Investors Bancorp, Inc.
Q4 2014 Earnings Call Transcript

Published: 30 Jan 2015

[Operator:]

Good morning, and welcome to the ISBC Fourth Quarter Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. Please also note, this event is being recorded. I would now like to turn the conference over to Tom Splaine, Senior Vice President. Please go ahead sir.

[Tom Splaine:]

Thank you, Rocco, and good morning, everyone, and thank you for joining us today on the call. I'm Tom Splaine, Senior Vice President, 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, 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 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 the certain risks and uncertainties affecting Investors Bancorp, please see the section entitled Risk Factors, Management Discussion and Analysis of Financial Conditions and Results of Operations set forth in Investors Bancorp, Inc. filings with the SEC. And now, I'd like to turn the call over to our President and CEO, Kevin Cummings; and our Senior Executive Vice President and Chief Operating Officer, Domenick Cama.

[Kevin Cummings:]

Thanks, Tom, and I’m just going to introduce some other people in the room with us today. Sean Burke who just joined us in January is with us; Kelly Pecoraro, our Chief Accounting Officer; and Marianne Wade, Manager in Financial reporting. And I want to welcome Sean to the team and we’re off to a good start, some good results; he has some big shoes to fill. So welcome, Sean.

[Sean Burke:]

Thanks, Kevin.

[Kevin Cummings:]

And thanks, Tom, and good morning. Investors had a very strong quarter as we posted record earnings of $43.1 million for the quarter compared to net income of $27.5 million for the three months ended December 31, 2013. For the year, we posted net income of $131.7 million versus $112 in 2013. As outlined and explained in our press release, there were was some non-core items in the fourth quarter of 2014 and 2013 and for the respective 12 month period. Core earnings for the quarter were $40.1 million in 2014 versus $31.6 million in 2013 as we recorded a tax benefit in 2014 of approximately $3 million due to a change in rate in state taxes primarily New York State which increased the value of deferred tax assets on the balance sheet, and in 2013, we had some merger expenses related to the Roma transaction. This core earnings represent a 27% increase over 2013 fourth quarter core earnings. On an annual basis, 2014 was impacted by our second step expenses which included a $20 million contribution to our foundation and $13 million acceleration of stock compensation plus the tax benefit recorded in the fourth quarter and a net gain associated with the GCF merger. Reflecting these adjustments, our income for the year 2014 was $148.6 million versus $116.2 million, which represents a 28% increase with the year. Our core income has gone from $36 million in 2009 to $148 million in 2014 which equates to an average year-over-year increase in core earnings of 34% for the last five years. The strong earnings momentum allowed us to increase our cash dividend from $0.04 to $0.05 and to declare a special dividend of additional $0.05 for the quarter. This decision serves us well as we continue to leverage our capital post-second step in the same manner as we’ve executed before the second step. Organic growth, smart acquisitions that do not dilute tangible book value, stock buybacks and cash dividends. Our tangible capital ratio is down to a robust 18.6% from 19.41% in the third quarter, which is an 81 basis points reduction for the quarter. If we were to pro forma, the $0.10 dividend just recently declared, that reduction would have been approximately 1%. We greatly anticipate our one-year anniversary of our second step as we will continue to leverage our capital and start buying back our stock through a buyback program. We believe during this period of transition post-second step plus the fact we are focused on improving our technology and core processing platform, organic growth dividends and buybacks will be the main tools to continue to leverage our excess capital. Using just two of these strategies, dividends and organic growth, we’ve been able to reduce our tangible capital ratios by over a 100 basis points in the last six months. Our total shareholder return continues to outpace our peer group as outlined in our proxy statement. Our TSR for calendar year 2014 was 14.5% and for the three years ended 12/31/2014, it was 117%. Those numbers put us in the top 10% of that group of 20 banks. These results continue to show the transformation of our franchise in the New York-New Jersey metropolitan area. We have a local business that spans the suburbs of Philadelphia to Long Island, and we are well-positioned to continue to expand and grow. Total assets increased $940 million for the quarter as commercial loans increased $788 million for the quarter, 43% of the growth came in the month of December as we finished the year on a very strong note. Our business lending group, which includes owner occupied commercial mortgages, crossed over the $1 billion mark and had growth of $420 million for the year. This is an area of focus for us as we continue to invest in our resources and build out this lending group. Commercial loans, including CRE and C&I and construction loans, now comprised 59% of the loan portfolio and have grown 28%, 38% and 48% over the last three years. Our CRE and business lenders continue to penetrate our markets and continue to serve the CRE and business customer that is looking for a local bank with local resources and that can make a larger deal and compete with the larger national banks. On the deposit side, we grew $700 million for the quarter and $1.5 billion for the year, which represents 13.5% annual growth. We continue to invest in our retail network, recently opening two branches, one in Garfield and one in Staten Island, and relocating our Madison branch here in New Jersey to a main street location with a driveway. Core deposits now comprise 79% of our total deposits and we have grown 24% for the year and 14% in core deposits for the quarter. We are in the process of rolling out a new consumer checking account with many new features. We continue to make investments in sales training and leadership development in the retail area as we understand the fierce competition in our markets. And we also understand the need to continue to improve and get better in all aspects of our business. Our government and business deposits are up 34% for the year as we continue to expand to these markets and build and maintain our current relationships. Bottom-line, we continue to grow and leverage our capital in all areas of the bank. On the P&L front, net interest margin for the quarter was 3.17% down from 3.27% for the third quarter. Prepayment fees were $3.1 million versus $4.3 million in the third and $4.8 million in the second quarter of 2014. In addition, our cash and due from bank's average balances for the quarter were elevated and exceeded $400 million as our loan growth accelerated in December versus November and October. Net interest income increased $2.3 million for the quarter with the majority of that increase coming in December where our net interest income was $48.4 million and our net interest margin was 3.24% for the month of December. We continue to have strong earnings momentum going into 2015. Our asset quality continues to improve with non-accrual loans at 72 basis points versus 81 basis points in the third quarter. Non-accrual loans totaled $108.4 million of which $84.2 million are residential and consumer loans. These loans have an average balance of $207,000 and for as little credit risk to us on an individual basis. During the quarter, our largest non-performing loan of $10 million was paid in full by the borrower. This repayment related to a construction loan made in late 2008 and we also expect additional interest recovery in the future of approximately $1 million. During the quarter, we provided $11.5 million for our provision for loan losses. Management believes that this provision is necessary due to the growth of the portfolio and the changing mix of the portfolio to business lending and CRE. Net charge-offs for the quarter were $2.3 million for the quarter and $11.1 million for the year. Included in our non-accrual commercial loans of $24 million there are only nine loans originated by Investors Bank for $5.3 million. The remaining $19 million are loans acquired principally from the acquisitions of Roma, GCF Bank and American Bank. These loans are mostly smaller loans in nature and average under $500,000 per loan. So we're pretty happy with our credit quality especially on the businesses that has originated from our loan processes here. Our overall allowance to total loans ratio remained at 1.33% compared to third quarter and year end 2013. Our coverage ratio to total non-performing loan which includes performing TDRs was 136% at year end. We believe we've been prudent in managing our loan growth as it's averaged over 25% for the last five years. Our allowance over that period has grown from $55 million to just over $200 million and properly reflects our loss exposure, changing mix of the portfolio and the growth of that portfolio during that period. With respect to expenses, our core efficiency ratio for the quarter was 49% versus 52% in the fourth quarter of 2013 and 52% in the third quarter of 2014. Operating expenses for the quarter were the lowest for the year at just about $74 million due to lower benefit and comp expenses and reduced data processing and professional fees. We continue to make investments in our compliance, risk management and C&I business in addition to opening two new branches in the quarter. Our core conversion will cause increased expenses in 2015 due to consulting fees and overtime to hourly employees working on the conversion. This project is a major undertaking of the bank and includes a project team of over 125 people. Currently, it is on schedule for completion in August, 2015. Over the past year or so we’ve taken on the tradition of recognizing an employee as an unsung hero, who has done outstanding job for us, and has embraced the core values of the bank. Those core values are character, commitment, cooperation and community. This quarter, we have a little change. We recognized two employees who we wish to recognize as unsung heroes. They are Ana Oliveira our Senior Vice President, Retail and Regional Manager the New York Market, and Sharon Lingswiler, the Regional Manager and Senior Vice President for our Southwest Market, which includes the Roma and GCF acquisitions which were closed in the last 13 months. Both of these employees took on increased responsibility and relocated to these new markets. Through their leadership and dedication they have helped the bank integrate and expand our markets in both New York and Southwest New Jersey. Ana entered the New York market with three branches in late 2010 and had a $120 million in deposits. Today, through the hard work of her team and Ana's leadership that franchisee has grown to over $1.5 billion and 24 branches. Core deposits comprise 85% of these deposits and have grown by 17% in 2014. Ana and her team continue to embrace our values and are an integral part of the community as they continue to expand in Brooklyn, Queens and Long Island. We thank and employed Ana for her leadership and dedication to her team. Sharon moved to Mercer County in 2013 in anticipation of our merger with Roma last December. Sharon and her team hit the ground running as and they established a smooth transition through the merger and integration process and brought a high level of energy to the Roma and GCF teams. Total deposits are up 9% since acquisition. But more importantly, core deposits have grown 34%. Sharon's region leads the bank in sales of non-deposit products and she and her team continues to work with Tim Touhey and Erik Larsen in our CRE and our business lending groups to penetrate at this southwest market of New Jersey. We are very pleased with the results of these acquisitions. And if you recall, both these acquisitions resulted in a net negative goodwill due to the utilization of our mutual and MHC corporate structure. We congratulate both Ana and Sharon and their teams for all their hard work and dedication to the bank's core values. They are special people who serve others, who understand that leadership is service first and foremost and who lead by example. They realize that people do what they see and not what they hear. This quarter was a great finish to a remarkable year. The transformation and energy level of this bank continues to grow and expand. We increased our assets, leveraged our equity and increased our normal cash dividend. Our total stockholders return was 14.5% for the year and we will continue to stay focused on building the premier franchise in our region. We have a solid plan. It is a tested plan based on the result of these past seven years. We are focused on execution and we will continue to execute on our plan through organic growth, stock buyback, dividend and smart acquisitions. We will remain focused on our employee development and our customer service. Together with our customers we will make our communities a better place to live. If we continue to stay focus on these constituents, you, our shareholders, will continue to be rewarded. Thank you for your attention. And let's open it up for questions.

[Operator:]

Thank you. We will now begin the question and answer session. [Operator Instructions]. Our first question comes from Jared Shaw of Wells Fargo Securities. Please go ahead.

[Jared Shaw:]

Good morning, everybody, and congratulations, Sean, on the new role there.

[Sean Burke:]

Thanks, Jared.

[Jared Shaw:]

I have a few questions. If we can start on the deposit growth from the promotion, is that going to continue through 2015 or does that end at the end of the quarter?

[Domenick Cama:]

Hey. Good morning, Jared. It's Domenick. The campaign ended in mid December.

[Jared Shaw:]

Okay. So when you look at that margin the December margin of 3.24%, is that a good starting point going into first quarter or is there some of the interest recovery from that MPA in that number for the December margin?

[Domenick Cama:]

Well, we think that we will have -- our net interest margin will probably go down between 3 basis points to 5 basis points from where it is now. We have a couple of things going on right. First, you have on the positive side we have now the full impact of the cash going to work. We actually held up a large amount of cash in November and that had a negative effect on NIM for the quarter. We also refinanced about a $150 million of borrowings early on in the year and we picked up over 125 basis points on about $150 million. So those are the positives going in. We had a great month in December, but some of the negatives we’ll still -- we’ll have some lag on the deposit campaign, that is some of that money came in the December. So we will start to feel the brunt of that in the first quarter of 2015. Also with the 10-year falling below 1.80%, we started to see our refi activity pickup at the mortgage company; the refis now are running at about 60% of total origination. So when you look at that starting from a base of 3.17%, we are calling for contraction of about 3 basis points to 5 basis points.

[Jared Shaw:]

Okay. That makes sense. When you look at the expenses this quarter it was a positive surprise compared to I think prior discussion of $78 million of expenses. You just - as we go into 2015, is that sustainable in terms of the pick-up or the benefit from the comp side?

[Domenick Cama:]

No. We are going to stay with guidance for the first quarter of approximately, somewhere between $77.5 million and $78 million. We had some benefit in the fourth quarter; we’re self-insured and we were able to reserve some of the accrual that we had based on lower claims, medical claims than expected. We also had some legal expenses that we were able - some legal accruals that we were able to reserve because some of the expenses did not materialize. So we have reconciled back to a $78 million number for this quarter and we think that that’s going to be the run rate at least for the first quarter. Now the other point that I want to make on the run rate for the expenses is that we’ll will start to see that quarterly non-interest expense start to ramp-up through the year as we continue to build infrastructure. And then also if the shareholders approve our benefit plans that expense will start to come in somewhere toward the second to third quarter of 2015.

[Jared Shaw:]

Great, great. Okay. As we look at 2015, is there any new anticipated lending areas, it seems like you are getting some good traction on the medical and the ABL side, anything else that could be potential new growth for you?

[Domenick Cama:]

Well, I’m not sure if we have discussed -- we started a unit in the third quarter of 2014 and that is a unit that’s lending money on the cash surrender value of life insurance policy. And that’s just about getting off the ground. So that although has been started in 2014 we won’t realize the full impact of that group until 2015, but in comparison to some of the like the multifamily or the commercial real estate numbers those numbers are much smaller.

[Jared Shaw:]

Okay. And then just finally, looking at the tax-rate you had said, this quarter obviously 33% and then turning higher. Is that higher than the previous levels of 37% to 38% or trending back to those levels?

[Tom Splaine:]

Yes, this is Tom Splaine, Jared. We are now looking at the effective tax rate now that we’ve made the adjustment for New York state tax. We’re now looking at in tax rate going forward about 37.5% to 38% is probably a good range to be operating in and it’s in line with where we’ve been historically but it might inch little higher as we do move forward.

[Jared Shaw:]

Okay, great. Thank you very much.

[Operator:]

Our next question comes from Collyn Gilbert of KBW. Please go ahead.

[Collyn Gilbert:]

Thanks, good morning guys. So given the strength that you had -- and I apologize, Kevin, if you covered this in your opening remarks, but given the strength that you guys saw in December and especially that you are seeing on the C&I side does that change your sort of overall outlook for loan growth as look forward?

[Domenick Cama:]

I don’t think so Collyn, we think that we are projecting about a $1.5 billion in net loan growth for 2015. And when I look at the numbers for January we’re off a little bit but that’s offset by the strong month that we had in December. So, right now we are calling to somewhere around $400 million in loan growth for the quarter.

[Collyn Gilbert:]

Okay, okay. And then Tom do you --

[Domenick Cama:]

You get a lot of tax driven deals at year-end especially on the real estate side.

[Collyn Gilbert:]

Right, okay, good point. Okay. And then, Tom, here turning to your commentary on the NIM I just kind of think it about that the pressure the 3 basis points to 5 basis points, how that breaks out on the asset side as you are looking at kind of new loan yield compression, security yield compression, I mean just if you could talk to a little bit of the dynamics in terms of new assets that you are putting on your books at what yield, where you expect those to go, and then same thing on the security side?

[Domenick Cama:]

Well, Collyn, on the asset side -- on security side its almost the wash, I mean, we have about a weighted -- we have an asset yield of about 2.10% on securities and we are modeling about a $200 million in growth at about 1.75% yield because generally we invest in shorter duration agency issued securities. The big number is really on the multifamily side, on multifamily where we have an average asset yield of 4.21% and we're projecting that we're going to bring on somewhere around $200 million on average for the quarter at about at a rate of 3.50%. And that’s kind of where we're modeling, and that gives us some -- I'm sorry I said 3.50%, I meant 3.25%.

[Collyn Gilbert:]

Okay, okay.

[Domenick Cama:]

On residential loans we're at wash in terms of overall balance sheet growth but what the dynamic in residential loans is that we have $200 million coming off at 4.50% but and $200 million going back on at 3.50%. So that’s, even though there is no growth there you're having 100 basis point impact of, from the refinance activity.

[Kevin Cummings:]

Collyn, that’s why we're focusing on the business aspect, the business lending and even the business lending owner-occupied, those two lines of business in December had a 4.25% and a 4.50% rate and it's much more a profitable business in the multifamily and the residential.

[Collyn Gilbert:]

Okay, that’s helpful. And Tom, the 3.25% that you're talking about on the multifamily, is that the rate you're seeing on five year paper or is that more seven year paper?

[Domenick Cama:]

Yes, that’s, it’s almost a blend, Collyn. We -- our five-year rate is at 3-1/8%, the five-year multifamily rate is 3-1/8% and our seven-year rate is 3-3/8%. But we do, when I look at the pipeline, the pipeline is actually priced at about 3.67%. And so that brings in some additional loans that don’t exactly fit within the mould of what constitutes what gets the 3-1/8% rate. So we have add-ons for certain aspects of the loan. So, that’s kind of a blended average of across all four maturity spectrums on the multi family side.

[Collyn Gilbert:]

Okay, that’s helpful color. And then just on the reserve, I know -- you guys has said that a lot of the provision was just obviously the growth because credit has been good. Is it, I mean, you've been holding at that 1.33% for most of the year, is that kind of what you're managing to as we assume credit stays as good as it is, the growth trajectory is kind of the same, is that the right numbers to think about going forward on a reserve basis?

[Domenick Cama:]

Collyn, it’s a -- the heated issue in the accounting world now with some of the influences of the public -- the PCOB and then the documentation process and everything like that. And it really depends on charge-off histories and other what happened to the economy. So projecting where we stay and what we do is really subject to so many different factors. So, I don’t really don’t want to give any guidance on that. We feel that it’s prudent and we're at a good spot right now.

[Collyn Gilbert:]

Okay, okay, very good. I'll leave it there. Thanks guys.

[Operator:]

Our next question comes from Matthew Kelley of Sterne Agee. Please go ahead.

[Matthew Kelley:]

Just to clarify on what you're talking about in the securities book, you're envisioning adding $200 million a quarter on the securities book, $800 million for the year, is that right?

[Kevin Cummings:]

Yes.

[Matthew Kelley:]

Okay. Got it. And then in the multifamily business, what percentage of the production has been the longer duration stuff and how has that changed over the last couple of years in the seven-year and longer?

[Domenick Cama:]

The production is broken out in five-year about 38%, seven-year is 31%.

[Matthew Kelley:]

Okay, got it. And then there's been some banks in that business, you have sold portions of their portfolio participations. Have you been involved in any of those type of transactions or is it been mostly conventional originations through the brokers?

[Domenick Cama:]

It's been conventional. We've done some participations here or there, but they've really been where we've sold pieces about portfolio to some other banks around the region. We haven't really been involved in big participations with big lenders in New York.

[Matthew Kelley:]

Okay, got it. And then when you were doing the deposit promotion the campaign there, just walk -- remind us what the rates were and would you consider doing it again to support some of the asset growth over the next year?

[Domenick Cama:]

Well, first of all, the program was a money market program for new money. So the, what we were offering was at 1.25% interest rate for money market accounts. Initially, we had set criteria of $100,000 and that wasn’t working so well. So we lowered the minimum to $10,000 and as a result brought in about $460 million. As far as doing it again, it's taken its toll on our deposit cost, its added 2 basis points to 3 basis points when I think they were all factored in, so it hurts a little bit. We have talked about maybe doing some CD campaigns, one in which given the prospect for longer or rates going up at some point that maybe we can offer a two-year or three-year CD that may attract some business and lock-in some money for a longer period in time.

[Matthew Kelley:]

Got it, got it. Okay, thank you.

[Operator:]

Our next question comes from Mark Fitzgibbon of Sandler O'Neill. Please go ahead.

[Mark Fitzgibbon:]

There was a decent sequential quarter decline in fee and service charges this quarter. I’m curious why was that and we likely we see that snap back in 1Q?

[Domenick Cama:]

I think we were elevated in September --

[Mark Fitzgibbon:]

It look like fees and service charge has been running around a little over $5 million for the last few quarters and it was about $4.1 million this quarter.

[Kevin Cummings:]

Yes, in the third quarter we had a pick-up of some fee income in the lending area. So it's a little elevated some unique event pertained to the third quarter and FAS 91 fee recognition.

[Mark Fitzgibbon:]

Okay. So sort of $4 million one is a good run rate going forward you think?

[Domenick Cama:]

Is a better run rate.

[Kevin Cummings:]

Yes, I think that is a little like this quarter, Mark. I think if we were in that $4.5 million or so I mean I think that’s a relevant range for us.

[Mark Fitzgibbon:]

Okay. And then secondly, I’m wondering if you expect to make the special dividend sort of an annual thing we’re at the end in the fourth you kind of true-up based upon the earnings part of the company or was this sort of a one short deal?

[Kevin Cummings:]

It was a one shot deal for this quarter and I think once we get the stock buybacks we won’t be considering it. I think we will consider it again the second quarter but it was its certainly in lieu of the stock buybacks. We prefer the stock buybacks to the special one-time dividend.

[Mark Fitzgibbon:]

Great. Thank you.

[Operator:]

Thank you. This concludes the question-and-answer session. I’d like to turn the conference back over to management for any closing remarks.

[Kevin Cummings:]

Okay. Well, thank you all for your participation today. 2014 was a historical year; we’re pleased with the momentum in the company. We thank you for your support and I’m not going mark this just get off the call, but I’m going to say this go Patriots, enjoy the Super Bowl. Have a great weekend. Thank you.

[Operator:]

And thank you, sir. The conference has now concluded and we thank you all for attending today's presentation. You may now disconnect your lines and have a great day.