Citizens Financial Group, Inc. (CFG) Q4 2013 Earnings Report, Transcript and Summary

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.

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.

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: a 10% return on equity; capital ratios -- tangible capital ratio down to 8% level; pay a dividend; and build a fortress balance sheet. Over the last 8-plus years as a public company, we have made great strides to transform the business plan and transform the culture of this bank. In fiscal 2007, our very first full year as a public company, our return on equity and return on tangible equity was approximately 2.5%. Our resi and consumer loans comprised 93% of our loan portfolio. The allowance was 19 basis points. Our deposits were $3.7 billion, of which only 24%, $891 million, was core deposits. Those core deposits have grown $6.4 billion since we have gone public, since the end of fiscal 2007, 6.5 years ago. Our loans, our commercial loans, are up $6.7 billion and our resi and consumer loans are up $2.8 billion. And as I said earlier, our return on tangible equity is approximately 11.4% versus the 2.5% over that period of time. The change in our company has been dynamic. In 2007, we had 46 branches and 475 employees. Today, we have 133 branches, including GCF, and over 1,500 employees. We have made significant investments in our back office, which has grown from less than 50 employees, 50 technology and back office people, to now close to 180. Our risk management area has grown to keep up with the change in our business, and we will continue to invest in our risk management and our infrastructure to ensure we maintain our growth and to protect the bank and manage the bank in a safe and prudent manner. At this time, we are well-positioned for our second step. We are cautiously optimistic that we can close the transaction in the second quarter but we are still awaiting regulatory approval. We look forward to the excitement of the capital-raising process and look forward to your continued support. Because of legal requirements, that is all we can say or will say about this long-anticipated announcement. We had a very strong year and quarter as we posted record earnings, and it was our 24th consecutive quarter of core earnings excluding merger and OTTI charges exceeding 15% or better year-over-year. Core earnings for the fourth quarter and 2013, for the year ended 12/31, were at $31.6 million in the third quarter and $116.1 million, respectively, versus approximately $97 million and $25.8 million in 2012. This reflects a 20% and 22% increase for the year and the quarter, respectively. On a return on equity and return on tangible equity basis, core earnings were 10.6% return and 11.6% for the quarter, respectively. Throughout our history as a public company, we have stuck to our principles of managing the company with the following guidelines to leverage our capital base: organic growth; thoughtful, smart acquisitions that do not to dilute tangible book value. And on that note, we always get asked the question what will we do with the second step proceeds, and one of the answers I give is that, many times over the course of the past few years, we felt like a baseball general manager who stayed during the Winter Meetings. The best trade I made this winter was the one I did not make. Keeping that discipline will help us in our post-second step environment. And then finally, stock buybacks and paying the dividend will be a strategic initiative once we get back and get approval to do stock buybacks. We believe our past performance will serve us well as we prepare the second step capital raise. But we stay focused on creating shareholder value and continue to make investments in our back office, what I call the plumbing, our risk management with respect to credit, compliance and regulatory risk. We will be well-prepared to leverage our second step proceeds. The closing of the Roma transaction and our loan and deposit growth are the highlights of this quarter. On a standalone basis, the Investors loan portfolio grew to over $12 billion, which reflects approximately 4.5% growth for the quarter and 15.4% for the year. Originations were strong for the quarter. And in January 2014, we are off to our best start in the history of the company. Just in the last few days, I've been out on calls with our loan officers with a major health care provider, a long time well-known New Jersey real estate developer and a significant national real estate capital management company. These opportunities are coming to us as we continue to build our brand and our reputation for customer service continues to grow. With the additional capital, hopefully this momentum will continue to propel us and allow us to increase market share with high-quality credits. The margin held up well for the quarter at 3.41%, a 3-basis point improvement from the third quarter. In the fourth quarter, we had approximately $5.1 million in prepayment fees versus $4.1 million in the third quarter, $3.6 million in the second and $3.1 million in the first quarter of 2013. Our credit quality continues to improve, and we continue to maintain a cautious view with respect to our allowance for loan losses due to our growth and the overall credit risk to our business. The New York market, principally in Manhattan and Brooklyn, are strong, but the average worker is still struggling in this economy due to high health care costs and a slow recovery in the job market. It is a low velocity economy despite the efforts of the Federal Reserve via the low interest rate policies. Having said that, we still believe the New York-New Jersey market is the strongest in the world and our goal is to become the leading community bank headquartered in this region, one that is focused, first and foremost, on our local customers, the neighborhood not-for-profit and to be the best corporate citizen, leading the way to improve our communities through the engagement and commitment of our employees and management team. We need to lead by example. We need to be leaders that serve, not self-serving leaders. Our nonperforming assets totaled $148.5 million at year end, which includes approximately $11.3 million from the Roma transaction. Most importantly, our nonaccrual loans totaled 39 loans and totaled $26.1 million, with the largest one being a $10 million loan, which has a recent appraisal for $15 million, and the next 2 largest loans are a participation loan from an acquisition at $2.5 million and a multi-family loan for $3.1 million. The remaining commercial loan nonaccruals totaled $10.5 million, an average less than $300,000 per loan. We are currently evaluating a cleanup note sale for these and other Roma loans for the first quarter or early second quarter of this year. Our commercial NPLs, our commercial nonperforming -- or our commercial nonaccrual loans is 37 basis points at the end of the year. We are pleased to report that our provisions continue to exceed net charge-offs of $2.1 million and if you back out our acquired loans from our recent acquisitions of Brooklyn, Marathon and Roma, our allowance coverage ratio to total loans approximates 1.5%. In December, we sent our loan review teams into Roma to do a full review of the performing and nonperforming portfolio, as we've been monitoring that portfolio from a distance through the most of 2013. These reviews covered 75% of that portfolio, and we are satisfied with the quality of that portfolio at this point in time, that we have adequate credit marks against the nonperforming assets. I'm happy to report that we have approved in December and January approximately $106 million in new commercial loans in this market, in the Roma market and the Philadelphia market. And we are making great strides on both the retail and the commercial side in creating new businesses in that market since we closed the transaction in December. This Mercer County-Philadelphia market is a great opportunity for us. We have both the retail and commercial teams in place to capitalize on this market opportunity. Other than Sun National, there are no local community banks headquartered in this region over $2 billion, and we believe we are well-positioned to capitalize and partner with the Roma and GCF teams to bring the Investor customer experience to the southwest part of our state and the Philadelphia markets. On the retail side, deposits grew $2.1 billion, of which, approximately $1.3 billion came from Roma, $736 million came from organic growth, and while we maintained our cost of funds for the quarter, are relatively flat. We energized our retail team with a promotional incentive in the fourth quarter and some new promotional products, and they did a great job bringing in new customer relationships. As you know, as a regional bank over $10 billion are regulated view of liquidity from a different perspective than when were below $10 billion, and we do closely watch our loan to deposit ratio and borrowings to asset ratio as they become key metrics for the company. At this time, I'm going to start something new on our quarterly calls. I'd like to take this type of opportunity to highlight one of the unsung heroes at the bank. I will start to do this on our quarterly calls to congratulate one of our employees who has done a fantastic job and has embraced the core values of Character, Commitment, Cooperation and Community, 4 Cs. And if there were 2 other Cs, it would be -- it wouldn't be Cummings and Cama, it would be caring, because no one cares how much you know until you show them how much you care, and confidence. This person embraces all of those characteristics. And so many of our teams are working so hard that I need to tell you, our owners, what a great job and what a great team you have in place. This quarter's unsung hero is Mary Anne Wade, [ph] the Manager of Financial Reporting for the company. Mary Anne has led the team and filed our S-1 document in a record time and continues to coordinate our financial and reporting activities. In addition, during this time, she participated on a special task force, what we call project insight team, at the bank to improve employee communications, morale and to make Investors one of the best banks in the country to work for. Her team, along with our investment bankers and attorneys, are doing a great job supporting management in our strategic plan and executing on our second step opportunity. I thank Mary Anne and all our employees for their values and their efforts to make Investors a special place to work. They lead by example and understand that people do what they see, not what they hear. In summary, we continue to stay focused on the execution of our strategies and our business plan to become the premier commercial banking franchise in the New York-New Jersey metro marketplace. With GCF, we now have 130-plus branches from the suburbs of Philadelphia to the boroughs of New York and Long Island. We have leveraged our capital down to 7.9%. Our ROE is over 10% and we are paying a dividend. Our experience over the last 8 years as an MHC has positioned us to execute a successful second step transition -- transaction. We will continue to manage the company using the 3 levers: prudent organic growth, smart acquisitions that did not dilute tangible book value and stock buybacks and dividends. Our track record and history will serve us well as we move to our next phase as a 100% public company. We look forward with great excitement to the next 12 to 24 months. We have many opportunities ahead of us and we will have the capital to execute on our plans to be a major regional force in the New York-New Jersey market, the best market in the world. I'd like to thank all of you for your support and thank our employees for their dedication and hard work. It is a very exciting time at the bank, and we really appreciate the support and this opportunity. Thank you, and I'll be glad to open it up for questions.

[Operator Instructions] And our first question comes from Matthew Breese from Sterne Agee. Matthew Breese - Sterne Agee & Leach Inc., Research Division: Now, with the acquisitions closed, I was just curious where we can expect core expenses to settle out in 2014?

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.

Expense saves.

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 - Sterne Agee & Leach Inc., Research Division: 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?

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

The conversions are in schedule.

The conversions are in schedule. One scheduled In early March and the other one's scheduled in late June. Matthew Breese - Sterne Agee & Leach Inc., Research Division: 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?

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 - Sterne Agee & Leach Inc., Research Division: Understood. And then, as it relates to your overall allowance, where do you feel comfortable with the reserve to loan ratio?

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.

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.

And our next question comes from Rick Weiss from Boenning.

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?

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.

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

5 years.

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?

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

That will be coming out in the 10-K.

Right.

How? As a footnote on the K?

Yes.

Our next question comes from David Darst from Guggenheim Securities.

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?

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.

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

It's about a $30 million ARPU.

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

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?

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.

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

No. At this point, because the transaction took so long to execute, we want to try to do 2 things: one is recapture some of the market share we lost during the period of uncertainty; and two, give all of the Roma employees some energy to go out there and to have something that they can sell to bring their new customers back. So it's really to create some momentum in the market and to recapture some market share that we lost.

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

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?

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

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?

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.

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.

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.

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