Investors Bancorp, Inc.
Q4 2020 Earnings Call Transcript

Published: 28 Jan 2021

[Operator:]

Good morning, and welcome to the Investors Bancorp's Fourth Quarter 2020 Earnings Conference Call. All participants will be in a listen-only mode. . After today's presentation there will be an opportunity to ask questions. . We'll begin this morning's call with the company's standard forward-looking statement disclosure. On this call, representatives of Investors Bancorp Incorporated 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:]

Thank you, Gary, and good morning and welcome to the Investors Bancorp's fourth quarter earnings call. Last night, the company reported in its press release net income of $75.1 million or $0.32 per diluted share for the three months ended December 31, 2020. This compares to $64.3 million or $0.27 per diluted share for the three months ended in the third quarter September 30, and $48.7 million or $0.19 per diluted share for the three months ended December 31, 2019. These results represent a 17% increase in earnings from the third quarter of 2020 and a 54% increase over the fourth quarter of 2019. On an EPS basis, the increase in earnings represents 19% increase over the linked quarter and a 68% increase over the prior-year's quarter. There were non-core transactions that impacted our fourth quarter and our results for this year. During the quarter, we recorded a gain from two sale leaseback transactions totaling $22.8 million, which was offset by the early extinguishment of long-term borrowings of $44.1 million in expense. This transaction will have a positive effect on our net interest margin in future years and especially 2021. In addition, in the fourth quarter, we also recorded a restructuring charge of $11.7 million with the anticipated closure of 10 branches, which will result in cost savings of approximately $4 million on an annual basis in the future. Taking these transactions into effect and the related tax impact, our core operating earnings for the fourth quarter of 2020 was $84 million or $0.35 per diluted share, which reflects a 1.27% return on average assets and a return on tangible equity of 13% for the quarter. On an annual basis, in addition to the items previously mentioned, we also had a transaction costs related to our acquisition of Gold Coast Bank in the second quarter, which negatively impacted earnings by approximately $3.6 billion earlier in the year. Taking all these items into effect, plus the related tax impact, earnings or core earnings were $234 million and $0.99 per diluted share for the year-ended December 31, 2020.

[Sean Burke:]

Thank you, Kevin. Net interest margin increased 19 basis points to 2.98% in the fourth quarter; our core margin expanded 16 basis points. Declining deposit costs, cash balances plus the extinguishment of wholesale funding drove the improvement. Total non-interest income totaled $45.8 million, an increase of $25.9 million quarter-over-quarter. Excluding gains on our sale leaseback transactions in the quarter, non-interest income totaled $22.6 million, an increase of $2.7 million quarter-over-quarter, driven largely by continued strong mortgage banking activity and customer swap fees. With respect to non-interest expenses, excluding $23 million of costs from the early extinguishment of debt, $12 million of branch closure costs, and $1 million of a tax credit investment, non-interest expenses for the quarter were $107 million, an increase of $3 million compared to the third quarter. The increase was primarily driven by incentive compensation, given strong fourth quarter results. Provision for credit losses was a negative $2.7 million for the fourth quarter compared to $8.3 million for the third quarter. The decrease was driven primarily by an improving economic forecast and net loan recoveries in the quarter of $2 million. Total loan balances increased $125 million quarter-over-quarter, inclusive of the sale of our PPP loans totaling $328 million. Excluding the sale of PPP loans, C&I loans grew $505 million, or 15% quarter-over-quarter. Total deposits were up $422 million quarter-over-quarter, including non-interest bearing deposits, which were up $318 million or 10% quarter-over-quarter. Our percentage of non-interest bearing deposits to total deposits improved to 19% at year-end 2020 compared to 14% a year-ago. During the quarter, we extinguished $1 billion in wholesale funding at an average cost of approximately 2%. Year-to-date, borrowings were down $2.5 billion and our ratio of borrowings to assets declined to 13% from 22% a year-ago. Asset quality, liquidity and capital continued to remain in a solid position at quarter-end. Non-accrual loans represented 0.51% of total loans at December 31, 2020, compared to 0.63% at September 30, while our allowance for credit losses to loans remained unchanged at 1.44%.

[Kevin Cummings:]

Okay. Thanks, Sean. In total, what a year 2020 has been. We've gone from unbelievable fear and uncertainty in the early part of the first quarter to 2021, a year of great possibilities. Having finished consecutive quarters of double-digit return on tangible equity, we're pleased but not satisfied with our results. We're hopeful with the rollout of the vaccine and are we're well-positioned to take advantage of the opportunities before us. We are very optimistic and look forward to this upcoming year. So now I'd like to turn the meeting over to questions and open up the line. Gary?

[Operator:]

We'll now begin the question-and-answer session. . The first question is from Mark Fitzgibbon with Piper Sandler. Please go ahead.

[Mark Fitzgibbon:]

Hey, guys. Good morning. Sean, just to clarify, did you give NIM guidance? I think I missed that when you were saying.

[Sean Burke:]

Yes, Mark. For the full-year 2021, our guidance was 3% area.

[Mark Fitzgibbon:]

Okay, great. And then secondly of the loans you have on deferral, what is the expiration schedule, those deferrals look like over the fourth quarter?

[Kevin Cummings:]

Hey Mark, a number of the loans mature, some due sometime in November and December, and we have a chunk coming due in April also. So I would say of the $635 million commercial loans, approximately 20% is coming due in the middle of the year, and about 70% is coming due towards the end of 2021. And the rest is scattered throughout the year, but a big chunk coming due at the end of the year.

[Mark Fitzgibbon:]

Okay. And then, Dom, you guys have benefited to a great degree from the declining rates, it's certainly benefited your margin. At what point would you expect to start kind of reducing liability sensitivity and positioning the balance sheet for higher rates?

[Domenick Cama:]

Well, we've already started doing that Mark. We were doing that in 2020 as we saw rates come down. So significantly, we entered into a number of swap transactions that had an average costs ranging anywhere from 55 basis points to 65 basis points. In addition, we have also positioned the loan portfolio where we're doing more customer-facing swaps. And so we've reduced our liability sensitivity at year-over-year and we still have some work to do. But we think we're in a pretty good position for the next few years. And we continue to look at ways to reduce that liability sensitivity.

[Mark Fitzgibbon:]

Thank you. And then last question is on M&A. I wonder, it strikes me that 2021 could be a fairly active year for M&A? How are you guys thinking about it? What are sort of your priorities? And what would be most appealing from the acquisition or sales standpoint in a potential partner?

[Domenick Cama:]

Yes. I think Mark; we want to continue to take the bank into a point of being more commercial like. And so bank that can add obviously, more non-interest bearing deposits, more C&I type loans, those are appealing to us because ultimately, we believe that being more commercial bank like and reducing our reliance on resi, and multifamily is a better way to go both from an ROE perspective and from a valuation perspective.

[Operator:]

The next question is from Steven Duong with RBC Capital Markets. Please go ahead.

[Steven Duong:]

Hey, just want to go into your 6% to 10% loan guidance. I assume that includes the $300 million or so in the Berkshire acquisition?

[Kevin Cummings:]

Yes.

[Steven Duong:]

Okay. And I guess if you were to strip that out, I guess where do you see the loan growth coming from primarily, you had such a really strong C&I this quarter, maybe just give us some more color and then and we're seeing that as a read-through for this year?

[Kevin Cummings:]

Yes, it's a good question, Steve. We see the growth coming primarily from the commercial real estate sector, and C&I sector. As you point out, C&I had a strong year for us, even without PPP. And we're continuing our focus there. We've seen our multifamily spreads widen over the last six months. And so while we took a backseat to multifamily lending in the early part of the year, we've fully ramped down our CRE and our multifamily business up again. And to the point where our CRE pipelines these days are about $1.04 billion and C&I is about $600 million. So the C&I pipeline at its peak was probably closer to a $1 billion and so we have some building to do there. But CRE pipeline, we think is in a good spot. And that will help us grow in 2021. We continue to see residential run-off to some degree. And so we think that'll be more than offset by the commercial real estate business.

[Steven Duong:]

Yes, it's really such a great quarter on the C&I side. Was there an increased demand or was it just more of you guys putting more sweat into it?

[Kevin Cummings:]

Yes, I think it's the latter.

[Steven Duong:]

Okay. That was great to hear.

[Kevin Cummings:]

Steve, the latter part of 2019 and early 2020, we hired some loan officers, that it takes them a while to get up and going. And we had some -- we had some pretty good loans in the education space out on Long Island, in the non-profit space. And it was pretty, I got that -- actually a lot of these people I didn't meet -- I've meet them on Zoom calls. And they're pretty productive. And they came in, and finally put some numbers up on the board in the fourth quarter after a slow start in the first half of the year --

[Steven Duong:]

It's great to hear that --

[Kevin Cummings:]

I think it's basically neutral, the additions to the team.

[Steven Duong:]

Yes, it's great to hear that that's paid off. And then, I guess, just on buybacks, what are you guys thinking about for this year?

[Kevin Cummings:]

I'm not sure, in total, in terms of dollar amounts, or volumes, but clearly we'll continue to look at the attractiveness of the stock. Obviously, it's moved quite a bit from us -- from when we first started to put buybacks in place. And we're waiting till earnings are done. And, Sean and I will sit down and kind of go through what we think is the right level to be buying at.

[Sean Burke:]

We do have some repurchases built into 2021, Steven. I think it's safe to assume that 6 million to 7 million shares would probably be on the lower end. But again, it all depends on the stock price and kind of -- how the market trends. But I think, if you were modeling this up, I think it's safe to assume, 6 million to 7 million of shares repurchased throughout the year.

[Steven Duong:]

Yes, got it. And are you targeting a capital level, just for modeling purposes at all?

[Kevin Cummings:]

Well, capital has inched up a little bit. We always, again, I answered this question. It depends on the environment we're in. In 2020, it was much more comfortable being at around 9.5% in a more normal environment is probably closer to 8.5%. So again, that's a tough question dependent on the economic environment that we find ourselves in.

[Operator:]

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

[Laurie Hunsicker:]

Well, hi, good morning. Just wondered if we could go back to back for a minute I just want to clarify. So after the 2 million share repurchase this quarter, there's currently 12.6 million shares remaining in your authorization; is that right number or is that --?

[Kevin Cummings:]

Yes, yes.

[Laurie Hunsicker:]

Okay. And historically, you've been active above current levels? Can you just share with us why you would only do half of that this year?

[Kevin Cummings:]

Well, again, Laurie, we want to be careful about how we allocate our buybacks. Sean said we do have 75 million or so built in for 2021. But clearly, we don't want to get over our skis in terms of buying at valuations that are too high. Right the earn back on that, wouldn't, would not be good for us. So we're trying to assess where the market is, where the valuations are going. And, we're confident in our business. But again, we want to be careful about where we are and want to make sure that when we enter back, when we continue our buyback program, that we're doing it in a prudent way.

[Sean Burke:]

Yes, Laurie, we increased the dividend, an extra penny actually than we had originally planned in our strategic plan. So that picks up about $10 million return to the shareholders. And then when you look at the economic uncertainty, that's why we're hedging our bets here a little bit. We're not going to put some number out there. We don't want to overpromise and under deliver with respect to buybacks.

[Laurie Hunsicker:]

Perfect that makes sense. Okay. And then I wondered if we could just switch back over the multifamily loan, the $37 million that came on deferral where was that located?

[Sean Burke:]

That was in Washington, DC. It's about 600 unit apartments.

[Laurie Hunsicker:]

That was . Okay, great. Okay, great. And then do you have to your multifamily loans of $7 billion round number is $3 billion in New York. Do you have a refresh on what New York City multifamily deferrals were?

[Domenick Cama:]

Yes, New York City multifamily deferrals $74 million, I'm sorry $91 million.

[Laurie Hunsicker:]

$91 million, okay. Okay, so $91 million of the round number $3 billion was on deferral?

[Domenick Cama:]

$91 million of the $635 million is -- are multifamily loans in Manhattan. And the weighted average LTV of those loans in Manhattan is 53%.

[Laurie Hunsicker:]

Okay. And that's up from -- last quarter that number was around $12 million?

[Domenick Cama:]

I don't know, Laurie. I don't have.

[Laurie Hunsicker:]

You don't, okay. Okay, fair enough. So just on New York, can you give us a refresh in terms of your overall New York City deferral exposure? I think last quarter, we had $313 million. So just of your total loans, how much is New York City deferral? And then do you have a breakdown today in terms of out of that, how much is hotel?

[Domenick Cama:]

It's $371 million in Manhattan. Of the $635 million it’s $371 million and the breakdown is $91 million in multifamily, $38 million in CRE, C&I is $1 million and hotel, lodging is $241 million.

[Operator:]

The next question is from Zach Westerlind with Stephens. Please go ahead.

[Zach Westerlind:]

Good morning, guys. It's Zach Westerlind filling in for Matt Breese.

[Kevin Cummings:]

Hi, how are you?

[Sean Burke:]

Hi, Zach.

[Zach Westerlind:]

Good, thanks. Just one really quick one from me. What was PPP income for the quarter?

[Domenick Cama:]

Well, we sold our PPP loans, Zach, in the fourth quarter, and the revenue on it was about $7 million overall.

[Sean Burke:]

But for the quarter Zach it was less than $1 million.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Kevin Cummings, for any closing remarks.

[Kevin Cummings:]

Okay, thank you, Gary. Our retail and lending teams are engaged and excited to be working and more importantly, by helping our customers and our communities through this pandemic. And I want to thank them for their efforts over the last nine, 10 months. This past year has not been easy. But we have faced the challenge and continue to get stronger and more adaptable as we navigate the changes from these unprecedented events. To all the challenges, uncertainties and hardships, we're stronger, but maybe a more humble bank, and understand that we're not driving the bus, but only passengers. We understand that it's not enough for the bank to be successful. But this year, will be our year to leave an imprint on our story or on our history. This year will be our year to create a legacy of significance for our employees, our customers, and the communities that we serve, and that we take care of them. Hopefully, our shareholders will prosper. During this crisis, we didn't give people what they wanted. We gave them what they needed. And I think at the end of the day, everyone needs inspiration. Everyone needs hope and everyone needs faith. And that faith most importantly is a belief in ourselves, our bank, our communities, and our country to be the very best we can be during these troubled and unprecedented times. I'm happy to report through the hard work of Dom and members of our retail and healthcare teams we'll be announcing shortly a major grant to a Regional Hospital to support their new treatment center for post-COVID care. One of the few such centers in our region and around the country, this setup will serve as both a clinical and research based facility to support and treat post-COVID patients and will be named the Investor Bank post-COVID Care Center. And when I think about it, what better legacy to have than to make our community a little bit better today than it was yesterday. And that in a nutshell, is our bank's mission. And we look forward to 2021 with much optimism, and it's going to be a year of great possibilities. I want to thank you for your time today. I want you all to be safe and enjoy the Super Bowl next week. On yesterday's Zoom call with Boomer and Phil, they each picked different teams. So one of them has to be right, Bommer, Kansas City and Phil, Tampa Bay. I think I'm going to go with coach Reid and the Chiefs because in reference to Mark Fitzgibbon, I will never underestimate Tom Brady. Either way, is should be a good game, enjoy it. And I look forward to hopefully seeing you all soon at a conference, a community bank or an industry event in person. Be safe, and stay healthy. Thank you for your time today.

[Operator:]

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