Investors Bancorp, Inc.
Q1 2018 Earnings Call Transcript

Published: 30 Apr 2018

[Operator:]

Good morning and welcome to the Investors Bancorp First Quarter Earnings Conference Call. [Operator Instructions] 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 operation 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 and Management’s Discussion and Analysis of Financial Conditions and Results of Operations set forth in Investors Bancorp’s filings with the SEC. Please note this event is being recorded. And now I would like to turn the call over to Kevin Cummings, President and CEO of Investors Bancorp.

[Kevin Cummings:]

Thank you, Denise and good morning and welcome to the 2018 first quarter Investors Bancorp earnings call. The company and the bank had a solid quarter with respect to net income and earnings per share. We reported net income of almost $57.9 million or $0.20 per diluted share versus $46 million or $0.16 per share in the first quarter of 2017. These results represent a 26% increase in net income and a 25% increase in EPS from the prior year. On a linked quarter basis, net income increased $9.7 million from $48.2 million or $0.17 per share, which represents a 20% increase in net income and an 18% in EPS from the quarter ended December 31, 2017. You have to remember that the fourth quarter results reflect adjusted core earnings, which backed out the impact of deferred tax asset write-down due to the tax law change and a $5.9 million pre-tax restructuring charge related to severance benefits and the closing of 6 branches. We continue to diversify our balance sheet and leverage our capital. During the quarter, we purchased 4.5 million shares at a total cost of over $61.8 million, which represents a net price of $13.67 per share for the quarter. Post second step, we have purchased over 71 million shares for $867 million at an average price of $12.06. During the quarter, we declared a $0.09 dividend, which is an increase from the $0.08 in the first quarter of 2017 and the same as last quarter. Since our second step in 2014, we have raised our dividend from $0.04 per share to $0.09 and we have leveraged our capital through organic growth, dividends and stock buybacks. Our tangible capital ratio now stands at 11.9%, down from almost 20% in the second quarter of 2014. And our total assets have grown from $17.4 billion to over $25 billion, an increase of 44.5% over the last 15 months. Our asset quality remains strong and we are well positioned to continue our prudent growth. During the quarter, loans grew $512 million as commercial loans increased $416 million. In February, we completed the acquisition of a $345 million equipment finance portfolio, which is included in our C&I portfolio. This business portfolio now exceeds $2 billion and has grown $650 million in the last year for 47% growth rate. We continue to make investments in this business line as it diversifies our portfolio, reduces our concentration in CRE and enhances our ability to drive non-interest bearing deposits into the bank. During the quarter, total deposits decreased $811 million, of which approximately 65% related to our government and municipal deposits business. At the end of 2017, we saw an increase in deposits due to the tax law change, where homeowners in New Jersey prepaid their 2018 property taxes to recognize the tax deduction. In addition, we had one relationship deployed its funds from a bond offering for approximately $185 million. On the business and commercial side, we saw some runoff in deposits due to increased competition in our market for deposits and an effort on our retail and business teams to hold the line on deposit costs. In reaction to these competitive pressures, we have just recently launched the deposit campaign for the branch network and are about – and actually today are launching our online money market product that we will launch and be marketed throughout the country digitally online. We believe that these actions will count as the competitive market environment we currently face and better position our bank to fund our future loan growth. Our asset quality remains strong as the net charge-offs totaled $2.3 million for the quarter versus $3.6 million in the quarter ended December 31. Our provision of $2.5 million exceeded charge-offs and our allowance at 112 basis points appears conservative based on our peers in our markets with similar portfolios. Our non-performing loans were flat for the quarter and represents 66 basis points and 68 basis points at March 31 and year-end 2017. As mentioned previously on the fourth quarter call, our CRE number went down as we were paid off on one loan for $14.3 million. And then in the C&I portfolio, we saw one relationship move-in for approximately $12.5 million moving to a non-accrual status at March 31 as it matured although it is still current on its interest payments. This loan is in our leverage lending group and the borrower is in the process of selling the company. And at this time, we do expect to be paid in full in the second or third quarter. On that note, our risk management teams continued to work hard enhancing our procedures. For almost 2 years now, we have been investing in all areas of risk management, including BSA, credit, technology and operations. On the BSA front, we are in continuous discussion with our regulators as we prepare for their examination in the second quarter. We are making significant progress and has completed many of the requirements of an informal agreement and are cautiously optimistic. On the CRE side, we continue to enhance our data analytics, which has helped us manage our portfolio and better understand the risk in the portfolio. We will continue to monitor the quality of the loan book. To-date, we are satisfied with our results with respect to delinquencies, net charge-offs and our allowance coverage. We will continue to improve our forward-looking analytics, such as stress testing in the CRE portfolio and other tools, which will improve the quality of our credit management. We are prudent and diligent with respect to our loan growth and want to ensure that the portfolio continues to maintain its high level of quality. We are very happy with the results with respect to our credit and I think we are going to continue to grow the portfolio and manage it in a diligent manner. Now, I would like to turn it over to our CFO, Sean Burke, who will give you some guidance and more commentary on operating results for the quarter.

[Sean Burke:]

Thanks, Kevin. I will be brief. As Kevin mentioned, net income was $57.9 million or $0.20 per share for the first quarter of 2018 compared to $46 million or $0.16 per share in the first quarter of 2017. Our net interest margin was 2.85% in the first quarter, which represents 5 basis points of margin compression quarter-over-quarter as a result of rising deposit costs. Net loans grew $499 million during the quarter. During February, we completed the acquisition of a $346 million equipment finance portfolio. The acquired portfolio carries an average yield of approximately 5%. Deposits decreased to $811 million compared to the prior quarter, as Kevin discussed reflecting seasonality, the timing and impact of tax reform on government and municipal deposits and the impact of rising interest rates. Our provision for loan loss totaled $2.5 million for the quarter compared to $4.5 million in Q4 2017 as charge-offs declined quarter-over-quarter. Non-interest expenses totaled $101.1 million, a decrease of $8.4 million from the prior quarter. Our core efficiency ratio declined to 56% from 57% in the prior quarter. The decrease was primarily driven by professional fees, which decreased $4.3 million. Our effective tax rate was 26% for the quarter, which we expect to be representative of our tax rate for 2018. Our asset quality charge-off trends, allowance coverage and capital ratios remain strong. At March 31, our non-performing asset ratio stood at 0.61%, consistent with the previous quarter. Lastly, consistent with our commitment to deploy excess capital, we repurchased 4.5 million shares, totaling $62 million during the quarter. Now, I would like to turn it back over to Kevin for concluding remarks.

[Kevin Cummings:]

Thanks, Sean. As we wrap up the call, I would like to take a moment to thank our two directors who are retiring from our board after many years of service to the bank. Brian Dittenhafer, our Lead Director and Bob Cashill, our Chairman and Former CEO, are two men who have given their time, energy and wisdom guiding and mentoring both our board and management teams here at the bank. These two men, especially Bob, as our former CEO, set the groundwork and the foundation of our strategic plan back in 2003 when we were just $5 billion in assets and less than 400 employees. Their guidance and their leadership are the gifts that keep giving. They are class acts and are great role models for both me and our entire executive team. We wish them all the best in their retirement, all the good health and happiness in their retirement. Investors Bank has seen many changes over the last 15 years since Bob Cashill became President in 2002. The company has been on a journey of continuous improvement. We have created a strong regional bank with over $25 billion in assets and 150 branches, from the suburbs of Philadelphia, to the boroughs of New York and Long Island. We continue to be a positive force in our community by being that regional bank that keeps community in banking. With the regulatory scrutiny, the last 2 years have been difficult, but we are coming out of it stronger and more prepared to grow to the next level as a regional bank. It certainly has not been predictable, but we are patient and focused on meeting our long-term objectives. We strive to be a different bank, one that makes the difference with our employees, our customers and the communities that we serve. This management team and all its employees lead the organization with a passion and a purpose to be the best that they can be. I appreciate everyone’s efforts. And now, I would like to thank you for your continued support and open up the line for questions. Thank you.

[Operator:]

Thank you, Mr. Cummings. [Operator Instructions] Your first question will come from Mark Fitzgibbon of Sandler O’Neill. Please go ahead.

[Mark Fitzgibbon:]

Hey, guys. Good morning.

[Kevin Cummings:]

Hi, Mark.

[Mark Fitzgibbon:]

First question I had for you, Kevin, who was the employee of the month and when are we going to see Dom and Sean?

[Kevin Cummings:]

Yes, I’ll tell you we were going to give it to Bob Cashill for all his hard work, so he got the employee of the month.

[Mark Fitzgibbon:]

He deserves it. He is a good man. First question I had really is for Sean, that decrease sequentially in professional fees, was that mostly tied to BSA/AML stuff or were there other things in it and also if you could share with us your sort of outlook for expenses for the rest of this year?

[Sean Burke:]

Sure. So, the bulk of the decline in professional fees was related to BSA. Some other items in there, but the bulk is related to BSA. And in terms of guidance for expenses going forward, our full year guidance previously provided was $415 million. We are maybe marginally better than that, but I am not prepared to really lower in any meaningful way at this point, Mark. And maybe to provide a little guidance for next quarter, I think the 103 area, $103 million for expenses is the right spot.

[Mark Fitzgibbon:]

Okay. And then in terms of the trajectory for the margin given some of the funding challenges is the margin likely to be under a little bit more pressure in coming quarters do you think than we saw this quarter?

[Sean Burke:]

We anticipated some of this deposit competition and trend. So at this point, there is no change to our net interest margin forecast. Our guidance that we have provided was the 2.75% range for full year 2018 and there is no change to that guidance.

[Mark Fitzgibbon:]

Great. Thank you.

[Operator:]

The next question will be from Dave Rochester of Deutsche Bank. Please go ahead.

[Dave Rochester:]

Hey, good morning guys.

[Kevin Cummings:]

Hey, Dave.

[Dave Rochester:]

On the deposit growth trend this quarter, I know you talked about a decent amount of seasonality there. Are you expecting those to rebound to where they were before this quarter? Just trying to figure out where the incremental funding is going to come from near-term since borrowings popped up a little bit this quarter.

[Sean Burke:]

Dave, I mean, it was more – I mean, it was seasonality certainly, but it was also the effect of the Tax Act and individuals in New Jersey prepaying their taxes in 2017, most paid approximately two quarters of taxes. And so generally, we would have seen more increase in the deposits for the quarter and instead because that growth happened prior to December, we didn’t see the growth. And when the money went out, it went out in bigger chunks as a result of the monies that were pre-funded. And we also had a $185 million payment that went out from one of the municipalities. They were funds that were raised in a bond offering and then they were reinvested outside the bank. So, it’s a little more than seasonality. We will probably see similar reactions in the second quarter, because we should have – we still have some of that money that was due to come in, in the second quarter still sitting here at the bank.

[Dave Rochester:]

Got it. And then for the borrowings that came on, were those just overnights or were you terming some of that stuff out?

[Sean Burke:]

We had done a combination of the two. Initially, we did some shorter term funding, but over the last month or so, we have been terming out a little bit.

[Dave Rochester:]

And what are the rates on the stuff that you are terming out at this point?

[Sean Burke:]

Well, that’s an important point, Dave. I think what we wanted to get across is that the outflows and then the increase in borrowings actually was a drag on our net interest margin for the quarter as short-term borrowing costs are very high right now. And our main funding source is the Federal Home Loan Bank and their funding has inched up over the past few months. And so on an overnight basis, it’s in excess of 2%. And so if we think about some of the deposits that went out, what are the cost to break in deposits, there will likely be lower than where we are at on an overnight basis and certainly lower than on a longer duration basis.

[Dave Rochester:]

Got it. Appreciate that. And then just could you give an update on the deposit competition you are seeing in the market where pricing has moved post the March hike? I think you were somewhere in like the 1.60% range for competitors, maybe up to 1.75% before the hike. Can you just give us an update on what you are seeing now and then what the rates are on your new market products and the CD promotions you are running now?

[Sean Burke:]

Sure. The competition heated up pretty quickly, Dave. As you said, we were seeing 1.60ish and recently we have seen rates as high as 2% on the CD term. Money markets, we are seeing anywhere between 1.75% and 1.90% on the money market side and again, that has all happened pretty quickly over the last 4 to 6 weeks.

[Dave Rochester:]

Yes. Well, I would imagine on the asset side, you are probably getting a little relief as well seeing higher rates. Can you just give an update on the pricing on multifamily and commercial real estate at this point, in terms of 5/1s?

[Sean Burke:]

Sure. 5/1s, 4.25% right now, but there was a comment that I wanted to make because I know there have been – with some of the analyst calls and some of the commentary from other banks, people talk about where their rates are right now. So, for example, our rate today is 4.25%, but if you look at the average yield of the loans we closed over the last 30 days, you are not going to see anywhere close to 4.25%, because we are still honoring commitments from 60 to 90-day periods before. And I guess that applies to most banks, but we are seeing a little bit of relief like when I compare the average rate of loans that we closed in March versus the average rate of loans that we closed in April, we are seeing about a 22, 23 basis point increase in the loans we closed in April. So we are getting a little relief now, but for the first quarter, we are still suffering with some of the lower rates that we had in the pipeline prior to year end.

[Dave Rochester:]

That makes sense. Appreciate that color. And then just one last one real quick, just given the BSA exam timing you were talking about, at what point do you ultimately anticipate getting out from under that and being ready for more M&A potentially?

[Sean Burke:]

Well, Dave, in response, you may imagine that we have been asked that question many times from visiting different investor conferences. So what we have said is that our exam is scheduled to start in the middle of May and we expect that the exam will take somewhere between 4 to 6 weeks. We should start to get a little bit of color probably towards the end of the second quarter on how the exam is going. And then I guess when we talk to our examiners or our regulators sometime in early third quarter, we will start to really get an understanding of how they feel about how the exam went. I am not at a point where I think where I can anticipate when we would be – when would the informal agreement would be lifted. I mean, I have continued to say that optimistically if we could be out – optimistically, I would think the end of the year and that’s optimistic and having used the term cautiously optimistic and I will continue to use that term.

[Dave Rochester:]

It sounds good. Alright. Thanks, guys.

[Operator:]

The next question will be from Austin Nicholas of Stephens Inc. Please go ahead.

[Austin Nicholas:]

Hey, guys. Good morning. Maybe just on the prior loan growth guide of 7% to 8% for the full year ‘18, is that still what you are – the range that you are looking at? And then maybe any adjustments to that kind of based upon what you saw in the first quarter and the portfolio acquisition?

[Sean Burke:]

I think we still feel comfortable with that guidance. Obviously, it was supplemented by the leasing portfolio acquisition. And so I think yes, the first quarter was a little slow. I mean, we even saw that in the market in general, but we have seen production pickup over the last 45 days. So, we are still comfortable with that level of loan growth for the year.

[Austin Nicholas:]

Okay. And then I guess just on maybe capital deployment, maybe first on the buyback authorization, can you maybe update us on what’s remaining there and maybe your outlook to deploy that?

[Sean Burke:]

It’s about 13 million shares we have left.

[Austin Nicholas:]

Okay. And then I guess just on M&A, I know you touched on kind of whole bank M&A, could you maybe remind us of your strategy there? And then would you still entertain, I guess asset portfolio purchases like you did earlier this year or anything on the deposit business as well?

[Sean Burke:]

Yes. I think we would entertain deposit acquisition, branch acquisition, asset acquisition, certainly. In terms of M&A, obviously, we are under the informal agreement, so we are prohibited from doing any M&A. But once that is lifted, we would of course look at continuing on the trend of doing some acquisitions. Obviously, when you look at those types of deals, you want to ensure that you are doing so in a prudent way. We are not diluting tangible book to any great degree that we will have an IRR that works for us that we will have an earn back that works for us. So we will look at all opportunities to continue to drive shareholder value.

[Austin Nicholas:]

Understood. Thanks. And then maybe just one last one on the provision, can you maybe give us some color on how we should think about providing for additional loan growth, especially given some of the mix shift that’s going on in terms of new production?

[Sean Burke:]

Yes. I think it will go the way of charge-offs actually our provision outlook. And so if charge-offs are contained throughout the remainder of the year, we would expect that the provision would trend in that direction as well.

[Austin Nicholas:]

Okay, great. Thanks, guys. That’s all I have.

[Operator:]

The next question will be from Brody Preston of Piper Jaffray. Please go ahead.

[Brody Preston:]

Good morning, guys. How are you?

[Sean Burke:]

Good morning.

[Kevin Cummings:]

Good morning.

[Brody Preston:]

Just touching back on the loan growth real quick, so with the portfolio acquisition, I think gross loans increased by a little over $500 million this quarter. And the guide previously was for $1.5 million and you said you are still comfortable with that. So just wanted to clarify that’s – the rest of that $1 billion in growth, I guess, that’s organic is what you are talking about right now or does that include more portfolio deals?

[Sean Burke:]

No, no. That’s organic.

[Brody Preston:]

Okay, thank you very much. And then on the share buybacks, you are touching back on that, are current levels still attractive for you to repurchase stock? I just wanted to get your thoughts around that.

[Sean Burke:]

Yes.

[Brody Preston:]

Alright. I love these one word answers. This is awesome. And then, yes, in the...

[Sean Burke:]

That was an easy question.

[Brody Preston:]

In the line item, are there any one-time gains there?

[Sean Burke:]

No one-time gains.

[Brody Preston:]

Alright, great. And on the tax rate, are we still – I think previously we talked about 27%, is that still what we are thinking?

[Sean Burke:]

I am thinking 26%, so a little bit lower.

[Brody Preston:]

Okay, great. And then last one on the 6 branch closures that you guys did about 6 weeks ago, I know a couple of those branches have been open for a pretty long time. And from what I can tell they were pretty decently performing with about $100 million or more in deposits. I just want to get your thoughts on how do you think about branch closures moving forward? Is it proximity? Is it vintage? Is it deposit levels at the branch? I just wanted some clarity on that.

[Sean Burke:]

It’s proximity. When we closed the 6 branches primarily the driving factor was the proximity to another office. And as you pointed out, some of them had – some of them were $100 million branches and we have been monitoring any losses. And I am happy to say that we have had minimal losses in that consolidation. As we move forward, I think we are going to continue to use geography as a way to determine what additional branches we can close. And to offset that, we want to continue to enhance our online capabilities and give more people the ability to do more online. Obviously, that would be the primary driver, but we would also look at branches that would continue to underperform, what our average branch size is and we would look at those branches also as an opportunity to reduce costs and cut the branches.

[Brody Preston:]

Alright, great. Thank you very much, guys.

[Sean Burke:]

Thank you.

[Operator:]

The next question will be from Laurie Hunsicker of Compass Point. Please go ahead.

[Laurie Hunsicker:]

Yes, hi, good morning.

[Kevin Cummings:]

Good morning.

[Laurie Hunsicker:]

I just wondered if we could circle back to loan loss provision, I just want to make sure I heard you right. So when we think about your loan loss provisioning, you are just really for the most part going to be covering charge-offs, not necessarily providing for new growth?

[Kevin Cummings:]

No, we will provide for new growth, but charge-offs and the fact that they have been declining actually helps to lower the overall provision and I think that what I was trying to communicate, Laurie. Laurie, over the last 3, 4 years, our net charge-offs have been under 10 basis points pretty consistently. So, I think the reserve is a robust reserve and we feel pretty comfortable with it.

[Laurie Hunsicker:]

Yes. Your credit is very, very good. So your reserves to loans, at 1.12%, do you have a target on how low you go there that could wind down to 1% in your stock or do you not think about it that way?

[Kevin Cummings:]

We don’t think about it that way. It’s based on the math.

[Laurie Hunsicker:]

Okay. Okay, great. And then Kevin, most of my other questions have been answered, but Kevin, I wanted to circle back to something you said around the M&A question. And obviously, you are not in, this is still a few quarters too early, but just if you can help us think about in this environment, you said you would not be diluting tangible book to any great degree. Can you share where is your line in the sand that you won’t cross in terms of tangible book dilution? And then also how you weigh that against share buyback with your stock arguably so close to book value, how you think about those two items? Thanks.

[Kevin Cummings:]

I think it’s a balancing act where we look at it. I think we always looked at the four tools we use to leverage our capital

[Laurie Hunsicker:]

And so I mean, would you then be at that line in the sand, you wouldn’t breach the 5 and 5? Do you not...

[Kevin Cummings:]

No. I mean – there is no line in the sand. I don’t see any sand. And I think certainly, we move forward and look at every situation as it is appropriate. And I can’t talk about things that aren’t in front of me or what we are talking about.

[Sean Burke:]

Laurie, what is in front of us we do like where we trade and we have been aggressive buying back the stock, I think that is probably the point that we would like to focus on.

[Laurie Hunsicker:]

Absolutely. The increase was nice this quarter. Thank you for taking my questions.

[Kevin Cummings:]

Thank you.

[Operator:]

And ladies and gentlemen, this will conclude our question-and-answer session. I would like to hand the conference back over to Kevin Cummings for his closing remarks.

[Kevin Cummings:]

Okay. Well, thank you for participating on the call. I think the quarter was a very strong quarter. Good expense control, the acquisition of the leasing portfolio was the highlight, it diversifies our portfolio. We continue to focus on becoming that middle-market bank in the New York/New Jersey region and we are very focused on our strategic plan and continuing to bring long-term value to our shareholders. I look forward to our shareholder meeting at the end – about 4 weeks from today. And I look forward to seeing you at the meeting. I want to thank you for your participation today. Have a great day and enjoy your weekend. Thank you very much.

[Operator:]

Thank you, sir. Ladies and gentlemen, the conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.