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Investors Bancorp, Inc. (NASDAQ:ISBC)

Q1 2013 Earnings Call

April 30, 2013 11:00 am ET

Executives

Thomas F. Splaine Jr. – Senior Vice President and Chief Financial Officer

Kevin D. Cummings – President and Chief Executive Officer

Analysts

Mark Fitzgibbon – Sandler O’Neill

Matthew Kelley – Sterne, Agee & Leach, Inc.

Collyn Glibert – KBW

Mark DeVries – Barclays Capital

Operator

Good morning, everyone, and welcome to the ISBC First Quarter Earnings Conference Call. (Operator Instructions) Please note today’s event is being recorded. I would now like to turn the conference call over to Mr. Tom Splaine.

Mr. Splaine, please go ahead.

Thomas F. Splaine Jr.

Thank you. Good morning, everyone and thank you for joining us today. I’m Thomas Splaine, Senior Vice President, 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, Inc. 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, 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. Investors Bancorp had a strong quarter in a tough operating environment, as interest rates remain low and the level of refi activity remains elevated. Investors had its most productive quarter in its history, and we are happy to report net income of $27.2 million or $0.25 a share, and this compares to last year of $18.9 million or $0.18 a share. Last year in 2012, we had completed the acquisition of Brooklyn Federal. Without those nonrecurring merger expenses, our net income in 2012 would have been $22.7 million or $0.21 a share.

Our 2013 first quarter, results in a 19% increase in EPS and a 19.8% increase in net income. Our return on equity and return on tangible equity both exceeded 10% and 11% respectively for the first time. Loan originations and residential purchases from our Corresponded Mortgage business exceeded $1 billion for the quarter, and that includes our commercial loans also, but only resulted in loan growth of $162 million in total loans.

We sold over $141 million to Freddie and Fannie in the quarter, but the pay downs and refis curtailed growth for the quarter. Commercial loans grew 2.9% for the quarter, and this reflects a 44.5% year-over-year increase with the Marathon acquisition. We continue on our journey of transforming the bank to a full-service commercial bank, as commercial loans now comprise 52% of our total loans, and loan income comprises 57% of total loan income.

Our credit quality remains strong, and our provision for loan losses exceeded our charge offs by $7.5 million. Our nonperforming loans increased a bit in the quarter, but our MPA ratio to total assets of 1.19 and our nonperforming loans to total loans of 1.37 remain good compared to our peers. Our allowance for loan losses increased over 26 million year-over-year at March 31 or this year. We now have a ratio of 1.41% and a coverage ratio to non-accrual loans over 100%, 110%.

Our 30 to 60 day numbers are down on both the Residential and the Commercial portfolios, down $73 million to $37.5 million, which translates to an average loan of about $300,000 for both portfolios. On the Commercial side, the 30/60 totals approximately $7.8 million and is comprised of 12 loans, which equates to an average loan of $650,000. Over 90% of these loans are comprised of loans acquired through acquisition, and one is a participation with another bank.

Bottom line, we have made great progress in managing our credit risk, as we have transformed the balance sheet. Year over year our non-accrual loans are down from 1.64% to 1.28% for total loans at March 31 of this year. Our commercial loan non accruals to total commercial loans is less than 1% than its 94 basis points, and total $51.6 million. In this total, $8.8 million has come through acquisitions, and $18.8 million is current to their terms and paying out of pocket, but have been reclassified as non-accrual due to regulatory and accounting guidance.

Looking back over the last four to five years, it has been an interesting journey, as we have transformed the bank from the fixed income fund, as in 2003 we had 80% of our assets in securities, to 2007 when 10% of our loan portfolio was included in commercial loans.

I’d like to thank Rich Spengler, our Chief Lending Officer, and his team of lenders for a great job, and for steering this ship through these difficult waters. We’ve also made significant investments in personnel in the Credit Risk Management Group, headed by Tom Stackhouse, our Chief Credit Officer. Over the last few years we’ve expanded and enhanced this group with seasoned professionals to support the loan growth of the bank.

On the retail side, we continue to integrate the Brooklyn and Marathon acquisitions. These are strategic acquisitions that support our real estate and middle market lending in New York. We now have a nice franchise in New York, with 23 branches and $1.3 billion in deposits. I’d like to remind you that we entered New York in October 2010 with three branches from the Millennium acquisition, which we paid 11 basis points for about $100 million in deposits. I’m happy to report that through this week our core deposits and these franchise are up 4.5% for the Brooklyn and Marathon franchises. And we continue to mentor and train our retail teams and bring them into the investor’s culture, which is one of service to each other, our customers, and the communities that we serve. If we take care of these three constituencies, you our shareholders will be rewarded.

On the acquisition front, we continue to prepare for the integration of Roma. Paul Kalamaras, our EVP of Retail, has been busy working on both the Marathon and the Roma retail structures.

The retail bank has recently announced a reorganization to address our growth, and we continue to make investments in the infrastructure of the bank. There’s one thing I’ve learned at Investors, is that change and growth are a good thing, even though it may prove a little bit uncomfortable.

We will be moving three seasoned Investor bankers to the Roma franchise, and with the hiring of Tim Tui as a Commercial Real Estate Exec in that franchise in Southwest Jersey, the region will hit the ground running when the deal is completed.

On the regulatory and approval front, the proxies are in the mail for the Roma transaction, and the shareholders meeting for both companies are set for May 30. We have not yet received regulatory approval, as the regulatory application received a comment during the application public comment period. We plan to close the merger once regulatory approval is received.

We announced our eighth acquisition this quarter, Gateway Community, on April 5, and the deal extends our franchise into the Philadelphia suburbs with four branches and $278 million in deposits.

This transaction is a merger of mutual and enhances our second step valuation. In addition, with Gateway and Roma, Investors will have the largest deposits, statewide market share for a New Jersey based bank after these pending announced acquisitions are completed.

Overall, it’s been a busy quarter with no moss growing under our feet. We posted greater than 10% return on equity, greater than 11% for tangible equity. We have leveraged our capital from almost 20% at our IPO day in 2005 to 7.75% at March 2013. We just declared our third cash dividend of $0.05.

We continue to manage the company using our three levers, prudent organic growth, smart acquisitions that do not dilute tangible book value or second-step valuation and equity management tools such as stock buybacks and cash dividends. All of these tools will be useful as we look forward to a second-step transaction, which after Roma and Gateway deals we believe we are well positioned to execute.

I would like to thank our team, our employees and staff for their continued hard work and dedication. They certainly make my job fun and interesting. We continue to look for ways to improve our service to our customers, and I am thankful for their outstanding efforts.

It is an exciting time at Investors. We have some economic headwinds, and the regulatory environment is dynamic and changing, but we believe, like in 2009 and 2010, these challenges are opportunities for a bank like Investors.

We look forward with great excitement for the next 12 to 24 months. We have a great opportunity here to be a $17 billion organization with 15% capital, one of the strongest regional banks in the country. With the potential wave of consolidation, which all the investment bankers are predicting, we will be well positioned, having completed eight acquisitions since June of 2008.

Our team is well tested. It’s a veteran team that is up to this opportunity, and it is an honor along with our executive team of Dom Cama, Rich Spangler, Paul Kalamaras, Tom Splaine, and Dan Harris to lead this organization.

I thank you for your attention and your support. And now I’d like to open it up to questions.

Question-and-Answer Session

Operator

At this time we’ll begin the question-and-answer session (Operator Instructions) Our first question comes from Mark Fitzgibbon from Sandler O’Neill. Please go ahead with your question.

Mark Fitzgibbon – Sandler O’Neill

Hey, guys. Good morning.

Thomas F. Splaine Jr.

Hey, Mark.

Mark Fitzgibbon – Sandler O’Neill

It looks like you’ve booked about $277 million of loans that were originated by the mortgage operation on the balance sheet in the quarter. What are those – what duration were those loans? Were they 30-year fixed or hybrid loans?

Domenick A. Cama

Mark, good morning. It’s Domenick. The residential mortgage is about a 55% of the residential mortgages are fixed rate loans, and the rest are hybrid ARMs.

Mark Fitzgibbon – Sandler O’Neill

Okay. Secondly, I wondered if you could share with us your outlook for the margin in say 2Q?

Domenick A. Cama

Right now it looks, Mark, like it’s going to be about a 10 basis point decline, notwithstanding any affect from prepayment income.

Mark Fitzgibbon – Sandler O’Neill

Okay. And could you also share with us what your pipeline looks like on a commercial real estate and multi-family as well as a C&I pipeline?

Domenick A. Cama

It is about $900 million, the pipeline has about $900 million in it, Mark.

Mark Fitzgibbon – Sandler O’Neill

Okay. And then lastly, I wondered if you think there’s any chance of doing additional mutual holding company deals prior to announcing a second step?

Domenick A. Cama

Well, we don’t have any that we’re talking to right now, but that – never say never.

Mark Fitzgibbon – Sandler O’Neill

Thank you.

Thomas F. Splaine Jr.

You’re welcome.

Operator

Our next question comes from Matthew Kelley from Sterne, Agee. Please go ahead with your question.

Matthew Kelley – Sterne, Agee & Leach, Inc.

Yeah. Hi, guys. Matt. Just to follow up on the question of the pipeline, the $900 million in commercial real estate and multi-family, what’s the average yield in that pipeline? And then the average duration, anything getting longer there?

Thomas F. Splaine Jr.

No. It’s actually starting to get a little shorter. The weighted average coupon on the pipeline is about 3 75.

Matthew Kelley – Sterne, Agee & Leach, Inc.

Okay. And what’s the split between multi-family commercial real estate?

Thomas F. Splaine Jr.

It’s still about 60% in multi-family.

Matthew Kelley – Sterne, Agee & Leach, Inc.

Okay. Gotcha. And do you have a better sense now of where pro forma expenses are going to come in once Roma is brought on board, call it the full third quarter?

Thomas F. Splaine Jr.

We haven’t projected with Roma yet, because we’re still working on that, but we’re looking at about $56 million to $57 million of quarterly run rate, that’s without Roma.

Matthew Kelley – Sterne Agee & Leach, Inc

Okay. Got it.

Thomas F. Splaine Jr.

Just for information purposes, Roma runs at about $12.5 million, has as $12.5 million quarterly run rate on expenses. So I’m not sure how much we’re going to pare that back yet.

Matthew Kelley – Sterne Agee & Leach, Inc

Okay. Got it. And then, just a little commentary on the pipeline in the mortgage banking operation and comments on sale margins? And what you saw during the quarter and what you’re seeing now?

Thomas F. Splaine Jr.

Yeah. As far as the refi split, the first quarter saw about 75% refi businesses versus purchases. It’s been about 70% in April, but with this recent rally in the 10-year treasury, our mortgage company has seen a pickup in applications. In terms of pricing, we’re looking at probably about 2 75, about a 2 75 price profit on mortgages.

Matthew Kelley – Sterne Agee & Leach, Inc

Okay. Gotcha. All right. Thank you.

Operator

Our next question comes from Collyn Glibert from KBW. Please go ahead with your questions.

Collyn Glibert – KBW

Great. Thanks. Good morning, guys.

Thomas F. Splaine Jr.

Hey. Good morning, Collyn.

Kevin D. Cummings

Good morning, Collyn.

Collyn Glibert – KBW

How are you guys thinking about your funding strategy going forward? And just kind of thinking about loan and deposits, the loan-to-deposit ratio – just trying to get a sense of kind of your comfort level there? Will you continue to use incremental borrowings? Or do you see – are there certain deposit initiatives? Or just if you could talk and give a bit of color on that?

Thomas F. Splaine Jr.

Sure. Collyn, the loan-to-deposit ratio right now is just shy of 120%. And in the past we’ve taken the number as high as 125%, although I’ll tell you that 125% makes us uncomfortable. We don’t really like to be above that level.

In terms of the remainder of the year and the future, that’s why we’re so happy to have the Roma transaction coming along, because Roma’s loan-to-deposit ratio is about 60%. And on a pro forma basis we see our loan-to-deposit ratio coming down to about – somewhere about 110% to 111%. So that helps us there, right there. Also Roma has a big portfolio of securities that we’re looking at and trying to decide how many of those securities we’ll keep going into the acquisition.

The thought is that perhaps we would sell off a portion of those securities so as we could reduce borrowings a little bit more. But in terms of our own comfort zone, we’re perfectly content running somewhere between 110% and 115%, 120% loan-to-deposit ratio.

Collyn Glibert – KBW

Okay. That’s helpful. And just a question on the prepayment income that you guys saw in the quarter, was that skewed more towards the beginning of the quarter? Or and kind of what are your thoughts? I know you gave the NIM guidance, Dom, excluding prepaids. So just how you are you seeing speeds there?

Thomas F. Splaine Jr.

It was about, Collyn, it was about $3 million for the quarter.

Kevin D. Cummings

It was pretty consistent in all three months. Yeah. It was.

Thomas F. Splaine Jr.

So I can’t pinpoint one specific month where it all came it. It was really, as Kevin said, it was really consistently applied during the three month period.

Collyn Glibert – KBW

Okay. And just one final question, maybe could be interpreted from your comments on loan pricing, but just in general, how would you guys characterize the environment in terms of competition? Where are you seeing competition pick up? How much has it intensified in the last three to six months? Or has it been fairly consistent? Are there new players that are coming in with your rational terms? And then, If you could talk a little bit about that.

Thomas F. Splaine Jr.

I’ve listened to a few conference calls this past quarter of banks in the New York market, who everybody says the same thing, that the competition is irrational. And certainly we’ve run into our share of competition in which there’s some pricing that is difficult to match. We have yet to break the 3% barrier in terms of multifamily pricing, although I know some of our competitors have. Certainly, it is intense. Not only do you have a number of banks who have reentered the market, you also now have the bigger, the financial institutions, the larger financial institutions making – getting back on their feet and coming into the market and having an impact, even on some of the smaller community bank business. So I’ll just answer your question, Collyn, by saying yeah, the market remained intense. It’s been intense for the last year or so, and it hasn’t let up yet.

Kevin D. Cummings

Collyn, it’s a great opportunity. We welcome the competition. We’re not going to sit here and lament and complain about it. It’s – we’re in the market, and we’re making loans, and it’s a great challenge. We love the competition.

Collyn Glibert – KBW

All right. That was all I had. Thanks, guys.

Operator

And our next question comes from Mark DeVries from Barclays. Please go ahead with your question.

Mark DeVries – Barclays Capital

Yeah, thanks. Could you talk about any deposit repricing opportunities you see for the remainder of the year?

Thomas F. Splaine Jr.

Yeah. Mark, we have just over the next quarter about $500 million in CDs that are maturing from a weighted average cost of 68 basis points to about 40 basis points. So we’re looking at somewhere around a 25 basis point pickup on $0.5 million in CDs repricing. We also had about $200 million in federal home loan bank borrowings that have repriced already during the quarter. We’re picking up about 200 basis points on that $200 million. So that is going to have a significant impact on the cost of borrowings for the quarter.

Mark DeVries – Barclays Capital

Okay. But I assume that’s reflected in your guidance for the 10 bps…

Thomas F. Splaine Jr.

Yes.

Mark DeVries – Barclays Capital

Decline in the margin? Okay. Hey, anything on the back half of the year we can look towards?

Thomas F. Splaine Jr.

We have some borrowings that are maturing towards the latter part of the year, but it really is not a significant as the $200 million that we had come due this quarter.

Mark DeVries – Barclays Capital

Okay. That’s helpful. And then finally are you still targeting the $700 million, $800 million or so in asset growth kind of excluding your M&A of the Roma, Gateway deals for the year?

Thomas F. Splaine Jr.

Yes.

Mark DeVries – Barclays Capital

Okay. Great. All right. Thank you.

Kevin D. Cummings

Okay, Mark.

Operator

And, ladies and gentlemen, we’re showing no additional questions. At this time, I’d like to turn the conference call back over to management for any closing remarks.

Thomas F. Splaine Jr.

Okay. Well we’d like to thank you for your participation today. We’re well positioned and moving forward with the Roma and Gateway transactions and it was a very good quarter but we’re still working hard to bring value to our shareholders. We thank you for everything and thank you for your support. Have a great day.

Operator

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

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