I understand. Because the second quarter did see a lot of growth in CRE and multifamily, but it sounds like the pipeline is a definitive change from that.

Is that – is your saying just the timing on what was going on in some of the C&I or is that reflective of, Dom, some of your points or maybe, Kevin, you made them just in terms of pulling back in certain areas? But just wanting to try to understand how that dynamic is shifting fairly quickly from quarter to quarter.

Domenick Cama

Collyn, I think first quarter was slow in the C&I space. Our efforts continue to be to diversify the loan portfolio and so I wouldn’t say that there is increased effort to do C&I, because that effort has been there all along.

In terms of our progress, our progress has been good and it comes at a good time. Obviously, there is some regulatory concern about the multifamily space in New York, which is an area that we have been strong in. And we also have the same concern in terms of the lower cap rates.

And so we are happy that the pipeline is taking shape in much the way it is, because what it’s doing is helping to continue the diversification and to decrease our reliance on multifamily loans for the growth going forward.

Collyn Gilbert

Okay, that’s helpful. Then just one more follow-up on the growth dynamic. How would you compare the opportunities that you are seeing in Philadelphia from New Jersey? Are you seeing better opportunities in the Philadelphia market?

Domenick Cama

I think when we look at Philadelphia and the regions surrounding it, we do find good opportunities right in Philadelphia. And when I say that I mean Philadelphia proper. We don’t see as many opportunities in some of the New Jersey suburbs of Philadelphia.

We stretch into – down into the Camden and Gloucester County and Burlington County region. And some of those transactions or some of the deals that come from that area are not as strong as the ones that come from Center City Philadelphia.

Collyn Gilbert

Okay, that’s very helpful. Then just back to the expenses and, Sean, your comment that you guys are moving the expense items fairly quickly and making these investments fairly quickly. Is this – are you responding to something specific in this regard?

I guess my question is because it – I think when the guidance for the expenses in the first quarter was to hold in a relative range; you had indicated maybe some tweaks here and there. But it sounds like now we are settling out at an even higher range and I guess, frankly, my fear is we come third quarter and then we are hitting a new higher range. So I’m just trying to understand what is it that’s causing this quick uptick in expenses, maybe even beyond what you all had anticipated.

Domenick Cama

Collyn, this is Domenick. I just want to comment on that. In the fourth quarter of 2015, we hired a new Chief Risk Officer and the build out of the risk management structure was budgeted for – was reevaluated in the early part of 2016.

Since then we have looked – we have talked about strategically how we are going to continue to grow the loan portfolio and the things that we need to put in place in order to continue to grow that loan portfolio, especially as it relates to less reliance on multifamily lending and more reliance on C&I and commercial real estate. As a result, we are looking at new ways to go through our processing and that has entailed bringing in some additional consultants and some people to help us build out what we call a three-line-of-defense model for our credit risk and lending operations.

And so those were some things that we did not anticipate early on in the risk management infrastructure build, but certainly have come now to fruition. And when Sean referred to the fact that that has ramped up, he means really ramped up because we started looking at that only in April and May.

Collyn Gilbert

Okay, that’s helpful. Then just...

Domenick Cama

We believe that that will be – those expenses will have run through by the end of 2016 and we shouldn’t see them at those elevated levels through 2017.

Collyn Gilbert

Okay, that’s great. That’s helpful. Then just one final question. Is there any opportunity that you guys are seeing to build out some of those fee lines and I guess more penetration maybe that’s coming from your customer accounts post the systems conversion that you guys did last year? Just kind of curious to see if there’s any potential momentum that can be extracted in those lines

Domenick Cama

There has been a task force actually at the bank in order to evaluate and analyze where our non-interest income – how it can increase. And so that, I’m happy to say, has started to show some results. I’m not prepared to discuss those with you. I don’t have all of the numbers and they are not quite built out yet.

But in my meetings with the leader of that task force, he has already indicated that we’ve found some low-hanging fruit that’s going to result in some non-interest income increases going forward. So that’s something that we’ve started working on in the first quarter of 2016 and continues throughout the year. But the answer to your question is, yes, we do expect to see a pickup in that line item.

Collyn Gilbert

Okay, that’s great. That’s helpful. Thank you, guys.

Operator

And your next question is from David Bishop from FIG Partners. Please go ahead.

David Bishop

Good morning, Kevin. A question for you. You got a fairly large acquisition taking place on the island. Clearly there’s always typical disruption from the employee and client side.

Any thoughts in terms of getting aggressive? I don’t know if there’s any sort of lending teams or personnel that you have circled that you think will be an opportunity to bolster loan growth out on the island?

Domenick Cama

The timing is perfect, David. We just recently opened a new lending production office and staffed it out in the Melville, Long Island, region. I’m not sure if you know where Melville is, but it’s adjacent to the institution that you referred to that’s being acquired. And so we are expecting to be able to pick up some benefit as a result of the disruption that will take place from those potential deals.

David Bishop

Got it. Then just circling back to multifamily and specifically New York, New York City. Given the regulatory browbeating since December, have you seen any sort of cross-currents of improvement, either on pricing or structure? Is it still just status quo in terms of the competitive environment?

Domenick Cama

You know, it’s interesting. I was thinking about this morning in preparing for the call. And I think the regulatory scrutiny, and certainly our own uncertainty about where the market is, is really resulted in a more well-defined lending environment.

What I mean by that is we are seeing less lenders doing things that were not good from an underwriting perspective and what that means is that we are seeing less loans being made as IOs. We are seeing loans being made at higher cap rates, despite what the appraisals say.

And so in terms of the looseness, if you will, of the underwriting and the competitive environment, we think that the regulatory scrutiny has been good to help bring guys in line and bring banks in line and make them do more prudent lending.

Kevin Cummings

We’ve seen it ourselves in our own portfolio, our interest-only portfolio was probably last year up around – in the multifamily and commercial real estate space 14%, just a little bit over 14% and it’s down around 7% today.

David Bishop

Great, thank you for the color.

Operator

And our next question is from Matthew Breese from Piper Jaffray. Please go ahead.

Matthew Breese

Morning, everybody. In your opening remarks, you noted that you are being more selective on what gets pulled in from the loan pipeline. Can you give us some examples of the changes you are making to be more selective? And with that, what is the loan growth outlook for the rest of the year?

Domenick Cama

We have reduced and limited the loans that we will make with interest-only characteristics. In the past, we’ve been able to go out to a couple of years, three years. We’ve scaled that back, so we will not entertain loans that have longer than a one-year IO period.

We also, because of our franchise in the southern New Jersey market – we go down through the suburbs of – the New Jersey suburbs of Philadelphia – we have entertained some loans in the Maryland and Delaware markets. And we have restricted those types of loans. We won’t entertain those types of loans anymore.

So those are some of the changes that we have made in order to be more selective, as Kevin described it. In addition, in terms of the projections for the year I think we are going to hold steady at that $1.5 billion. We think that that $1.5 billion is probably a good number.

Kevin Cummings

Also in our underwriting process, we are stress testing the loans with respect to cap rates and interest rates and looking at things a little more closely in the underwriting process.

Matthew Breese

Then just thinking about the loan-to-deposit ratio up here at 120% and given the loan growth outlook, is that a limiting factor on how much you can put on the books? I know the sell-side looks at a quite a bit. Is that something that – is that a metric that you look at and measure yourself by?

Domenick Cama

We look at that loan-to-deposit ratio number very frequently. It’s something that we used to help manage the Company by. And it does have some volatility because of the fact that we have a large municipal deposit portfolio that goes out – money goes out in order to pay expenses for the municipality, but then comes right back. It comes right back when taxes are being paid by the residents of the municipality. And so we manage the number.

I think a better way, unfortunately, when we display the number, we display it at a point in time – at a quarter-end point in time and sometimes that doesn’t give the right picture. But when we look at it on an average basis over the quarter and over the year, it is reasonable. But there’s no question that we look at the number and manage the Company within some guidelines that we have set here for that number.

Matthew Breese

Is there an upper limit where you wouldn’t take it above that you could share with us?

Domenick Cama

We’ve said publicly that we are willing to go to about 130%. We try to keep it below 125%, but just to give us some flexibility, our own internal guidelines allow us to go to 130%.

Matthew Breese

Got it, okay. Then thinking about your commentary before on non-interest income, I saw this quarter there was an uptick in other income and, in particular, there is like a $700,000 increase related to non-depository investment products. Is that one of the areas you are looking to improve? And is the $708,000 we saw this quarter, is that a sustainable number?

Domenick Cama

Yes, as a matter of fact, it is. That group that helps to produce that income has had some very good months over the last few months. They have had some good hires and we think that that number is sustainable going forward.

Matthew Breese

Okay, got it. That’s all I had, thank you very much.

Operator

And our next question is from Paul Gerard from Princeton. Please go ahead.

Paul Gerard

Good morning, everybody. I have two questions. First, are you aware of the notice of – filing of change of control notice with the FDIC with the Bank of Princeton? Have you been contacted by James Michael Goodson yet?

Domenick Cama

We are aware of the filing; however, we have not been contacted by anyone.

Paul Gerard

Will this filing in any way change your attitude or behavior towards the Bank of Princeton acquisition?

Domenick Cama

Absolutely not, absolutely not. We still think it’s a good transaction for us. We believe in it and we feel very good about it.

Paul Gerard

Thank you.

Operator

Ladies and gentlemen, this will conclude today’s question-and-answer session. I would like to turn the conference back over to management for any closing remarks at this time.

Kevin Cummings

Okay. The second quarter was a strong quarter for us. We are very happy with the results. We continue to work in a dynamic environment, in a dynamic economy and we look forward to the last – second half of the year.

I want to thank you for your participation on the call and I wish you to enjoy the rest of the summer. We will see you on the road or see you or talk to you in the October meeting. Okay, thank you very much and enjoy the rest of your summer.

Operator

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect your lines.

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