Citizens Financial Group, Inc. (CFG) Q1 2013 Earnings Report, Transcript and Summary

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.

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.

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…

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.

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?

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?

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?

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?

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.

You’re welcome.

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?

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?

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?

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.

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?

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.

Our next question comes from Collyn Glibert from KBW. Please go ahead with your questions. Collyn Glibert – KBW: Great. Thanks. Good morning, guys.

Hey. Good morning, Collyn.

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?

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?

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

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

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.

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.

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.

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?

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…

Yes. Mark DeVries – Barclays Capital: Decline in the margin? Okay. Hey, anything on the back half of the year we can look towards?

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?

Yes. Mark DeVries – Barclays Capital: Okay. Great. All right. Thank you.

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.

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.

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