Investors Bancorp in Short Hills, N.J., has ambitious plans for the $2.2 billion it raised last year.
The $19 billion-asset company flourished during the downturn, growing largely by acquiring struggling banks and making inroads into New York's ultracompetitive multifamily lending market, emerging as one of the area's heavyweights.
"We were the best kept secret in New Jersey five years ago," Kevin Cummings, who has led the company as its chief executive since 2008, said in a recent interview at American Banker's New York office. He was previously Investors' chief operating officer.
Investors embarked on its long-awaited second-step conversion last year, completing the transformation in May. Earlier this week, it received early approval from the Federal Reserve Board to start buying back stock. Former mutuals are typically required to wait a year after converting to start repurchasing shares.
In a wide-ranging conversation, Cummings discussed Investors' appetite for acquisitions, an upcoming systems conversion and the state of multifamily lending. The following is an edited version of that interview.
Investors bought eight institutions, including several mutuals, in the years leading up to the second-step conversion. What's the progress of integrating those deals?
KEVIN CUMMINGS: The integration has been outstanding. We track every acquisition via its deposit growth and it has been very, very strong. Part of that is the commitment we give to the employees. The math is only one piece of an acquisition; the biggest issue is the cultural integration.
We have to get people on board and get them excited about working with us, with our brand. And the acquisitions have been fruitful. We've made over $500 million in loans in the southwest part of New Jersey since the acquisition of Roma [Financial] in 2013.
Everything is on one system, but it is on our legacy thrift system. We've been working on this project of putting the company on Fiserv's Signature System for more than a year and a half. We're right in the jaws of the beast right now. We're doing the data clean-up now and it is all on track.
The old system is the last vestige of the company's thrift roots?
Exactly, this will give us a full-fledged commercial platform that we can leverage to $50 billion in assets if we so choose. It will give us the ability to compete with the national banks in products and services.
It is a massive undertaking. We have a project team of 140 people. The conversion is Aug. 23.
Because we were doing so many acquisitions we weren't planning on doing Roma or [Gateway Community Financial] this was delayed this a bit. But opportunity knocks.
We made the commitment to not do any acquisitions until we get this done. Once we do, we will move forward. It should bring some efficiencies. It may not show up in the expense line, but it will free up our employees to do more with their customers.
What's your take on M&A once you're done with the systems conversion?
Our job is to leverage the capital. Without adding a nickel to our capital base we could grow our assets to $36 billion and be at 10% capital. Look at what we've done the last seven years our job is to leverage capital to create shareholder returns.
We buy back our stock, we do smart acquisitions that do not dilute our tangible book value. We organically grow and we pay dividends. It is half time.
Now we have to have an even better second half. We have a learning culture where we want to continue to improve. We can't rest on our laurels. We have to make investments in our infrastructure, our branch structure and in our people.
What kinds of deals are you after?
Because our stock is trading at 110% to 115% of tangible book value, we can't buy a bank that is trading at two times tangible book value. So we have to look for banks that are struggling maybe having some regulatory issues or loan generation issues but are rich in deposits. Our ideal candidate is a bank rich in deposits where we can make that franchise better. It is like buying real estate. You don't want to buy at the top of the market; you want to buy it at a reasonable price, put sweat equity into it and make it better.
Are there many opportunities like that left?
You have to think about what's on the horizon: the regulatory burden; a narrowing interest rate margin; the "it's not fun anymore" comment you hear from a lot of bankers; demographics; the age of the CEOs; and potentially shareholder activism. In times of turmoil, those are the things that will make us, a company with a lot of capital, attractive. Who would you rather pair with? A bank trading at two- to three-times book, or someone like us? Who has the safest currency if you're doing, say, a 120% to 130% book deal?
The higher trading one could mean more money today, though.
What's the upside? If they're going to pay $15 a share, you're going to get $15 worth of value. Would you rather have a company that is trading at two times or one that is trading at 110% with impeccable credit quality and is strongly capitalized?
But you pursue dividends and buybacks with the hope of pushing your stock, right?
That's the strategy right on the head.
As you plot out being a much larger company, how do you see yourself getting there?
We've grown from $5.8 billion to $19 billion, with about $4 billion of that coming from acquisitions and $9 billion from organic growth. Here's the game plan. If I can go the next six years and grow $9 billion organically, I'll be at $28 billion. If we do two to three acquisitions at $1.5 billion to $2 billion, that's $6 billion and we would be at $35 billion.
How do you view geography? Where would you like to go?
We're in the most lucrative markets in the country. Look at this place, it is Disneyworld with tall buildings. It is booming. New York is such an economic power. Look at how well it has recovered, and it is doing it without Wall Street. In this market, a 1% market share increase is phenomenal.
Besides getting bigger in New York, are you looking at Philadelphia? Connecticut?
We would look at Philly before we looked at Connecticut. There are banks in Philly that overlap into southern New Jersey, so there might be something there. Our priority now is filling in northern New Jersey, Bergen County and out through Brooklyn, Queens and western Long Island.
Could a merger with a bank of a similar size be of interest?
It shouldn't be off the table. It is certainly an option. Deals like that often come down to math. Who is the acquirer? Our market cap is $4 billion, but where our stock trades would make it difficult to merge with someone trading at say 175% of tangible book value. But as our tangible book value improves, that scenario could be more plausible. It is all in the math. If the math works, then you could talk about the social issues.
You mentioned targeting deposit-rich institutions. Are you looking to lower Investors' loan-to-deposit ratio?
We've created a very strong loan machine. Commercial loan growth was 28% last year. We've gone from $380 million in commercial loans in 2007 to $9 billion today, with multifamily being the largest piece of that at $5 billion. It's been a radical transformation of our culture. When we made our first commercial loan a construction loan in 2005, we had to wire the money to another bank because we didn't have business checking.
Where do you want the loan-to-deposit ratio to be?
We've maintained it at about 125% throughout the recession and our growth period, but we are viewed differently now. Our peers back in 2007 were other thrifts. Now they are the commercial banks and we're an outlier. They look at it and want to know why. (Investors' loan-to-deposit ratio at Dec. 31 was 112%.)
Who is "they"?
A few analysts and a few regulators. I think a comfortable spot is 105% to 115%. We're in the business of lending.
Multifamily in New York is fiercely competitive, and some banks are even pulling back. How aggressive are you?
We got in when no one was lending. We developed relationships and it has been good to us. But we're making a pivot because you can't continue to do what you did the last five years for another five years and expect it to get you where you want to be. We have to get better. We are not leaving it because it is a profitable business.
We are incenting our lenders to do more commercial real estate and we've created a commercial business lending group that has $1 billion in loans. That's $5 million to $15 million commercial loans. We could be a category killer if we execute. And that is a big "if."
You mentioned shareholder activism as a reason for others selling, but you have an activist among your investors. As a converted mutual, you're barred from selling for three years, but how do you view that relationship?
We thought it was a compliment that someone wanted to invest $300 million in our second step. We treat him almost like a regular shareholder. We're transparent. I met with him recently and we had a conversation after the earnings conference call. We are on a honeymoon right now.
How do you make sure you stay on the honeymoon?
Perform. It is on us. If you look at our track record, what would he have told us to do differently? We've had investors take large positions before and many are still in the stock. We feel comfortable.
What are the headwinds that could affect your strategy?
A flat yield curve. Maintaining a high-energy culture as we get bigger. The availability of acquisitions that are priced reasonably.
Being patient and not doing a stupid deal the way some banks have done post-second step and, lastly, it is always on the front of my mind because of our loan growth: credit quality. That's what wakes me up at 4 a.m.