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Investors Bancorp, Inc. (NASDAQ:ISBC)

Q1 2014 Earnings Conference Call

April 17, 2014 04:30 PM ET

Executives

Thomas Splaine - SVP and CFO

Kevin Cummings - President and CEO

Domenick Cama - COO

Analysts

Laurie Hunsicker - Compass Point

Christopher Marinac - FIG Partners LLC

Matthew Katten - Barclays Capital

Operator

Good afternoon, everyone, and welcome to the Investors Bancorp First Quarter Earnings Conference Call. (Operator Instructions). Please also note today’s event is being recorded. And at this time I'd like to turn the conference call over to Mr. Thomas Splaine, Chief Financial Officer. Sir, please go ahead.

Thomas Splaine

Thank you Jamey and good afternoon everyone, and thank you for joining the call today. I'm Thomas Splaine, the Senior Vice President and Chief Financial Officer. And we'll begin this afternoon’s call with the 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 Discussion and Analysis of Financial Condition 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 Cummings

Thanks, Tom. And good afternoon, not good morning, it’s a good afternoon, I appreciate you’re getting on the call so late in the afternoon right before the holiday. One thing I’d like say thank you to -- I appreciate that our accounting and financial group’s efforts in getting our earnings out in record time this quarter. Thank you very much. And I’d also like to say upfront that under advice of our SEC council we can now comment on the second step offering and that this call is focused just on the results of our first quarter.

It continues to be a busy quarter here at Investors as we continue to grow and expand our markets in New York and New Jersey. In the first quarter, we closed the GCF transaction which added $250 million in deposits and $195 million in loans. This transaction was a mutual to MHC transaction and no shares were issued to the public and all shares were issued to the Investors MHC.

This transaction along with a previous Roma transaction have greatly increased our shares outstanding at the MHC and this will hopefully enhance our second step valuation and appraisal. In March we converted the quarter operating systems of the Roma and Roma Asia franchises and it’s good to have everyone on the same operating system. We also changed all the signage and marketing materials and we did that all in one weekend in March without any major problems or issues.

We’ve become quite adept at doing those things in one weekend. It was 26 branches and everything went out without issue. For the quarter net income was $34.4 million versus $27.2 million in 2013, which represents a 27% increase from the prior year.

Our net interest margin was flat compared to last year at 3.26% and has dropped 5 basis points, compared to the fourth quarter of 2013. Prepayment penalties were $4.1 million in 2014 versus $3.1 million in 2013 and $5.1 million in the fourth quarter of 2013.

One of the big things of this quarter is our asset quality continues to improve as our non-performing loans, including performing TDR’s were at 1% of total loans and our non-accrual loans were at only 88 basis points for the first quarter. The non-accrual loans are broken down as follows. The biggest piece of that is in the residential and consumer portfolio at $79.4 million and our commercial portfolio which approximates us $7.2 billion, has only $18.3 million with 25 basis points for a total non-accruals of $97.7 million.

In the commercial portfolio there is one loan for $10 million originated by Investors in March of 2008 that is well secured with an appraisal for $15 million. The remaining $8.3 million in the commercial portfolio of the non-accrual portfolio, there is $7 million of loans from prior acquisitions. These acquisitions are Marathon, American and Roma banks. And $1.3 million in six more loans originated by Investors Bank.

You know we’re pretty happy with that result and are going into the second step; going into the growth period. If you look at the 380 -- in 2007 our commercial book was $380 million. That book, the Investor book has grown to $6.5 billion and we have close to only $11.3 million in non-accrual loans, which represents 17 basis points.

Our allowance coverage ratio to non-accrual loans is 185%. Our allowance for total loans is 1.33 and our allowance to total loans originated by Investors is 151. So we’ve always said that at the time of the second step we’d want to have a fortress balance sheet and we’ve think we’ve accomplished that while maintaining a significant amount of growth, growing from $380 million in 2007, at the end of 2007 to almost $6.5 billion today. That’s on the commercial side.

With respect to operating expenses we had a noisy quarter again as GCF expenses and some severance payments from the Roma came through which totaled $1.4 million. Plus we had about $1.3 million due to the severe winter, mainly snow removal of course.

With those items out of the picture, we would have had approximately $75 million OpEx run rate for the quarter. The fact of the matter is our headcount continues to grow. We are a bigger bank that will get bigger and we have invested in our headcount. We have hired more talented employees in all areas of the bank including regulatory risk management and technology and operations.

We started, we also have started to incur consulting fees with respect to our core effort conversion which approximated $300,000 in this quarter. And one thing we’d like to note is because of the timing of the Roma conversion and the timing of the GCF conversion which is scheduled for June of this year, we haven’t anticipated or we haven’t seen the anticipated cost saves on those transactions yet.

On a positive note, we continue to move our ORE properties off the balance sheet as we recorded a gain in other income for the fourth consecutive quarter on the sale of residential ORE. We recorded a gain of $131,000 and we have gone four straight quarters with gains on ORE totaling 1.7 million over the last four quarters. Again, we try to be conservative in our marks and move these assets in the most economical way off our balance sheet.

In addition, in other income we had a bargain purchase gain of 1.5 million relating to the GCF acquisition and our investment advisory group had an increase of 300,000 over last year as we made progress and headway in the Roma and GCF markets.

These gains were offset by a decrease in mortgage banking revenue of $2.8 million, which was offset by a recovery of loans acquired in business combinations of $1.4 million. All in, it was a busy quarter for the bank as we prepare to complete our second step transaction. We believe we have demonstrated a compelling story for the bank, which has achieved its benchmarks for the second step, 10% return on equity, 8% capital ratios and payment of dividends.

Going forward, we think this formula works well for us. It’s based on organic growth and when you look at our organic growth over the last -- since we’ve gone public it’s about $6 billion since 2007, smart acquisitions that do not to dilute tangible book value. We have about $4 billion in acquisitions that have come through, eight acquisitions since our first acquisition in June of 2008 and we have $77 million in goodwill on the books. We had stock buybacks where we brought approximately 30% of the public shares and then payment of dividend and finally we want to maintain a fortress balance sheet or MPAs of less than 1%.

But most importantly, we continue to create an exciting and engaging culture for our employees and the management team who have embraced our core values. Last quarter, began a tradition of recognizing one of our employees that we call an unsung hero who has done an outstanding job for us and has embraced our core values of character, cooperation, commitment and community. There are so many people here at the bank working so hard, whether it’s at the KBW stock center working on mergers and integrations and driving and continuing the momentum of change to make us the best community bank in our market.

This quarter’s unsung hero is Joe Valenti, our Senior Vice President and Facilities Manager. He is our go to guy to get things done and continues to maintain what we call the plumbing, literally the plumbing of this organization. His group has managed the renovation, relocation and new construction of approximately 60 branches over the last few years which included a budgeted cost of $55 million. He has managed our response to Superstorm Sandy and somehow got us through this tough winter. He has done everything we need him to do and then some. He is like a Cal Ripken, a Derek Jeter in that he’s the ultimate team player and there can no better compliment than to be known as teammate that makes other people, other players better. I call it the Jason Kidd rule.

I thank Joe and all our employees for their values and their efforts to make Investors a special place to work. Hopefully, this will be our last call as an MHC. It has been a great run where we have learned a lot and hopefully improved in every aspect of this banking business. We have many opportunities ahead of us. We are in great markets and we have the team to execute on our plans to be a major regional force in this New York, New Jersey region. And that New York, New Jersey region is the best market in the world. I would like to thank all of you for your support and I thank our employees for their dedication and hard work. It is a very exciting time at the bank and I thank you all for your support and efforts.

Now, I would like to open it up for questions.

Question-and-Answer Session

Operator

At this time, we’ll begin the question-and-answer session. (Operator Instructions) And our first question comes from Laurie Hunsicker from Compass Point. Please go ahead with your question.

Laurie Hunsicker - Compass Point

I just wondered if you could expand a little bit, as you’ve said you’ve done eight acquisitions as part of your three pronged strategy and you’ve done it without diluting tangible book and obviously as you get out of this MHC structure you no longer can buy mutuals and MHCs. If you could just tell us how you look at -- how you think about tangible book dilution and may be targets for how big you see yourself in two years, three years, five years? Thank you.

Kevin Cummings

Well certainly we’re going to be opportunistic as far as looking at what comes to us with this capital. We estimate we’ll be at 18% capital. Domenick and I talk about this all the time. We chatted about it this morning. We’re going to be major shareholders and protecting tangible book value is going to be very important. We can’t let our egos get in the away just to do a deal because of a certain size. If you look at the transactions, lot of them are going to be coming our way. Domenick’s getting calls all the time. We’re going to have to be disciplined and do the same things we’ve done over the past six years since 2008.

If you look at our plan -- if you look at the organic growth that we have had, we started in the commercial real-estate business with half a dozen people, 10 people. Now we have a commercial division of over 100 people. So we feel that we could leverage this new capital by growing anywhere from $1.2 billion to $1.8 billion per year over the next six years, that’s almost $10 billion. So we don’t feel any pressure to do a deal just for the sake of doing a deal and we’re going to be hopefully good stewards of capital and protect our interest -- protect my own personal interest, because I don’t want to be at a shareholders meeting and have people yelling at me.

Domenick Cama

And Laurie, and if I can add, this is Domenick, we have been vocal about the immediate future beyond the second step that we don’t foresee any transactions going out 12 months to 18 months for a number of reasons. One is certainly we want to make sure that our stock is starting to mature and starts to carry a multiple that is more mature. And second is that given our strategic plan, we see a growth in the portfolio given our loan production machine of giving us enough fuel to continue to leverage the capital and grow the bank accordingly.

Operator

And our next question comes from Christopher Marinac from FIG Partners LLC. Please go ahead with your question.

Christopher Marinac - FIG Partners LLC

Kevin, I want to ask little bit about loan growth and what you are seeing in pipelines and the pace of growth we see this quarter, can that accelerate just given seasonality in Q1 versus Q2 and Q3?

Domenick Cama

Chris, this is Domenick. The pipeline is up a little bit from our last quarter. It’s just shy of $1 billion and still has a concentration of multifamily loans. Although we are changing direction a little bit in that. We’re focusing some more business in the commercial real estate sector and the C&I business. So while multifamily still comprise a majority of the pipeline, we’re starting to see some growth in our commercial real estate and C&I portfolio.

Kevin Cummings

Chris, one of the things we’ve recognized, back in 2007, 2008, the commercial portfolio was less than -- at the end of 2007 it was less than $400 million. We didn’t have to worry about prepayments and amortization of the portfolio. That’s a headwind that we recognize going forward. But we have more and better resources now than we had in 2007. So hopefully we have the machine in place. We originated on the residential and the book side over $5 billion in loans last year and hopefully on the residential side it would be difficult to maintain it but certainly on the commercial side we have the increased resources.

The investments that we made while being an MHC, the investments that we’ve made in -- I’d look at the allowance for loan losses and other things like that. In 2007 our allowance was $8 million. It was 20 basis points on a total portfolio of $4 billion. Today it’s 133 basis points on a $13.5 billion portfolio. So we funded that all through this recession and went from $12 million in net income and made $34 million in this quarter.

Christopher Marinac - FIG Partners LLC

Great, and I guess Kevin just as a follow up, when is the next time that the Board would revisit the dividend? Is that later this year or do they look at it on a quarterly basis?

Kevin Cummings

Chris, we will look at it on a quarterly basis.

Christopher Marinac - FIG Partners LLC

Should we think that the payout ratio evolves more over time as the bank continues to have success?

Kevin Cummings

Chris, we have not revealed at this point what we expect to happen to the dividend, but suffice it to say that given the conversion from a mutual holding company to a full public company, obviously there’re be a lot more shares in the company. And while we have begun to do the analysis and are starting to zero in on where we want to be, we haven’t revealed it at this point. So we’re not going to discuss it on this call.

Operator

Our next question comes from Matthew Keating from Barclays. Please go ahead with your question

Matthew Katten - Barclays Capital

So, if I heard correctly, I think you said that the core operating expense run rate this quarter was around $75 million. I think last quarter you kind of guided to, once you kind of get through the data processing conversion, obviously you got Roma done this quarter and GCF is maybe scheduled for June. But I think at that point, last time you said maybe you could get expenses down to $69 million, $70 million range. Does that still feel like an achievable target at this point? Thanks.

Kevin Cummings

No, we don’t see 70 million as being the run rate going forward. We continue to build the risk management infrastructure, credit infrastructure, bringing on new employees. And so, while our expenses for the quarter were approximately 77 million, we think that being in the $75 million range is probably the new run rate quarterly going forward.

Matthew Katten - Barclays Capital

Understood. Thanks for that clarification. And then I guess just on the tax, I know there was some noise this quarter with the change in the New York state tax code but is a 38% type run rate what your expectations are at the moment?

Thomas Splaine

Yes, for taxes what we’re looking at now with the change in the state tax rate in New York, we’re looking at somewhere probably in the neighborhood of 38.5% to 39%, somewhere in that ballpark right now as these tax laws get reviewed and hammered through but that should be a pretty good area for you guys.

Matthew Katten - Barclays Capital

Okay. And do you think you’ll have to add anymore headcount in the risk management area. I know you have made significant investments over time but I guess post the second step, do you have expectations to hire a lot more on that front or it shouldn’t really change necessarily what you’re doing on that front? Thanks.

Kevin Cummings

I wouldn’t say that it’s a lot more. We continue to be diligent in our efforts to meet all of our regulatory obligations. The regulators are in here all the time given the size of the Company and so we will continue to make some investments there but I would not say from a headcount perspective that it’s a lot more.

Operator

And everyone at this time, I’m showing no additional questions. I would like to turn the conference call back over to management for any closing remarks.

Kevin Cummings

Okay. That’s a record. I appreciate everyone’s participation. We are excited about our future prospects here and maybe I’ll just get a chance to see you once we hit the road for the second step. So everyone have a great holiday. I wish you the best and thank you for participating on the call. Thank you.

Operator

Ladies and gentlemen that does conclude today’s conference call. We do thank you for attending. You may now disconnect your telephone lines.

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