Investors Bancorp, Inc.

Thank you, Emily. 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 a 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 operation, 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.

Thanks, Tom. Good morning, everyone.

Investors Bank had another strong quarter as we posted record earnings and our 23rd consecutive quarter of core earnings, excluding merger expenses and other temporary impairment charges, exceeding 15% or better year-over-year. We are pleased to report record earnings -- report earnings of $29.3 million for the quarter compared to net income of $24.5 million in 2012.

On an EPS basis, third quarter earnings are $0.27 a share versus $0.23 in 2012 and $0.26 in our trailing second quarter. 2013 third quarter results translate to an increase of 20% in net income and 17% increase in EPS.

Our return on equity and return on tangible equity exceeded 10% and 11%, respectively. Over the past 5 years, we stated that our goal would be get to get -- our goal would be to get to a double-digit ROE, and we have now attained that goal consistently in 2013.

It is a great improvement from 2009, when our ROE for that year was 4.4% and our book value was $7.67. Today, our book value is $10.32.

In 2007, our ROE was 2.47%. So I just wanted to show the transformation of our business has resulted in positive results.

And as we move forward and we leverage the capital from our first step in 2005, we have done this by using 3 tools for capital management: organic growth, smart acquisitions that do not dilute tangible book value and stock buybacks and dividends. We believe our past performance and experience will serve us well as we prepare for our second-step capital raise.

With regard to that, we need to get our Roma and GCF acquisitions completed. And as you know, we are awaiting Federal Reserve approval of our application.

We have received approvals from the New Jersey Department of Banking and the FDIC in June, and the FDIC is our primary federal regulator of Investors Bank. Once we get these deals approved, we can begin the process of our second-step capital raise.

With these 2 acquisitions, plus an overall increase in valuation, our investment bankers estimate that our second-step valuation has gone from $900 million 18 months ago to about $1.5 billion, $1.7 billion today. We are very excited about this opportunity, and the newer capital will allow us to continue to grow and to continue on our path to becoming the premier banking franchise in the New York, New Jersey market area.

After all announced deals are completed, including the M&T and the Hudson City deal, Investors will have the #1 deposit market share of any bank headquartered in New Jersey and will be the only institution with a geographic franchise that goes from the New Jersey suburbs of Philadelphia to eastern Long Island. On that note, last night, I attended a charitable dinner in south Jersey, in Berlin, New Jersey with the Roma and Investors team, where we were the lead sponsor at an event attended by over 475 people.

It was great to be out with our team, led by Paul Kalamaras, our Executive Vice President of Retail; Sharon Lingswiler, our Senior VP, who moved from North Jersey and is in that market now; and several branch managers, market managers and business lenders. This group is very enthusiastic, and that market has tremendous potential, especially with the excitement and energy that the Investors team can bring to it.

Roma is a franchise that has huge potential, and with the right leadership and hard work, we will be successful in integrating and expanding our market penetration in that south Jersey market. The headline for the quarter is our loan originations and growth for the year.

Loans exceed $11.5 billion and have increased 4.3% linked quarter and 22% year-over-year. Year-to-date, loans are up almost $1.1 billion or 10.4%.

Commercial loans now make up 54% of the portfolio, which is a big difference from where we started our business transformation plan. In March of 2007, our loans totaled $3.4 billion, with only $215 million in CRE.

Of which -- of that $215 million, $110 million was in construction. Today, we have a $6.2 billion commercial loan portfolio, with only $218 million in construction exposure.

As we continue to evolve, our mix will continue to change. At quarter end, we have $3.6 billion in multifamily, $1.8 billion in rental CRE and $561 million in business lending, which includes commercial mortgages that are owner occupied and rely on business income and cash flow from business activities.

Over the past 12 months, this business lending group has increased its headcount and has increased its loans from approximately $200 million to $561 million. We have recently hired a team from a New York financial institution to start an asset-based lending in the metropolitan area and continue to look for opportunities to expand our market mix in this area.

This is a big part of our evolution, becoming a full-service regional bank, which can serve the middle market and small-business market, which we feel is neglected by the larger national players. It is a relationship game, and we feel, with our local expertise and decision-making, we can do well in this segment, especially in the New York market.

The market held up -- the margin held up well for the quarter at 3.38%, a 3-basis-point improvement from the second quarter and the third quarter of last year. We had approximately $4.1 million in prepayment penalties in the quarter versus $3.6 million in the second quarter and $3.1 million in the first quarter of 2013.

Another highlight of the quarter is our credit quality, which continues to improve, and we continue to maintain a cautious view with respect to our allowance for loan losses. With the growth of our portfolio and its changing mix from residential to commercial, we believe it is prudent banking and good accounting to maintain our allowance at a strong level.

A wise banker once told me that a loan is good twice in its life, when it's made and when it's paid. We believe the economy is still struggling.

There is too much uncertainty with respect to government regulation, Obamacare, budget deficits, debt levels and sluggish growth, so as a result, a prudent approach to credit quality is necessary. We are also considering potential changes in the New York market, with the end of the Bloomberg era, and that causes some concern and uncertainty to longer-term outlooks for economic growth in the city.

We still believe that despite these conditions, the New York, New Jersey market is the strongest market in the world, and we aspire to be the premier community bank headquartered in this region. It is -- that focus on the local customer, the local not-for-profit and the local community will serve us well.

On the credit front. Our total nonperforming loans total $134.1 million, or 1.16% of total loans, with only $51 million or 38% of that total is in the commercial sector.

Nonaccrual loans total $109 million, of which $34.5 million is commercial. And that's 95 basis points, so we're finally under 1%, which is one of our goals since 2009.

Of this $34.5 million, $14.2 million is current at September 30. Our largest NPL for $10 million is in due diligence with a buyer, with a contract price which will result in no loss to the bank.

Two other loans are close to resolution for $5.6 million. Those loans, including the current loans, the 1 -- the one $10 million loan and the $5.6 million, total $30 million of the $34.5 million in nonaccrual.

The remaining exposure of $4.5 million is made up of 16 loans, with no loans over $800,000. Our commercial exposure has been reduced over the years as we have taken a proactive approach to addressing our problems and moving them to resolution.

Through this cycle, starting in 2009, we have taken over $100 million in charge-offs in the commercial portfolio, with very little of it going to foreclosure. We sold notes, did bulk sales and addressed our issues quickly and promptly.

On the residential side, our nonaccrual loans are $75.1 million and average less than $250,000 per loan. Our 30- and 60-day delinquencies are down linked quarter and year-over-year.

Gross charge-offs for the quarter approximated $2.5 million, of which, almost $2 million was residential. We had a recovery in the quarter, which gives our NCOs or our net charge-offs of approximately $1.4 million in the quarter compared to $13.2 million in 2012.

On the retail side. We funded a good deal of our loan growth with borrowings as we continue to change the mix of our retail deposits from CDs to core deposits.

This is a conscious effort on our retail management and executive management to become more bank-like and to gather more core deposits into the bank. Currently, core deposits represent almost -- just over -- or close to 70% of deposits.

We opened 2 branches in Brooklyn: in Carroll Gardens and Quentin Road during the quarter. This will increase our franchise in New York City, and we have almost $1.5 billion in deposits in that franchise, which supports our commercial business and CRE lending businesses in New York.

In New Jersey, we are upgrading locations and continue to make investments in the franchise. I made a presentation to the regulators when they were in, and over the last -- since 2008, since our acquisition with -- of Summit and the renovations of those branches, we have spent over $40 million in capital improvements in our branch system since 2008 through de novo branching, relocations and renovations.

We have -- and we will continue to make investments to improve our branch locations. We have teams of lenders and retail bankers working together and building relationships in the Roma and GCF markets.

This area, as we become more involved in the market, has tremendous potential as there are no banks at our size in the region. It is a different market from New York City and north Jersey, but we believe, with our business and retail teams, we can do very well with our brand and our energy in that market.

These 2 acquisitions, because of their loan -- because of their low loan-to-deposit ratios, will allow us to get our loan-to-deposit ratio down below 120% by year-end. In addition, we expect to have approximately $400 million to $600 million in organic deposit growth in the fourth quarter as we roll out new customer initiatives, which started in October.

Plus, we're doing very well at the 3 branches that we opened in Brooklyn this year. In summary, we continue to stay focused on the execution of our strategic business plan to become the premier commercial banking franchise headquartered in the New York, New Jersey region.

Upon completion of our 2 pending acquisitions, we will have 130-plus branches from the suburbs of Philadelphia to the boroughs of New York to eastern Long Island. We have leveraged our capital down to 7.3%.

Our ROE is over 10% year-to-date, and we are paying a dividend. Our experience over the last 8 years as an MHC has positioned us to execute, hopefully, on a successful second step.

We will continue to manage the company using our 3 levers: organic growth, smart acquisitions and stock buybacks and dividends. Our track record and history will serve us well as we move to the 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 our markets.

I would 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 appreciate the teamwork and living the core values of the company that all our employees do every day.

Thank you, and I'd like to open it up to questions.

First question I had for you was on that early lease termination you referenced in the press release. What does that relate to?

Mark, this is Domenick. The lease terminations are related to branch facilities that were -- headquarter facilities that we've acquired in transactions -- in merger transactions.

Okay, great. And then, secondly, could you help us think about the run rate for expenses going forward, excluding the impact of Roma and Gateway?

Yes. If you look at our expenses this quarter, they're just over $60 million, but we had some onetime items, like the lease termination, as well as an insurance catch-up on medical bills.

But there was -- so we view our operating expenses for the quarter around $58 million. As we continue to build up the franchise into Q4, we'll probably see that base number moving up to around $58.5 million or just under $60 million.

Okay. And then, lastly, could you share with us what the -- sort of the average rate on the pipeline looks like right now?

On the commercial real estate pipeline, Mark, the average rate is just under 4%.

And how about the multifamily?

Multifamily space, it's about -- multifamily is about 3.75%, and mixed use is a little bit higher than that.

Can you just talk about where you see the margin kind of coming in once the deals are completed? I know that -- any plans to kind of reshuffle the earning asset mix of those companies?

And what you think the impact ultimately will be on the margin once those are rolled into the balance sheet?

Matt, we can't comment on what we think the margin will be. I can tell you that for the -- I'll go through it this way with you.

As far as the quarter is concerned, without the Roma transaction and any impact from prepayment penalties, we see the margins staying relatively flat for the fourth quarter. Now when you consider the impact of Roma, we think that'll have a positive impact on the margin because of using the deposits that come from the Roma transaction to pay down borrowings.

Okay, got you. And then is there any potential for the Roma deal closing in calendar 2014?

Is there any risk that this gets pushed out until next year? And does that pose any challenges for completing both the second step and deals in the same calendar year?

Is that an issue at all?

Yes. Matt, in terms of the transaction, I mean, we remain confident that we'll be able to close the transaction in 2013.

We're pretty comfortable that, that will happen. Certainly, if we -- even if we close it in 2013, we expect, just based on the timeline of announcing the second step right after that, that the second step will happen sometime around the end of the first quarter, beginning of the second quarter of 2014.

Okay, got you. And still no goodwill anticipated?

And basically, the structure of the shares issued and core deposit intangibles are in place, but no goodwill?

Yes. I mean, at this point, we've run the accounting through the Department of Professional Practices of our external audit firm, KPMG, and we've submitted the applications that show the impact of not -- of no goodwill and have had no -- we've had some questions from the regulators, but no adverse reaction to it.

Okay, got you. Got you.

And then just for the fourth quarter, should we expect a similar type of decline in the security deal as you remix kind of the earning asset base?

The securities yield?

I mean securities balance, excuse me?

Well, the securities balances are pegged to be somewhere between 11% and 14% of total asset size. So depending on what happens to assets, security balances will either go up or down.

We just feel that maintaining securities-to-asset ratio of somewhere between 11% to 14% is prudent in terms of liquidity.

Just to drill into the loan growth a little bit. You guys had put up really strong loan growth the last 2 quarters.

What do you think is attributable to that? I mean, is it just everything that you've said, Kevin, in your introductory comments coming together?

Is it -- do you think that there's been some pull forward here going on in the market? I mean you weren't alone in the growth that you posted this quarter, a lot of your peers did, too.

But just trying to gauge the sustainability of your growth because it's also coming off of a much higher base at this point.

Well, certainly, the momentum that we have in the marketplace, the addition to staff, we have more lenders in the marketplace, our brand is expanding. The market is not growing because the economy is not growing.

But I think we're grabbing more market share. So it's -- Dom, we say we work pretty hard here, and I think our guys are excited about being here.

They're coming over, and it's a fresh place and it's different. And I think we're being very successful in working in the market and expanding our reach, both in the combination of working with our retail teams, small-business groups, the business lenders and the CRE.

Our guys in New York and -- you got to remember, what, 2010, we started lending in New York, and they've done an outstanding job on the -- in the multifamily and the commercial real estate space. Working with brokers, we want to continue to move and use -- become more of a relationship bank, that's our biggest challenge.

We understand that. But really, we filled a niche in the 2009, 2010 period, and we will look forward to continuing our growth and our evolution to a more relationship bank.

And Collyn, there is certainly some -- there is some effect of pull-through, meaning that, especially in the multifamily sector, we've seen deals start to get pushed through a little more quickly as borrowers are trying to take advantage of rates before they spike up.

Okay, that's helpful. And just kind of big picture in order -- Kevin, to your point that the economy is not growing, so it's a function of taking share.

What do you think a reasonable growth rate is in order to preserve your credit-quality metrics? Are you guys -- do you think a 10% grower or a 15% grower?

No, Collyn, we're not reaching for any loans. I mean, we've had the -- we've gone through this cycle without a credit downgrade from both -- from our regulatory process.

So the fact that we're reaching on credit or any question like that, has nothing to do with the growth. Growth is there.

If it's there, we take it. But there's very little stretching on credit standards.

No, I wasn't....

No, I'm just saying. I think, last -- we had a comment, our underwriting is basically almost at a 65% LTV and $150 million-plus cash flow.

So we're -- that's why -- I mean, it's our underwriting that has resulted in our strong credit quality.

Okay. And then just tying that then, Tom, if you can comment on the reserve.

I know it built this quarter, and you guys all indicated that you'll probably continue to grow that. How -- do you have any sort of target in mind for where you want to take that?

I know the dynamics are going to change post the mergers, but just thinking about you guys on the standalone.

No. Again, it's difficult in a banking environment to be an outlier because everyone looks at you, compares you to peers.

We have consistently outpaced our loan growth with our provisions, and our net charge-offs have been -- our provisions have consistently been larger than our net charge-offs. So as time goes on -- we go through the process every quarter, and we have frequent discussions with our external accountants.

And we want to be on a conservative side because of all the uncertainty in the economy, both as indicated by what goes on in Washington, changes in the administration in New York City. There is uncertainty, and we want to run the bank in a prudent and safe and sound manner.

And Collyn, also in terms of our provision and our overall allowance, I mean, when you consider the fact that the bank's balance sheet -- loan portfolio is comprised of now 44% residential loans, strategically, it's our decision now to start to move that number down. And when you consider the increased credit risk of the commercial loan portfolio -- and specifically, we're looking at our C&I portfolio.

As Kevin mentioned, we've had over $300 million in growth in our C&I portfolio over a 1-year period. We still consider that portfolio unseasoned.

And so we continue to believe that the mix is changing and the growth is occurring in a different sector, and therefore, it's necessary for us to be prudent in terms of our provisions.

Okay. And then just 1 final question.

On the resi mortgage side, what was the -- sort of the composition of the residential mortgages that you've put on the balance sheet this quarter and, like, in the recent quarters? Just in terms of structure and...

When we look at it for the recent originations, they're probably 60-40 right now, fixed-rate to adjustable-rate loans. It's -- so I think that the mix and the balance has been -- is a little bit more even now than it was earlier in the year, where everyone was looking for long-term fixed-rate loans.

So that's where we're going right now.

Just to follow up on Collyn's questions with the loans. Is there any effect from Superstorm Sandy, the rebuilding efforts?

Is that helping your loan growth? Or do you expect it to in the near future?

Rick, it's unbelievably quiet. I know OceanFirst made a statement that they expect a pickup in the loan activities.

It's a difficult thing, making those loans when -- if a house has been destroyed and the land value is there. We're not really chasing that business because it's labor-intensive, and it's individual single-family homes.

But on the other hand, our exposure, last year, was approximately -- from Union Beach to Seaside Heights was approximately $280 million. We've had paydowns in that portfolio to around $200 million.

So our exposure has decreased from a residential point of view, and our delinquencies are minimal. One commercial loan that we had -- or the 1 sizable commercial loan that we had is back performing, and it wasn't even down the shore.

It was up in the Bergen County area. The Hackensack River came into its manufacturing facility, and that company is a well-run company.

It's back off our -- coming off our watch list shortly. So it's eerily quiet, Rick.

It really is, and it's surprisingly quiet. But I think people -- the rules, the FEMA guidelines, do I have to lift the house up, do I have to do -- what is it to my frontage, to my neighbors' frontage and things like that, there's a lot of moving parts there.

And I think a lot of people have not really moved on their plans to deal with the properties. So that's the problems that they might have.

Okay. So like, I guess, just taking more time than everybody expected then for the rebuild.

And so none of the loan growth you're seeing is now attributable to Sandy?

Correct, not even close.

Okay. And let me -- and just to go back, I thought in the beginning you said today, if you did the second step, it would be $1.5 billion to $1.7 billion.

Is that -- did I hear that right?

That's a range.

Yes, that's a range of just under book value to about 104%.

Okay. Does that -- would that include Roma in that?

It would include both Roma and GCF.

Okay. It does include them.

Yes.

Following up on the securities question from before. It looks like the yield was up a little bit linked quarter here.

What did premium amortization expense do?

Dave, I'm sorry, your question was, what is premium amortization?

Yes, expense for the securities. What was the portion of that in the securities yield?

We don't have that number handy here, Dave. But we could get that for you.

Yes. Dave, the fact that interest rate -- the yields on securities has increased is due primarily to the fact that interest rates were up over the period of time that we're investing in.

We do -- we're about flat on our TruPS portfolio in terms of the amount of interest that we're accreting there. But the overall increase in the yield on the securities portfolio is simply attributed to higher rates on the types of securities that we buy.

And we don't, we don't venture away from our guidelines in terms of type of securities we buy, it's just that there were higher interest rates for those.

Okay. And I should have mentioned this before the first question, but it's actually Timur Braziler calling in for Dave.

I guess the next question, and I appreciate the rates you gave surrounding your loan pipeline, but can you give the balance of the loan pipeline at the end of the third quarter?

Yes, the pipeline is about $1.2 billion.

$1.2 billion, okay. And then on the multifamily front, I know you had said that the pipeline rate was about 3.25%.

What was the rate of the multifamily loans that were booked in the third [ph]...

I said 3.75%.

3.75%, okay. And what was that rate...

I'm sorry, what was your next question?

What was that rate in the third quarter?

Second quarter?

No, no. I -- the loan pipeline, you had said had a rate of 3.75%, and I'm just wondering what that rate for bookings was in the third quarter for originations.

That is for the third quarter.

He wants it for originations in the third quarter.

Right. So the loans -- the multifamily loans that are booked in the third quarter, what was the rate on those for multifamily?

Yes. I'll give it to you in a minute.

The average rate for multifamily loans in the third quarter, this is on a month-to-date basis, was 3.30%. That's for multifamily.

Right. Okay, great.

And then I guess just following up on the second-step process and then the conversations with regulators. Has the volume of conversations changed recently regarding the approval for Roma or the Fed?

We'd rather not comment on that.

Okay. And then just lastly, you guys have the appraisal in hand for the second step or is that something that needs to be done post the completion of the Roma deal?

No, the appraisal is something that needs to be done. Our estimates are based on different valuations that we receive from different market makers in our stock.

Kevin and others, can you elaborate on the impact of your new branches, particularly on Long Island? Just thinking of both near term and more intermediate term revenue impact, outside of the expense comment that was mentioned in the release.

Can you repeat that? You didn't -- you faded out on us.

Can you speak a little louder?

I was asking about the revenue impact from new branches, particularly with the focus on Long Island. You mentioned from the expense side in the release, just curious on more color there.

In terms of profitability, the branches on Long Island were all acquired branches. The Brooklyn Federal -- most of them were from Brooklyn Federal, and we paid a premium of about 3.5% for those deposits.

But just overall, in terms of profitability, we estimate that branches become profitable somewhere around the 2.5 years to 4 years depending on what the mix of deposits is in those branches. Given the cost of funds or cost of deposits in the branches that we have on Long Island and given our current run rate for asset yields, we consider those branches profitable right from the very onset.

Great. Would you consider new offices there in that region?

Yes.

Looking at some of the recent de novo branches. For example, Boro Park, which was opened in 2011, is at $94 million.

Avenue M, opened up last year, is $77 million. Ocean Avenue, this year, we opened it up during the summer in the second quarter, $28 million.

So we feel that area, because of the density of population, it's really a good area for us to expand and bring the Investors brand to those markets.

Did you discuss the percentage of growth that you just had from New Jersey this quarter? And maybe just any commentary on kind of increasing real estate activity that you're seeing in New Jersey.

No, we did not break down the difference between the states in terms of our loan growth. But I can tell you that given that the growth was primarily multifamily related, most of the growth happened in the New York market.

Okay. And then post second step...

[indiscernible] I'd say most of the residential is in New Jersey, then too.

Okay. And then how should we maybe be thinking about the dividend and the earnings payout ratio post conversion -- or post second step?

I think it's too early to tell. Right now, we've tried to target a payout ratio of approximately 20%.

And just given the increase in earnings over the past 2 quarters, it's dropped below 20%. But 20% remains a target that we're comfortable with at this point.

Just quickly, Tom, can you just -- or maybe it was Dom that mentioned it, but the comment about the NIM -- that Roma would have a positive impact on the NIM because of the ability to take the deposits and pay down borrowings. I'm just -- could you walk through that a little bit?

Because I was thinking that with Roma's NIM so much lower that your alls that there still would be compression. So would you mind just giving a little bit more detail to that?

Well, again, it's just a matter of using deposits over borrowings, Collyn, that's how we saw it. Our funding -- I mean, I'm sorry, our loan growth we believe will be significant in the fourth quarter.

Also, we plan some balance sheet restructuring in terms of the Roma transaction. Meaning that, initially, we're looking at selling all of their securities in order to pay down borrowings.

And we're also considering a transaction, which we may securitize some of their loans to get those off the balance sheet. So when you look at the different levers that we'll pull along with the -- when we integrate Roma, we think it will have a positive impact on NIM.

Okay. Do you have a targeted dollar amount of borrowings that you're going to pay down?

Or is it...

Well, right now, just using Roma's balance sheet as it stands right now at the end of the third quarter, we think that we can pay off somewhere between $400 million to $500 million in borrowings.

Okay. And these are your borrowings?

Yes.

They have minimal borrowings.

They have about $80 million in borrowings.

Okay. Well, thank you very much for your participation on the call.

We had an excellent quarter. And I thank you for your participation and your interest in our company, and we look forward to a great fourth quarter and a positive 2014.

Thank you very much, and have a great day and a good weekend.