Citizens Financial Group, Inc. (CFG) Q4 2012 Earnings Report, Transcript and Summary

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

Thank you. And 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 the 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 are which are beyond Investors Bancorp’s control and are difficult to predict and can cause the 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 the 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.

Good morning and thanks, Tom. We had -- Investors had its most productive quarter in its history and we are happy to post a strong and profitable quarter with net income excluding merger-related expenses at $25.8 million or $0.24 a share, compared to $21 million or $0.20 a share in the prior year. On an annual basis, excluding the merger's expenses for Brooklyn and Marathon, our net income increased from $79 million to almost $97 million, a 23% increase in net income year-over-year. To say it was a busy quarter would be an understatement. Our management team was tested on several fronts and I'm very proud to say that the team did a great job and had a great quarter and completed many difficult tasks. The hurricane tested our disaster recovery plans and we got through the storm with flying colors as it gave our management team an opportunity to show how capable it is under difficult operating circumstances. It was a great opportunity for me to see some of our management teams that I don't work with everyday. Our technology and facilities groups, led by Sergio Alonso and Joe Valente, both senior VPs who joined the bank from Millennium, did an outstanding job. It highlights the point that sometimes we overlook that in our acquisition strategy, we are not only expanding our geography and our franchise but we're also picking up some strong people to complement our management team. On that front, on the acquisition front, we closed the Marathon deal in the quarter, which added about $780 million in deposits plus 13 branches, of which 12 are in New York. We entered the New York market in January 2010 with the opening of our loan production office in Manhattan, which has been very successful and is led by Joe Orefice, who joined us in late 2009. We entered the retail market with the acquisition of Millennium, with 3 branches in Queens and Long Island, and we now have 23 branches with approximately $1.4 billion in deposits, with 20 branches coming from acquisitions and 3 branches under our de novo branch openings, 1 we opened up in late 2011 in Borough Park and 2 in Brooklyn in 2012. Those 3 de novo branches have over $180 million in deposits at yearend, and have been opened less than 10 months. So it's not just an acquisition strategy in New York, but also a de novo strategy. Our regional manager, Anna Oliviera, also a Senior Vice President, joined us from an acquisition in 2010 from the Millennium transaction and has been doing an outstanding job in that market. She actually moved to Brooklyn to be closer to the market from New Jersey. We have a focused team and we're focused on this market and we see tremendous opportunities to expand and grow both our business lending, the retail deposit side and also the residential lending. Our mortgage company is out hiring mortgage officers to expand their sales force to work in that market. In just 2 years, we have a 23-branch franchise with $1.4 billion in deposits and approximately $2.4 billion in commercial loans in New York, and we are looking to continue to expand that market area. During the quarter, we also announced our seventh acquisition with the Roma Bank transaction which we are working on as we speak. This transaction was very appealing to us from a financial point of view, as it is similar to us and our ownership structure as an MHC, with only 25% of its shares outstanding to the public. It will give us approximately $1.5 billion in deposits plus it will support our South Jersey lending teams, where we have approximately $1 billion in loans in that market and another $458 million in commercial loans in Pennsylvania. We're hoping to close this -- we're on track to close this transaction in the second quarter. I guess the big story this quarter is our loan growth and we had an outstanding quarter as loans grew over $1 billion, of which $560 million came from Marathon, and approximately $460 million from organic growth net. And most of that growth, $507 million for the quarter, came from the commercial sector. For the first time in the bank's history, our commercial loan book exceeds the residential book, as commercial loans comprised 51% of the total loan portfolio. From a credit point, the commercial loan portfolio has $38 million in nonaccrual loans, which equates to 71 basis points on a total commercial portfolio of $5.4 billion. Our nonperforming at current levels, really the biggest piece in that piece is the $82.5 million in residential loans and that's a difficult process for us because of the foreclosure process in New Jersey. We have approximately -- it takes approximately 3 years to push things through the pipeline here in New Jersey. Our coverage ratio to non-accrual loans is 118% and we continue to manage the company in a prudent manner. Our allowance to total loans 1.36%, so if we pull out the Marathon loans, it is 1.44%. In 5 years, we have built our allowance from $9 million to $142 million, while our income for each year has grown from $12 million in 2007 to $79 million last year and $97 million in 2012. As I've mentioned on earlier calls, we remain focused on our strategic business objectives, which include a continued integration of our Marathon acquisition plus the Roma transaction through 2013. In January, we met with the employees of Roma and we're off to a good start with that group. Our C&I group, building out the middle market lending, our C&I group is getting traction. C&I loans grew $50 million in the quarter, from $120 million to $170 million. That group, though, manages not only the C&I loans but also the owner-occupied real estate that house businesses and manufacturing facilities, hotels and nursing homes, things like that -- of that nature. And that growth in the quarter, if you take those loans which are classified in the CRE portfolio, that group has grown from $361 million to $432 million in the quarter or 20% for the quarter. We have a good group of lenders, we just hired 3 lenders that form a medical team and we're focused on continuing to build that group as it brings in business loans and business deposits. And it also helps us on the interest rate risk side. We continue to move forward on our core processing conversion, which is scheduled to be completed in 2014. And finally, we continue to get closer to our second step transaction, which has been enhanced by the Roma transaction as we expect to raise $1 billion to $1.3 billion in the capital raise when the time -- once we complete the Roma transaction. As I stated on earlier calls, we wanted to get to a 10% return on equity on tangible capital, leverage our capital to the 8% mark, and we've done that. And I'm happy to announce that we're paying our second quarterly dividend. We've met all of these objectives while building a strong balance sheet with the manageable NPAs and an allowance that exceeds nonperforming loans at 12/31. We believe we are well-positioned to execute on our short-term plans and long-term plans. Our transformation continues as we build out our franchise in New York and New Jersey. With the Roma transaction and our second step, we will be a $16 billion organization with 15% to 16% tangible equity, we'll have the largest deposit market share for any bank headquartered in New Jersey. Our employees are motivated and excited with all that is happening here at the bank. Just last week, we did a company-wide questionnaire seeking feedback from our employees and received an 88% participation rate. This team continues to motivate me and I thank our employees for all the good things that they do, both at the bank and in the communities that they serve. We will continue to outhustle our competition to improve our results and create shareholder value to you, our owners. It is our pleasure to be of service to you and I thank you for everything you do. Okay. Now let's open it up for some questions.

[Operator Instructions] And the first question comes from Matthew Kelley with Sterne Agee. Matthew Brandon Kelley - Sterne Agee & Leach Inc., Research Division: Just a question on the margin. The core margin x prepayments came in a little better, why don't we just talk about where you see that going and if there's anything else that benefited the margin this quarter that we should be considering going forward? That would be my first question.

Mat, it's Domenick. The margin was obviously positively impacted by the prepayment income on multifamily business for the month. December was a very big month and we saw a big boost in prepayment income there. That had an effect of approximately 12 basis points on the net interest margin. The other factor impacting the net interest margin for the quarter was the reduction in overall cost of funds. Cost of funds dropped about 10 basis points for the quarter. So as we look out towards first quarter of 2013, what we're anticipating, without the -- any increase from prepayment income is approximately a 10 basis point reduction in the net interest margin, that would take it down to 3 40. And depending on -- it looks like this quarter, it would -- this quarter is going to be a more normal quarter in terms of loan growth. And so with that, we're projecting about $1 million in prepayment income for the quarter. Matthew Brandon Kelley - Sterne Agee & Leach Inc., Research Division: Okay. Got you. And then I was wondering if you can give us some detail in the mortgage banking operation, just gain on sale margins and where pipelines ended up the year compared to September 30?

We had a pretty strong -- not only a pretty strong quarter but a pretty strong year in terms of mortgage banking. Margins, we have not seen the margin decline that some have experienced, and that has been a result of the fact that our pipeline has been so strong. But in talking to the mortgage company over the last few days about it, they have seen a shift in the business with where less business has been going to the secondary market. So they see that we are going to reduce our margins, I think we're going to do that next week by about 0.25 of a point.

And the next question comes from Mark Fitzgibbon with Sandler O'Neill and Partners. Mark T. Fitzgibbon - Sandler O'Neill + Partners, L.P., Research Division: As it relates to the balance sheet in 2013, if you exclude Roma, what kind of balance sheet growth might you be looking for? Is it likely to be slower in the first part of the year because your capital ratios are a little bit lower than your target?

Yes, Mark, we are projecting a balance sheet growth of somewhere around $600 million to $700 million. That's what we expect without Roma. Mark T. Fitzgibbon - Sandler O'Neill + Partners, L.P., Research Division: For the full year? Okay. And spread reasonably evenly across the year?

Yes. January looks like it's obviously a lighter month than -- it's a lighter month. It's historically a lighter month. However, you had a bunch of business get done in December of 2012 because of a number of factors like 10/31 exchanges for property transfers, the fiscal cliff. And so transactions that could've gotten done in January got pushed into December, so we do expect the first quarter to be a little lighter than the fourth quarter of last year. Mark T. Fitzgibbon - Sandler O'Neill + Partners, L.P., Research Division: Okay. And secondly, do you see much in the way of potential loss content on the Sandy loans based on your initial analysis?

No. Actually -- we wish -- I mean, at the initial analysis, we don't see much exposure, to be honest with you. Mark T. Fitzgibbon - Sandler O'Neill + Partners, L.P., Research Division: And then, I wonder if you could share with us your thoughts on the tax rate for this year, is it sort of 37%, 38% a good number?

I think, where we're running at right now, the tax rate this quarter spiked up because of some nondeductible expenses related to the acquisition in the fourth quarter and for the year. But as we move forward into next year, we're also going to have some expenses related to the Roma acquisition but we're probably looking at somewhere in the neighborhood of 37.5% to 38%. Mark T. Fitzgibbon - Sandler O'Neill + Partners, L.P., Research Division: Okay. And lastly, just wondered if you could share with us any surprises, positive or negative coming out of Marathon?

No. At this point, we're still integrating customers, we have people calling on Marathon customers. We actually did the data conversion over this past weekend and that went well. So we haven't seen any surprises come out of there.

And the next question comes from Mark DeVries from Barclays.

Can you talk a little bit about where your loan yields are coming out on your multifamily and CRE loans?

Mark, the multifamily yields are coming in, I mean, just new production is coming in at about 3.60%. That's where we see multifamily is being on right now and that's a result of a combination of maturity terms.

Okay. So are you going out 7 years?

We are. About 10% of the business is getting done in the 7-year maturity bucket.

Okay. Got it. Can you talk a little bit on deposit repricing opportunities over the next year? And with Roma, how you think about where your organic deposit growth opportunities are, post deal close?

In terms of Investors, we did have a significant reduction in our cost of funds over the year 2012, that exceeded 40 basis points, 45 basis points year-over-year. In terms of Roma, their cost of funds is a little bit higher, so we expect to see some pickup there. But overall, Roma's net interest margin is actually dilutive to ours, their net interest margin is about 278 basis points. So the challenge that we have, or the opportunity I should say, is to convert some of the lower-yielding assets that they have on the balance sheet into more the higher-yielding assets that we have, or that we are producing. In terms of our own deposit costs here, while we did have this 45 basis point pick up over 2012, we see the opportunities for continued reduction is slowing. We're probably close to the bottom.

Okay, great. And then just one last thing. How much operating expense are you targeting for 2013, not excluding any restructuring charges for Roma?

The way we're looking at it right now, Mark, is taking out the Marathon expenses. We see probably Q1 and Q2 to run probably around that $52 million to $53 million range. And then depending on what happens with Roma and when we get regulatory approval, when it closes in Q2, that would be incremental to us. But we're looking for after cost saves of Roma to come in around $7.5 million to $8 million per quarter once we get them onboard and get them integrated with cost saves, which will happen later on in 2013.

And the next question comes from Collyn Gilbert with Stifel, Nicolaus. Collyn Bement Gilbert - Stifel, Nicolaus & Co., Inc., Research Division: Kevin, can you just give us our thoughts, or your thoughts on how you would sort of prioritize expansion into contiguous markets?

Depending on a transaction, I think we're looking east -- continue to look east. We're looking on organic growth, Hudson County. And then along the Route 80 Corridor, Southern Burton County, Staten Island, we have one branch from the Marathon transaction, so Staten Island is certainly an option for organic expansion. And I think just what will happen from an opportunity point of view, when those situations come up, banks aren't bought, they're sold. We didn't look at the recent Somerset transaction that was announced this week and I think we just didn't get a chance to look at it, we're kind of in a box here now with the -- we don't want to do anything to tangible book value, we want anything that dilutes tangible book value, it's not something we're interested in doing right now. Collyn Bement Gilbert - Stifel, Nicolaus & Co., Inc., Research Division: Okay. Would you look a little bit further to the south, Southern Jersey or Philly markets at all?

Collyn, good morning, it's Domenick. Yes. We think that with the Roma transaction, that we're establishing a good base down in that market, that Burlington County market, which came to Roma as a result of the Sterling transaction. It's something that we're excited about. As we announced on the call, when we announced the deal, we have a significant amount of business already in that market. Kevin mentioned $500 million approximately on the Pennsylvania side, and $1.2 billion on the New Jersey side. So as we've looked at the branches, they're a lower average deposit than some of ours, but I think the market is presenting a good opportunity for us and it's one that we're excited about.

And the next question comes from Timur Braziler of KBW. Timur Braziler - Keefe, Bruyette, & Woods, Inc., Research Division: Just a couple of questions. The $7 million pretax, M&A[ph] expense experienced this quarter, can you provide a breakdown of which line items that cost was in?

Sure. That breakdown is about $5 million, went through the compensation line, and about $2.4 million went through data processing fees, termination fees and professional fees. Timur Braziler - Keefe, Bruyette, & Woods, Inc., Research Division: Okay, great. Then going back to the comments that you made in the beginning of the presentation about the current New York presence and continuing to further expand in that market, is that a -- do you have a large enough presence now, you feel that you can just add a couple de novos per year or are you looking to do anything more meaningful than that?

I think, both. I think that we believe that the market is underserved, if you will. And while we do, we'll take a conservative approach to growth organically. We also would look at opportunities to expand through acquisitions in that market. But it's one that -- we don't think we're big enough in the market now with 23 branches, we know we need to expand that. Timur Braziler - Keefe, Bruyette, & Woods, Inc., Research Division: Okay. And is the expansion -- if you're going to focus mainly on the city itself or some of the other Boroughs?

No, I think, the Boroughs. We look at the opportunity to do business in New York to be better in the Boroughs. If you go into the city, the city is saturated with banks and they're mostly large institutions. And the nature of our business is one in which we're dealing with communities and relation -- have relationships with customers and we think that the Boroughs and some of the counties in Nassau and Suffolk county are better suited for that type of business.

I'd call Brooklyn and Queens Jersey City on steroids.

And there are no more questions at the present time so I'd like to turn the call back over to management for any closing remarks.

Okay. I thank you for your participation today. We're focused, we have our business plans in place and we're looking -- we're very excited about the opportunities in 2013. So I thank you for participating and I'll talk to you soon. Thank you.

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