Investors Bancorp, Inc.
Q1 2021 Earnings Call Transcript

Published: 1 May 2021

[Operator:]

Good morning, and welcome to the Investors Bancorp's First Quarter Earnings Call. 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.

[Kevin Cummings:]

Okay. Thank you, Betsy. Good morning, and welcome to the Investors Bancorp First Quarter Earnings Call for 2021. Last night, the company reported in its press release, net income of $72.3 million or $0.31 per diluted share for the quarter ended March 31, 2021. This compares to $75.1 million or $0.32 per diluted share for the quarter ended December 30 last year and $39.5 million or $0.17 per diluted share for the three months ended March 31, 2020. The fourth quarter of last year, we recorded some noncore transactions that impacted results and improved earnings to $84 million or $0.35 per share. The difference in core operating results of approximately $9 million for the fourth quarter were due to a $6.9 million reduction in prepayment fees, which are included in interest income. This decrease in fees caused a reduction in our net interest margin of eight basis points. Excluding these penalties or these penalty fees, our core margin increased by two basis points. The quarter was also impacted by a reduction in gain on sale of loans in mortgage banking activities of $1.7 million and a more favorable tax rate due to R&D credits recognized in the fourth quarter. These decreases in revenues were offset by cost control by reduced core operating expenses of $2.7 million in the first quarter. All things considered, it was a solid quarter for the bank and a good start to 2021. This time last year, there were major concerns about liquidity, capital and where the credit cycle was going to go. And I'm happy to report that the company declared its cash dividend of $0.14 per share to be paid in May, and this reflects a $0.02 increase from the dividend paid at the height of the pandemic last May of 2020. These results reflect our third straight quarter of double-digit return on tangible equity, and our return on average assets has averaged over 1.07% over that 3-quarter period. When I look back to where we were a year ago, it is remarkable what we have accomplished through this pandemic. A year ago, we were in the midst of the PPP process. Customers and our employees were in fear of touching doorknobs or speaking with each other. There was uncertainty and no one felt comfortable with the normal routines of everyday life.

[Sean Burke:]

Thank you, Kevin. What a difference a year makes. Year-over-year net income and earnings per share were up over 80% with net income for the first quarter totaling $72.3 million or $0.31 per diluted share. Our net interest margin dropped eight basis points quarter-over-quarter to 2.9% with prepayment fees driving the decline. Our core net interest margin, however, expanded two basis points quarter-over-quarter as we continue to benefit from declining deposit costs.

[Kevin Cummings:]

Okay. Before I open up to questions, I just want to -- just give a sort of like the longer view. The last 12 months have been an unbelievable year of social unrest and economic turmoil. And when I look back on the last year, I see the bank's leadership team that has grown in confidence and competence as they've executed through this storm as we continue to provide a platform for our employees for personal growth and successful business careers. There is great optimism in the bank and in the communities that we serve. We continue to serve our customers, employees and our communities in partnership with our foundation.

[Operator:]

Our first question comes from Jared Shaw with Wells Fargo Securities.

[Jared Shaw:]

Good morning, guys. Maybe starting off on the funding side, with the runoff of that higher cost funding, your loan-to-deposit ratio is still pretty high. Are you seeing good trends sort of in the DDA growth that should be sustainable and that we should see maybe a faster pace of deposit growth from here? Or how should we be thinking about funding and deposit growth in light of loan growth expectations?

[Domenick Cama:]

I think that we'll continue to see an increase in our funding on the deposit side. Noninterest-bearing has been a nice surprise for us. This quarter, I think Sean mentioned that we were about $180 million in noninterest-bearing growth. Total deposit growth though was about $350 million in the branches. So I think when you compare that to $1.2 billion in growth in 2020, I think we're on pace to match what we did in 2020.

[Jared Shaw:]

Okay. And then when you look at the loan growth outlook, what category should we see that in? What's your appetite, I guess, for taking on additional New York City CRE at this point? Has pricing improved at all? Or has it gotten tighter, I guess? What does the growth mix outlook look like?

[Domenick Cama:]

Yes. The way the pipeline is broken out, I mean, the CRE pipeline is about $2.4 billion and the C&I pipeline is just about $900 million. That equates to the $3.3 billion Kevin referred to earlier. We have seen some Manhattan business pick up, especially on the CRE side and on the multifamily side. Things are getting better. They're not where they were pre COVID, but they are getting better. And to the extent that we need some additional risk mitigants in the CRE space, we're doing that. We're doing that in the form of PGs. We're doing that in the form of asking customers to put six months of payments in escrow with us. And yes, so we're pretty comfortable. Fortunately, we do a lot of business in New Jersey also, so New Jersey is contributing nicely to the pipeline. But we're not running away from Manhattan at this point, we're simply being more cautious as we make those loans. When you look at a loan that comes in from Manhattan, the first question you ask is, "How were you impacted during the COVID crisis?" And then you work from there.

[Jared Shaw:]

And then just finally for me, we're seeing some deal activity in your markets over the last few weeks. How do you think that impacts your ability, I guess, to potentially hire some people or target some customers that maybe you weren't able to get before? And then what's your outlook in terms of a participant in the M&A environment at this point?

[Domenick Cama:]

Yes. I think, Jared, from the perspective of competitive forces, I think you're exactly right. I mean, while a number of these institutions are doing their deals and trying to integrate their respective financial institutions, I think there'll be an opportunity for us to bring over additional lending teams or to capture some additional business in our market. I mean we're starting to see a little bit of that already, quite honestly. As far as the deal activity, I mean, clearly, I see, and I think we agree as a management team, that there is a compelling reason to do deals like that in terms of just being bigger, having more funds to contribute to technology investments and just being more diversified. So as far as the institutions that I know personally, those in our area, I congratulate them on the deals. I thought they were good deals for both institutions, and I wish them well.

[Kevin Cummings:]

Yes. Jared, I think the strategic opportunities will always be evaluated here, we've always said that. The core pillars of organic growth, M&A, both as either a buyer or a strategic partnership, dividends and stock buybacks. And certainly, those things are the pillars of our strategy moving forward. There is a lot of chatter, we're talking to a lot of people, a lot of opportunities out there, and I think it's an exciting time. But either way, the long-term view is we're in a very good position. And either way, there are great opportunities ahead of us.

[Jared Shaw:]

Thank you, I appreciate it.

[Operator:]

Our next question comes from Mark Fitzgibbon with Piper Sandler.

[Mark Fitzgibbon:]

Hey guys, good morning. Kevin, I love the uplifting comments.

[Kevin Cummings:]

Okay, Mark.

[Mark Fitzgibbon:]

First, I wondered if you could give us any update on the timing of the expected closing on the Berkshire Hills branches, when that might be?

[Domenick Cama:]

We'll probably get that closed before June 30, Mark.

[Mark Fitzgibbon:]

Okay. And then secondly, on the expense front, you guys did a nice job managing cost this quarter. I wondered if you could, Sean, maybe share with us your outlook for expenses for the next quarter or two.

[Sean Burke:]

I think we should be in a very good spot, Mark, there. We've provided a guide, I believe it was around $425 million, and we're doing a bit better than that. So next quarter, I expect it to be in a similar spot. The Berkshire transaction, when it closes, will add some additional cost when that comes in. But as Domenick mentioned, probably not until sometime in the second quarter. So just looking forward to second quarter, expense is probably in a very similar spot that they are in today.

[Mark Fitzgibbon:]

Okay. And then last, given the increased digitization of the business, are you guys thinking more about being proactive with branch consolidations in the rest of your network?

[Domenick Cama:]

Yes, we are, Mark. I think we mentioned in earlier releases, we planned on closing 10 branches. We closed those branches earlier this month, as a matter of fact, I think, on April 9. And so I think that we need to continue to evaluate those opportunities. We continue to develop online products, which that technology and that progress has been moving along nicely. And I think that will be a catalyst for us to continue to trim the branch network around the region.

[Mark Fitzgibbon:]

Thank you.

[Operator:]

Our next question comes from Steven Duong from RBC Capital Markets.

[Steven Duong:]

Hey, good morning guys. Sean, I just want to make sure I heard it right. The prepay income through April so far, was that $4.5 million?

[Sean Burke:]

That's correct. $4.5 million in the month of April.

[Steven Duong:]

Okay. So you're on pace to be above the fourth quarter level then?

[Sean Burke:]

Yes. I wouldn't go that far, Steven. I think the fourth quarter was elevated as far as our guidance for NIM that we gave for the full year, the 3% area. We were modeling in less than where we were in the fourth quarter, candidly. Our budget was $4 million to $5 million of prepayment fees per quarter built into our budget and built into our guidance. But we are seeing a nice rebound there. We do expect the margin to pop back up, maybe eight to 10 basis points in the second quarter.

[Kevin Cummings:]

Usually, it's seasonal in the fourth quarter because of tax reasons, 1031 exchange, whatever it might be, =usually prepayments are highest in the fourth quarter.

[Steven Duong:]

Right. Right. That makes sense. So I guess maybe we just drill down on just the loan yields. If we were to strip out just the prepaid income, I don't know if my calculation is right, but I'm getting your core loan yield down around 13 basis points. Does that sounds right? So I'm just wondering if you maybe just explain what the dynamics were with the core loan yield ex the prepay income.

[Domenick Cama:]

Steven, I think the best way to try to answer that question is just to go through kind of the average coupons that we're seeing based on the categories, four major categories. When we look at resi loans these days, resi loans are coming on the balance sheet at just probably around 3%, I'd put them right there. Multifamily is coming on somewhere between 3 1/8%, 3.125% and 3.20%. CRE is coming on at about 3 1/4% to 3 3/8%. And then C&I, as you know, has become more competitive, especially here in this market, and those yields are coming in somewhere between 3 3/8% and 3 3/4%. So obviously, the interest rate environment has benefited us on the liability side, but clearly, it's having an impact on the asset side, too. So I hope that answers your question.

[Sean Burke:]

And Steven, it's Sean. Your math is approximately correct. And just to add on, where we probably saw the most compression is in our residential portfolio. The current market rates are around the 3% area. Our portfolio is yielding, the residential side was yielding higher than that. And so it's kind of coming back down to the norm. So that's probably the spot where we're seeing the most compression.

[Steven Duong:]

Got it. So I guess, if rates are static, I guess, would you think that we'd just be around this level on the core loan yields?

[Sean Burke:]

Yes. I think that's fair. We took more compression this quarter. And I think moving forward, as we look through the year, we're not expecting to see that much compression on the loan yield side, some but not to the degree that we saw in the first quarter.

[Steven Duong:]

Got it. Okay. And then just last one for me. Just on your borrowings, I know that you're planning to prepay $250 million concurrent with the Berkshire deal this quarter. But you still have, as of right now, about $3.6 billion of borrowings. What are your thoughts about doing more prepayments, given that they're right now over 200 basis points?

[Domenick Cama:]

Yes. Steven, we obviously, we're looking at that. As you point out, we have the $3.5 billion or so at over 2%. So there's an opportunity to pick up some NIM thereby, frankly, burning capital by paying the prepayment fees. We'll look at that. We've been talking about doing a larger trade than the one that we projected for the Berkshire transaction. And so just given the Berkshire transaction, we may supersize, if you will, the prepayments using the Berkshire transaction as a catalyst for doing that.

[Steven Duong:]

Got it, appreciate that. Thank you guys.

[Operator:]

The next question comes from Michael Perito with KBW.

[Michael Perito:]

Hey guys, I appreciate taking your time. I was wondering if, first, you can just expand a little bit more on the residential mortgage gain on sale pipeline, sorry, if I missed it. And is it fair to think that that number could bounce back a little in the second quarter before normalizing presumably over the back half of the year?

[Domenick Cama:]

Are you talking about the income that we generate, the mortgage banking income?

[Michael Perito:]

Yes, the mortgage gain on sale, correct.

[Domenick Cama:]

Yes. Mike, we see activity has slowed on the mortgage banking front, and we think that that number will trend down for the next quarter. As a matter of fact, when we did our budgets, we actually projected that, that number would come down in 2021. So I think the answer is yes, that number will continue to trend down as we head through the rest of the year.

[Sean Burke:]

Mike, it's Sean. I just wanted to add though that, as Domenick mentioned, we are expecting that to trend down. But we are expecting swap fee income to offset some of that decline as we go throughout the year. So that's how we see fee income unfolding, where we're going to lose a little on the mortgage banking side, but we're going to pick up and gain an offset with swap income as we go throughout the year.

[Michael Perito:]

Got it. Thanks for that, and then just lastly, the loan growth, 7% to 9%, pretty strong. How do we balance kind of the provision expense here between the improving economic conditions, but clearly the accelerating loan growth? Do you guys have any kind of initial thoughts on that?

[Sean Burke:]

I think our models were showing, obviously, this quarter, improved economic conditions. We think that can continue to improve if we stay on the current trajectory that we're on. I think the New York City area has been a little slower to improve from a modeling perspective and a forecasting perspective than some other parts of the country. But we do believe it's trending in the right direction. And if we keep on the current path, that will mean maybe when we get toward the back half of the year, there could be more release coming in the provision line item.

[Kevin Cummings:]

I hate to say it, but hopefully, we'll have some loan growth that will offset that release. So we're looking for loan growth, okay?

[Michael Perito:]

Yes. No. I think that would probably be a scenario everyone would be very happy with. Thank you guys for taking my question, I appreciate it.

[Operator:]

Our next question is from Laurie Hunsicker with Compass Point.

[Laurie Hunsicker:]

Yes, hi, good morning, can you hear me now?

[Domenick Cama:]

We can.

[Kevin Cummings:]

Hi, Laurie.

[Laurie Hunsicker:]

Okay. Great. Sorry, don't know what I did. Of your $582 million in deferrals, how much of that is New York City?

[Kevin Cummings:]

$341 million, I believe.

[Laurie Hunsicker:]

Okay. Great. And then will you just remind us, of that, how much is multifamily in New York and how much is office in New York?

[Kevin Cummings:]

One second.

[Domenick Cama:]

Laurie, are you talking about New York City specifically, right, Manhattan, the Manhattan borough?

[Laurie Hunsicker:]

Yes, exactly, New York City-specific. And maybe along those lines, too, just of your $1.2 billion in office, how much of that plays into New York City as well? And if you don't have these, I can follow up with you offline.

[Kevin Cummings:]

Yes. We will follow up with the office. In Manhattan, $88 million is multifamily, CRE is $38 million, lodging is $195 million, C&I loans is 0.

[Laurie Hunsicker:]

C&I is 0. Okay. Great. And the buybacks, love seeing them. Obviously, they were a little slower this quarter. Any comments around that?

[Domenick Cama:]

I think, Laurie, obviously, we saw our stock price accelerate pretty quickly. So it gave us a reason to pause on our buybacks there and just trying to understand how tangible book value would compare to where we're trading on a book value basis. So we'll continue to evaluate that. The stock got up there around $15. So as I said, it just gave us reason to pause and just monitor how stable that would be going forward.

[Laurie Hunsicker:]

Got it. Okay. And then just last question, going back to what Jared asked, too, can you help us think a little bit about M&A? Obviously, it's been a year since we saw you close your last deal. Can you help us think about, as you look forward, whether it's a strategic partnership or you're a buyer or you're on the other side of it, how you think about asset size targets? What makes sense? What's ideal? How big would you go? How do you think about an MOE? How do all those things play into the very exciting M&A landscape we're seeing at the moment? Thanks.

[Kevin Cummings:]

Laurie, I would say yes. Certainly, we're open to any strategic discussions from an MOE. I mean, Berkshire is a $600 million deposit branch acquisition. So if it fits in with the strategy, if you look at the last two transactions, Berkshire is on one side of our franchise, Gold Coast was on the east side of our franchise. And I think we closed the Berkshire deal on April 3, a year ago. In the height of the pandemic, we had get to out there and change all the signage. We were worrying about the police shutting us down from being outside during that period of time. And both those transactions are very promising to us. They're a little on the small size, takes a lot of energy. I think that $7 billion to $15 billion area would be a great lock-on-type transaction to do. But we're open, and we'll do whatever is necessary to enhance the shareholder value of the company. There are a lot of discussions going on, and we are certainly looking at a lot of opportunities in the marketplace.

[Laurie Hunsicker:]

Right. Thanks for taking my questions.

[Kevin Cummings:]

Laurie, just on the numbers, I had said them earlier. The total exposure in Manhattan is $367 million, of which the hotel sector is $196 million; multifamily and CRE are $88 million and $38 million, respectively. And as I mentioned earlier, pretty good sponsorship and improving operations. And they're all paying us interest, too. I want to emphasize that. There's no principal and interest deferral, they're all paying us interest.

[Laurie Hunsicker:]

Okay, thanks.

[Operator:]

Our next question comes from Matthew Breese with Stephens.

[Matthew Breese:]

Good morning.

[Kevin Cummings:]

Hey, Matthew.

[Domenick Cama:]

Good morning, Matthew.

[Matthew Breese:]

I know we hit on a lot of the moving pieces, but maybe more directly talking about the core NIM, so ex prepayment penalty income, how do you think the year kind of unfolds for that metric and the cadence of expansion from here?

[Domenick Cama:]

Matt, I think that we'll continue to see benefits from falling rates, especially in our deposit portfolio. Like for example, we still have some room to go in our government banking portfolio. We're working on that. We still have a number of CD buckets in that are maturing through the year and we'll see some benefit from that. So I think the core NIM will continue to expand. I know there was a lot of focus on the overall NIM and prepayment fees. But we just look at that as being seasonal. But I think you're right, focusing on the core NIM is reflective of the changes that we're making in our balance sheet, where resi and multi are falling and C&I and CRE are going up and noninterest-bearing deposits have hit 20%. So I think we'll continue to see benefit in the core NIM.

[Matthew Breese:]

Got it. Okay. The other question I had was there's two pieces of legislation. In the State of New York, they're talking about this eviction without good cause. That's in committee. It seems like it would impact market rate apartments, and then it seems that President Biden is talking about the 1031 exchange. How do you kind of view these pieces of legislation impacting commercial real estate and multifamily? And how would you kind of assess the loan growth impact potential and credit quality impact potential?

[Kevin Cummings:]

Matt, I think you have to look at it in light of the whole Democratic agenda, capital gains tax, things like that, it's not going to be good for business. So it's certainly not good for economic development, for productivity. It seems like everything is going to be free. And so I certainly don't think it's good for investment in the country. I have a tendency to listen to Fox Business a little too much. And I certainly think that it's certainly going to have a negative impact on business and business investment going forward. But I think getting it through and putting it in operation, you don't want to bite the hand that feeds you, and commercial real estate, especially in the multifamily sector, is a very strong sector and pays a lot of taxes. And they shouldn't bite the hand that feeds them as far as generating tax revenues in the city and the state.

[Matthew Breese:]

Got it, that's all I have. I appreciate you taking my questions. Thank you.

[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:]

Well, thank you for your participation today. I look forward to seeing you all at our shareholders' meeting in May. It will be a virtual meeting again. And I think 2021 is going to be a very strong year for the company, we've had three quarters of double-digit return on equity. And it's probably a record for the company in the last nine months, and I think it will continue throughout 2021. So thank you for your participation today. Have a great day, and enjoy your spring. Be well.

[Operator:]

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