Investors Bancorp, Inc.
Q3 2013 Earnings Call Transcript

Published: 25 Oct 2013

[Operator:]

Good morning, and welcome to the Investors Bancorp Third Quarter Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. And I would now like to turn the conference over to Thomas Splaine, CFO. Please go ahead.

[Thomas F. Splaine:]

Thank you, Emily. Good morning, everyone, and thank you for joining us today. I'm Tom Splaine, Senior Vice President and Chief Financial Officer. And we’ll begin this morning’s call with a standard forward-looking statement disclosure. On this call, representatives of Investors Bancorp may make some forward-looking statements with respect to our financial position, our results of operation, business and prospects. 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 and are difficult to predict and can cause our actual results to materially differ from those expressed or forecasted in these forward-looking statements. In our press release and in our earnings release, we have included our Safe Harbor disclosure. We refer you to that statement, and these documents are incorporated into this presentation. For a more complete discussion of certain risks and uncertainties affecting Investors Bancorp, please see the section 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. And now I’d like to turn the call over to our President and Chief Executive Officer, Kevin Cummings; and Senior Executive Vice President and Chief Operating Officer, Domenick Cama.

[Kevin D. Cummings:]

Thanks, Tom. Good morning, everyone. Investors Bank had another strong quarter as we posted record earnings and our 23rd consecutive quarter of core earnings, excluding merger expenses and other temporary impairment charges, exceeding 15% or better year-over-year. We are pleased to report record earnings -- report earnings of $29.3 million for the quarter compared to net income of $24.5 million in 2012. On an EPS basis, third quarter earnings are $0.27 a share versus $0.23 in 2012 and $0.26 in our trailing second quarter. 2013 third quarter results translate to an increase of 20% in net income and 17% increase in EPS. Our return on equity and return on tangible equity exceeded 10% and 11%, respectively. Over the past 5 years, we stated that our goal would be get to get -- our goal would be to get to a double-digit ROE, and we have now attained that goal consistently in 2013. It is a great improvement from 2009, when our ROE for that year was 4.4% and our book value was $7.67. Today, our book value is $10.32. In 2007, our ROE was 2.47%. So I just wanted to show the transformation of our business has resulted in positive results. And as we move forward and we leverage the capital from our first step in 2005, we have done this by using 3 tools for capital management

[Operator:]

[Operator Instructions] And the first question is from Mark Fitzgibbon of Sandler O'Neill + Partners.

[Mark T. Fitzgibbon:]

First question I had for you was on that early lease termination you referenced in the press release. What does that relate to?

[Domenick A. Cama:]

Mark, this is Domenick. The lease terminations are related to branch facilities that were -- headquarter facilities that we've acquired in transactions -- in merger transactions.

[Mark T. Fitzgibbon:]

Okay, great. And then, secondly, could you help us think about the run rate for expenses going forward, excluding the impact of Roma and Gateway?

[Thomas F. Splaine:]

Yes. If you look at our expenses this quarter, they're just over $60 million, but we had some onetime items, like the lease termination, as well as an insurance catch-up on medical bills. But there was -- so we view our operating expenses for the quarter around $58 million. As we continue to build up the franchise into Q4, we'll probably see that base number moving up to around $58.5 million or just under $60 million.

[Mark T. Fitzgibbon:]

Okay. And then, lastly, could you share with us what the -- sort of the average rate on the pipeline looks like right now?

[Domenick A. Cama:]

On the commercial real estate pipeline, Mark, the average rate is just under 4%.

[Mark T. Fitzgibbon:]

And how about the multifamily?

[Domenick A. Cama:]

Multifamily space, it's about -- multifamily is about 3.75%, and mixed use is a little bit higher than that.

[Operator:]

Our next question is from Matthew Kelley of Sterne Agee.

[Matthew Brandon Kelley:]

Can you just talk about where you see the margin kind of coming in once the deals are completed? I know that -- any plans to kind of reshuffle the earning asset mix of those companies? And what you think the impact ultimately will be on the margin once those are rolled into the balance sheet?

[Domenick A. Cama:]

Matt, we can't comment on what we think the margin will be. I can tell you that for the -- I'll go through it this way with you. As far as the quarter is concerned, without the Roma transaction and any impact from prepayment penalties, we see the margins staying relatively flat for the fourth quarter. Now when you consider the impact of Roma, we think that'll have a positive impact on the margin because of using the deposits that come from the Roma transaction to pay down borrowings.

[Matthew Brandon Kelley:]

Okay, got you. And then is there any potential for the Roma deal closing in calendar 2014? Is there any risk that this gets pushed out until next year? And does that pose any challenges for completing both the second step and deals in the same calendar year? Is that an issue at all?

[Domenick A. Cama:]

Yes. Matt, in terms of the transaction, I mean, we remain confident that we'll be able to close the transaction in 2013. We're pretty comfortable that, that will happen. Certainly, if we -- even if we close it in 2013, we expect, just based on the timeline of announcing the second step right after that, that the second step will happen sometime around the end of the first quarter, beginning of the second quarter of 2014.

[Matthew Brandon Kelley:]

Okay, got you. And still no goodwill anticipated? And basically, the structure of the shares issued and core deposit intangibles are in place, but no goodwill?

[Domenick A. Cama:]

Yes. I mean, at this point, we've run the accounting through the Department of Professional Practices of our external audit firm, KPMG, and we've submitted the applications that show the impact of not -- of no goodwill and have had no -- we've had some questions from the regulators, but no adverse reaction to it.

[Matthew Brandon Kelley:]

Okay, got you. Got you. And then just for the fourth quarter, should we expect a similar type of decline in the security deal as you remix kind of the earning asset base?

[Domenick A. Cama:]

The securities yield?

[Matthew Brandon Kelley:]

I mean securities balance, excuse me?

[Domenick A. Cama:]

Well, the securities balances are pegged to be somewhere between 11% and 14% of total asset size. So depending on what happens to assets, security balances will either go up or down. We just feel that maintaining securities-to-asset ratio of somewhere between 11% to 14% is prudent in terms of liquidity.

[Operator:]

Our next question is from Collyn Gilbert of KBW.

[Collyn Bement Gilbert:]

Just to drill into the loan growth a little bit. You guys had put up really strong loan growth the last 2 quarters. What do you think is attributable to that? I mean, is it just everything that you've said, Kevin, in your introductory comments coming together? Is it -- do you think that there's been some pull forward here going on in the market? I mean you weren't alone in the growth that you posted this quarter, a lot of your peers did, too. But just trying to gauge the sustainability of your growth because it's also coming off of a much higher base at this point.

[Kevin D. Cummings:]

Well, certainly, the momentum that we have in the marketplace, the addition to staff, we have more lenders in the marketplace, our brand is expanding. The market is not growing because the economy is not growing. But I think we're grabbing more market share. So it's -- Dom, we say we work pretty hard here, and I think our guys are excited about being here. They're coming over, and it's a fresh place and it's different. And I think we're being very successful in working in the market and expanding our reach, both in the combination of working with our retail teams, small-business groups, the business lenders and the CRE. Our guys in New York and -- you got to remember, what, 2010, we started lending in New York, and they've done an outstanding job on the -- in the multifamily and the commercial real estate space. Working with brokers, we want to continue to move and use -- become more of a relationship bank, that's our biggest challenge. We understand that. But really, we filled a niche in the 2009, 2010 period, and we will look forward to continuing our growth and our evolution to a more relationship bank.

[Domenick A. Cama:]

And Collyn, there is certainly some -- there is some effect of pull-through, meaning that, especially in the multifamily sector, we've seen deals start to get pushed through a little more quickly as borrowers are trying to take advantage of rates before they spike up.

[Collyn Bement Gilbert:]

Okay, that's helpful. And just kind of big picture in order -- Kevin, to your point that the economy is not growing, so it's a function of taking share. What do you think a reasonable growth rate is in order to preserve your credit-quality metrics? Are you guys -- do you think a 10% grower or a 15% grower?

[Kevin D. Cummings:]

No, Collyn, we're not reaching for any loans. I mean, we've had the -- we've gone through this cycle without a credit downgrade from both -- from our regulatory process. So the fact that we're reaching on credit or any question like that, has nothing to do with the growth. Growth is there. If it's there, we take it. But there's very little stretching on credit standards.

[Collyn Bement Gilbert:]

No, I wasn't....

[Kevin D. Cummings:]

No, I'm just saying. I think, last -- we had a comment, our underwriting is basically almost at a 65% LTV and $150 million-plus cash flow. So we're -- that's why -- I mean, it's our underwriting that has resulted in our strong credit quality.

[Collyn Bement Gilbert:]

Okay. And then just tying that then, Tom, if you can comment on the reserve. I know it built this quarter, and you guys all indicated that you'll probably continue to grow that. How -- do you have any sort of target in mind for where you want to take that? I know the dynamics are going to change post the mergers, but just thinking about you guys on the standalone.

[Kevin D. Cummings:]

No. Again, it's difficult in a banking environment to be an outlier because everyone looks at you, compares you to peers. We have consistently outpaced our loan growth with our provisions, and our net charge-offs have been -- our provisions have consistently been larger than our net charge-offs. So as time goes on -- we go through the process every quarter, and we have frequent discussions with our external accountants. And we want to be on a conservative side because of all the uncertainty in the economy, both as indicated by what goes on in Washington, changes in the administration in New York City. There is uncertainty, and we want to run the bank in a prudent and safe and sound manner.

[Domenick A. Cama:]

And Collyn, also in terms of our provision and our overall allowance, I mean, when you consider the fact that the bank's balance sheet -- loan portfolio is comprised of now 44% residential loans, strategically, it's our decision now to start to move that number down. And when you consider the increased credit risk of the commercial loan portfolio -- and specifically, we're looking at our C&I portfolio. As Kevin mentioned, we've had over $300 million in growth in our C&I portfolio over a 1-year period. We still consider that portfolio unseasoned. And so we continue to believe that the mix is changing and the growth is occurring in a different sector, and therefore, it's necessary for us to be prudent in terms of our provisions.

[Collyn Bement Gilbert:]

Okay. And then just 1 final question. On the resi mortgage side, what was the -- sort of the composition of the residential mortgages that you've put on the balance sheet this quarter and, like, in the recent quarters? Just in terms of structure and...

[Thomas F. Splaine:]

When we look at it for the recent originations, they're probably 60-40 right now, fixed-rate to adjustable-rate loans. It's -- so I think that the mix and the balance has been -- is a little bit more even now than it was earlier in the year, where everyone was looking for long-term fixed-rate loans. So that's where we're going right now.

[Operator:]

Our next question is from Rick Weiss of Boenning.

[Richard D. Weiss:]

Just to follow up on Collyn's questions with the loans. Is there any effect from Superstorm Sandy, the rebuilding efforts? Is that helping your loan growth? Or do you expect it to in the near future?

[Thomas F. Splaine:]

Rick, it's unbelievably quiet. I know OceanFirst made a statement that they expect a pickup in the loan activities. It's a difficult thing, making those loans when -- if a house has been destroyed and the land value is there. We're not really chasing that business because it's labor-intensive, and it's individual single-family homes. But on the other hand, our exposure, last year, was approximately -- from Union Beach to Seaside Heights was approximately $280 million. We've had paydowns in that portfolio to around $200 million. So our exposure has decreased from a residential point of view, and our delinquencies are minimal. One commercial loan that we had -- or the 1 sizable commercial loan that we had is back performing, and it wasn't even down the shore. It was up in the Bergen County area. The Hackensack River came into its manufacturing facility, and that company is a well-run company. It's back off our -- coming off our watch list shortly. So it's eerily quiet, Rick. It really is, and it's surprisingly quiet. But I think people -- the rules, the FEMA guidelines, do I have to lift the house up, do I have to do -- what is it to my frontage, to my neighbors' frontage and things like that, there's a lot of moving parts there. And I think a lot of people have not really moved on their plans to deal with the properties. So that's the problems that they might have.

[Richard D. Weiss:]

Okay. So like, I guess, just taking more time than everybody expected then for the rebuild. And so none of the loan growth you're seeing is now attributable to Sandy?

[Kevin D. Cummings:]

Correct, not even close.

[Richard D. Weiss:]

Okay. And let me -- and just to go back, I thought in the beginning you said today, if you did the second step, it would be $1.5 billion to $1.7 billion. Is that -- did I hear that right?

[Kevin D. Cummings:]

That's a range.

[Domenick A. Cama:]

Yes, that's a range of just under book value to about 104%.

[Richard D. Weiss:]

Okay. Does that -- would that include Roma in that?

[Domenick A. Cama:]

It would include both Roma and GCF.

[Richard D. Weiss:]

Okay. It does include them.

[Domenick A. Cama:]

Yes.

[Operator:]

Our next question is from Dave Rochester of Deutsche Bank.

[Timur Braziler:]

Following up on the securities question from before. It looks like the yield was up a little bit linked quarter here. What did premium amortization expense do?

[Domenick A. Cama:]

Dave, I'm sorry, your question was, what is premium amortization?

[Timur Braziler:]

Yes, expense for the securities. What was the portion of that in the securities yield?

[Thomas F. Splaine:]

We don't have that number handy here, Dave. But we could get that for you.

[Domenick A. Cama:]

Yes. Dave, the fact that interest rate -- the yields on securities has increased is due primarily to the fact that interest rates were up over the period of time that we're investing in. We do -- we're about flat on our TruPS portfolio in terms of the amount of interest that we're accreting there. But the overall increase in the yield on the securities portfolio is simply attributed to higher rates on the types of securities that we buy. And we don't, we don't venture away from our guidelines in terms of type of securities we buy, it's just that there were higher interest rates for those.

[Timur Braziler:]

Okay. And I should have mentioned this before the first question, but it's actually Timur Braziler calling in for Dave. I guess the next question, and I appreciate the rates you gave surrounding your loan pipeline, but can you give the balance of the loan pipeline at the end of the third quarter?

[Domenick A. Cama:]

Yes, the pipeline is about $1.2 billion.

[Timur Braziler:]

$1.2 billion, okay. And then on the multifamily front, I know you had said that the pipeline rate was about 3.25%. What was the rate of the multifamily loans that were booked in the third [ph]...

[Domenick A. Cama:]

I said 3.75%.

[Timur Braziler:]

3.75%, okay. And what was that rate...

[Domenick A. Cama:]

I'm sorry, what was your next question?

[Timur Braziler:]

What was that rate in the third quarter?

[Thomas F. Splaine:]

Second quarter?

[Timur Braziler:]

No, no. I -- the loan pipeline, you had said had a rate of 3.75%, and I'm just wondering what that rate for bookings was in the third quarter for originations.

[Domenick A. Cama:]

That is for the third quarter.

[Kevin D. Cummings:]

He wants it for originations in the third quarter.

[Timur Braziler:]

Right. So the loans -- the multifamily loans that are booked in the third quarter, what was the rate on those for multifamily?

[Domenick A. Cama:]

Yes. I'll give it to you in a minute. The average rate for multifamily loans in the third quarter, this is on a month-to-date basis, was 3.30%. That's for multifamily.

[Timur Braziler:]

Right. Okay, great. And then I guess just following up on the second-step process and then the conversations with regulators. Has the volume of conversations changed recently regarding the approval for Roma or the Fed?

[Domenick A. Cama:]

We'd rather not comment on that.

[Timur Braziler:]

Okay. And then just lastly, you guys have the appraisal in hand for the second step or is that something that needs to be done post the completion of the Roma deal?

[Domenick A. Cama:]

No, the appraisal is something that needs to be done. Our estimates are based on different valuations that we receive from different market makers in our stock.

[Operator:]

Our next question is from Christopher Marinac of FIG Partners.

[Christopher W. Marinac:]

Kevin and others, can you elaborate on the impact of your new branches, particularly on Long Island? Just thinking of both near term and more intermediate term revenue impact, outside of the expense comment that was mentioned in the release.

[Thomas F. Splaine:]

Can you repeat that? You didn't -- you faded out on us.

[Domenick A. Cama:]

Can you speak a little louder?

[Christopher W. Marinac:]

I was asking about the revenue impact from new branches, particularly with the focus on Long Island. You mentioned from the expense side in the release, just curious on more color there.

[Domenick A. Cama:]

In terms of profitability, the branches on Long Island were all acquired branches. The Brooklyn Federal -- most of them were from Brooklyn Federal, and we paid a premium of about 3.5% for those deposits. But just overall, in terms of profitability, we estimate that branches become profitable somewhere around the 2.5 years to 4 years depending on what the mix of deposits is in those branches. Given the cost of funds or cost of deposits in the branches that we have on Long Island and given our current run rate for asset yields, we consider those branches profitable right from the very onset.

[Christopher W. Marinac:]

Great. Would you consider new offices there in that region?

[Domenick A. Cama:]

Yes.

[Kevin D. Cummings:]

Looking at some of the recent de novo branches. For example, Boro Park, which was opened in 2011, is at $94 million. Avenue M, opened up last year, is $77 million. Ocean Avenue, this year, we opened it up during the summer in the second quarter, $28 million. So we feel that area, because of the density of population, it's really a good area for us to expand and bring the Investors brand to those markets.

[Operator:]

Our next question is from David Darst of Guggenheim Securities.

[David Darst:]

Did you discuss the percentage of growth that you just had from New Jersey this quarter? And maybe just any commentary on kind of increasing real estate activity that you're seeing in New Jersey.

[Domenick A. Cama:]

No, we did not break down the difference between the states in terms of our loan growth. But I can tell you that given that the growth was primarily multifamily related, most of the growth happened in the New York market.

[David Darst:]

Okay. And then post second step...

[Kevin D. Cummings:]

[indiscernible] I'd say most of the residential is in New Jersey, then too.

[David Darst:]

Okay. And then how should we maybe be thinking about the dividend and the earnings payout ratio post conversion -- or post second step?

[Domenick A. Cama:]

I think it's too early to tell. Right now, we've tried to target a payout ratio of approximately 20%. And just given the increase in earnings over the past 2 quarters, it's dropped below 20%. But 20% remains a target that we're comfortable with at this point.

[Operator:]

And the next question is a follow-up from Collyn Gilbert of KBW.

[Collyn Bement Gilbert:]

Just quickly, Tom, can you just -- or maybe it was Dom that mentioned it, but the comment about the NIM -- that Roma would have a positive impact on the NIM because of the ability to take the deposits and pay down borrowings. I'm just -- could you walk through that a little bit? Because I was thinking that with Roma's NIM so much lower that your alls that there still would be compression. So would you mind just giving a little bit more detail to that?

[Domenick A. Cama:]

Well, again, it's just a matter of using deposits over borrowings, Collyn, that's how we saw it. Our funding -- I mean, I'm sorry, our loan growth we believe will be significant in the fourth quarter. Also, we plan some balance sheet restructuring in terms of the Roma transaction. Meaning that, initially, we're looking at selling all of their securities in order to pay down borrowings. And we're also considering a transaction, which we may securitize some of their loans to get those off the balance sheet. So when you look at the different levers that we'll pull along with the -- when we integrate Roma, we think it will have a positive impact on NIM.

[Collyn Bement Gilbert:]

Okay. Do you have a targeted dollar amount of borrowings that you're going to pay down? Or is it...

[Domenick A. Cama:]

Well, right now, just using Roma's balance sheet as it stands right now at the end of the third quarter, we think that we can pay off somewhere between $400 million to $500 million in borrowings.

[Collyn Bement Gilbert:]

Okay. And these are your borrowings?

[Domenick A. Cama:]

Yes.

[Kevin D. Cummings:]

They have minimal borrowings.

[Domenick A. Cama:]

They have about $80 million in borrowings.

[Operator:]

And this concludes our question-and-answer session. I'd like to turn the conference back over to Kevin Cummings for any closing remarks.

[Kevin D. Cummings:]

Okay. Well, thank you very much for your participation on the call. We had an excellent quarter. And I thank you for your participation and your interest in our company, and we look forward to a great fourth quarter and a positive 2014. Thank you very much, and have a great day and a good weekend.

[Operator:]

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