Investors Bancorp, Inc.
Q4 2013 Earnings Call Transcript

Published: 31 Jan 2014

[Operator:]

Good morning, everyone, and welcome to the ISBC Fourth Quarter Earnings Conference Call. [Operator Instructions] Please note today's event is being recorded. And at this time, I'd like to turn the conference call over to Mr. Thomas Splaine, the company's CFO. Please go ahead.

[Thomas F. Splaine:]

Good morning, everyone, and thank you for joining us today. I'm Thomas Splaine, the Senior Vice President and Chief Financial Officer. And we'll begin this morning's call with the 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 operations, 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:]

Good morning, and thank you, Tom. To say that Investors had a busy fourth quarter would be a huge understatement. In the last 2 months, we closed 2 acquisitions, Roma and GCF, which were long anticipated. And then finally, we've made the historic announcement of our second step. At our December 18 board meeting, the Board of Directors approved to move forward with our second step transaction as we met the criteria that we had set out in our strategic plan and our strategic goals that management had set many, many years ago, and they were

[Operator:]

[Operator Instructions] And our first question comes from Matthew Breese from Sterne Agee.

[Matthew Breese:]

Now, with the acquisitions closed, I was just curious where we can expect core expenses to settle out in 2014?

[Domenick A. Cama:]

Matt, this is Domenick. The -- we're looking at expenses to be a run rate of about $69 million to $70 million a quarter. However, we don't expect to see that -- that won't be fully phased in until the second and third quarter of 2014. So the first quarter, you'll see highly elevated -- you'll see the expenses elevated at about $72 million and then it will start to come down as we start to realize some of the expenses.

[Thomas F. Splaine:]

Expense saves.

[Domenick A. Cama:]

The expense saves, the cost saves from Roma and GCF. Having said that, I want to make note that we're conservative there with our estimates because we're continuing to make investments in the business. We continue to build our infrastructure. Some of the things that we're exposed to now from a regulatory perspective, like stress testing and building up our credit risk group, are putting expenses a little bit higher than they've been running in the past. So from an efficiency ratio standpoint, we're starting to see those -- that ratio start to climb up into the 54% and 55% range.

[Matthew Breese:]

Okay. But that run rate of $69 million to $70 million, that kind of bakes into -- that has baked in those expectations of some higher regulatory cost and combined cost?

[Domenick A. Cama:]

Yes, yes. But we won't get there until, again, somewhere between the second and third quarter of 2014 because...

[Kevin D. Cummings:]

The conversions are in schedule.

[Domenick A. Cama:]

The conversions are in schedule. One scheduled In early March and the other one's scheduled in late June.

[Matthew Breese:]

Okay. And then once fully integrated, how can you -- how do you assess your ability to grow loans on an annual basis? Has anything changed there?

[Domenick A. Cama:]

Well, as Kevin said in his presentation, we've already put several teams in place to cover both the GCF -- the former GCF and the former Roma markets. We've taken our people, some of our people and actually relocated them to that market. So we expect to be able to, not only grow loans, but also to change the mix of the loans that, that franchise -- or those 2 franchises were originating. In Roma's case, about 60% of their loans were residential in nature, and we want to move them more towards commercial. And again, Kevin pointed out in his presentation that we've already closed a number of transactions in that market. So as we move forward, thinking about the business overall, we don't expect anything to change up here in New York markets and the North Jersey markets. And we anticipate changing the portfolios that we inherited from Roma and from GCF and to be a force down there on the commercial side. So we're expecting good things from that market.

[Matthew Breese:]

Understood. And then, as it relates to your overall allowance, where do you feel comfortable with the reserve to loan ratio?

[Kevin D. Cummings:]

Well, I think we feel comfortable at the high end of the range. We hope we will -- we want to be a conservative bank and with the current accounting rules and the improving history of our net charge-offs, it becomes a process that is changing. And not necessarily changing, it's changed from where -- when I was on the other side of the fence, on the ordered side, it is quite different than it was 8, 10 years ago, we're post -- pre-SunTrust in the mid-90s. But it is -- we're managing it, and we're going to be a conservative bank that takes credit risk very seriously.

[Domenick A. Cama:]

Matt, as -- certainly, our credit has improved here and there's no doubt about that. However, our portfolio continues to evolve. It's a portfolio that's changing. Even here in the legacy Investors balance sheet, we have about 48% in residential loans. That continues to change as we put on more commercial real estate, multi-family business and C&I business. Those types of loans inherently bring more risk. And so, while, again, our credit is improving, we balance that against the fact that our portfolio composition is changing and we're putting on more risky assets.

[Operator:]

And our next question comes from Rick Weiss from Boenning.

[Richard D. Weiss:]

I have a question, I guess, in terms of the lending competition and it sounds like it's supposed to be very competitive on pricing or so, some banks are saying underwriting standards are being lowered. Is that what you're expect experiencing, too?

[Domenick A. Cama:]

I wouldn't say that we're seeing underwriting standards being lowered. Certainly, I can say that the pricing has become more competitive. And just as an example, Rick, just before this rally into 10-year over the last week or so, we had a pretty stable 10-year. But in the wake of the 10-year being relatively flat, we saw banks lowering their 5-year multi-family rate. And what we were told was that other banks in the market were getting ready or getting their -- lowering their rates in order to get their pipelines in order for the first quarter of 2014. Now, even we here have lowered our rate on multi-family loans from 3.50% to 3.25%. And now, it seems like we're at the higher end of that range.

[Richard D. Weiss:]

At the 3.25%, what would the maturity be on that?

[Domenick A. Cama:]

5 years.

[Richard D. Weiss:]

For 5 years. Okay. And also, I guess, a question with respect to -- when you closed the Gateway in January -- and sometimes you see banks that include subsequent events into the December financials, but sometimes you don't. I'm kind of wondering why this wasn't included this time?

[Kevin D. Cummings:]

Well, no, it's an immaterial transaction and it's a footnote disclosure. So...

[Domenick A. Cama:]

That will be coming out in the 10-K.

[Kevin D. Cummings:]

Right.

[Richard D. Weiss:]

How? As a footnote on the K?

[Kevin D. Cummings:]

Yes.

[Operator:]

Our next question comes from David Darst from Guggenheim Securities.

[David Darst:]

I guess you've previously mentioned the potential for a balance sheet restructuring when you completed the Roma acquisition. It looks like you did use their cash to pay down your FHLB borrowings. Should we see anything else occurring in the first quarter similar to that?

[Domenick A. Cama:]

The -- it's not only that cash, David, it was -- we sold their securities also. We sold about $370 million of their securities and used the proceeds from that transaction to pay down borrowings. And we don't expect to see anything like that in the first quarter. One of the things Kevin mentioned, the only other restructuring type of transaction, I'll call it, at this point is we're gearing up for potential sale of some delinquent loans down in that -- down from the Roma portfolio. But no other delevering, if you will, as a result. We accomplished that as soon as we closed.

[David Darst:]

Okay. Is the size notable from what you might be selling in the delinquent loans?

[Domenick A. Cama:]

It's about a $30 million ARPU.

[Kevin D. Cummings:]

Yes, and it includes some Investors cleanup sales. Some of those small nonperforming loans I referenced to in my discussion.

[David Darst:]

Okay. And then your organic deposit growth picked up this quarter, are you changing anything with the business or positioning of rates to bring down your loan-to-deposit ratio?

[Domenick A. Cama:]

Yes, well, Kevin mentioned the promotion that we put in place in the fourth quarter. It kicked off in October here in the North Jersey and the New York market. And it was intended to bring deposits in. Certainly, we were feeling some stress as a result of the loan growth at the company and the fact that we didn't close the Roma transaction. So we put a program in place, paid higher rates, brought in about somewhere between $550 million and $600 million in new deposits. But that promotion will be over in another 3 months. So that's the fourth quarter. Now, we also just instituted a promotion in the Roma markets that's exclusive to the markets that Roma and GCF occupied -- just the Roma markets and that's a high rate promotion that will be in place for about 1 month.

[David Darst:]

Are you lowering any CD rates and trying to remix what you're doing with this promotion?

[Domenick A. Cama:]

No. At this point, because the transaction took so long to execute, we want to try to do 2 things

[Operator:]

And our next question comes from Christopher Marinac from FIG Partners.

[Christopher W. Marinac:]

I guess I have an extension to the last question regarding the deposit rates. Will some of those specials sort of roll off on the next quarter? Or will you continue to do that selectively throughout the footprint?

[Domenick A. Cama:]

No, no. They will start to roll off next quarter.

[Christopher W. Marinac:]

Okay, very good. And then, as you have a full quarter of Roma in this quarter, how does the loan yield change on a full weighted basis? And then also, I guess a similar question, in the way of -- what's the new loan yield on new commercial loans on the books?

[Domenick A. Cama:]

Well, the yield on new commercial loans ranges anywhere from 3.75 to 4.50. So that's going from a maturity of 5 years at 3.75 to a maturity to 4.50 for 15 years. Again, Roma had primarily a residential loan portfolio, not a big commercial real estate portfolio. So we expect that what we bring in there will be right in the market of somewhere between 3.75 and 4.50.

[Operator:]

And ladies and gentlemen, at this time, we've reached the end of today's question-and-answer session. I would like to turn the conference call back over to Mr. Kevin Cummings for any closing remarks.

[Kevin D. Cummings:]

Okay. I'd like to thank you, all, for participating on the call today. I want to thank you, all, for your support during these years as an MHC. We're making this -- we're in a time of transition. It's a time -- a very exciting time for the company and hopefully, we'll be out and meeting with many of you in the market in the early -- late -- in the late first quarter, early second quarter. So, I thank you for your support and enjoy the weekend and enjoy the Super Bowl. Have a great day.

[Operator:]

Ladies and gentlemen, that concludes today's conference call. We do thank you for attending. You may now disconnect your telephone lines.