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Investors Bancorp pursues M&A, minus magic mutual math


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Investors Bancorp pursues M&A, minus magic mutual math

is re-enteringthe M&A space in metropolitan New York and New Jersey — this time, without themutual label.

Managementdiscussed Investors Bancorp's interest in engaging in M&A as a way to grow itsbranch footprint and loan portfolios during a first-quarter earnings call. For severalyears, the company successfully leveraged acquisitions to rapidly grow, but thosedeals took advantage of special rules and math associated with the mutual holdingcompany structure. The call also provided an opportunity for analysts to delve intohow management will evaluate the merits of a deal, with executives saying they arenot beholden to tangible book value dilution.

InvestorsBancorp will seek various opportunities, including M&A, during this "transitional"year as it leverages excess capital and grows, said President and CEO Kevin Cummings.Executives see acquiring an existing branch network as an attractive proposition,as they said organic growth through a de novo branching strategy has "lessand less of an impact on a percentage basis than doing M&A." Managementsaid the company could be willing to forgo loan growth in pursuit of transactions.Cummings reiterated that the company would engage in partnerships that enhance shareholdervalue and carry "reasonable earnback" under the static and crossover measurementmethods.

"Themath is the driver here but also the potential of the target and what we can dowith it is also a major consideration," he said. "One just has to lookat our last eight acquisitions since 2008 as they are a good history to measureour views and execution capabilities in the M&A space."

Thesedeals were done prior to the company's second-stageconversion in spring 2014. The mutual structure offered the company "phenomenal acquisition math" as it acquired81 branches, paying a blended deposit premium of 1.8% for $4.2 billion in deposits,wrote Compass Point analyst Laurie Havener Hunsicker in an April 29 report. Management'scomments about M&A were noteworthy after a report Havener Hunsicker authoredin January asserting thatInvestors Bancorp was a bidder for AstoriaFinancial Corp., which announced it would sell to NewYork Community Bancorp Inc. in fall 2015. Her report covering first-quarterearnings expressed concern about Investors Bancorp's acquisition appetite and willingnessto take on "outsized dilution" with "lengthy" earnback periods.

Managementdetailed its approach to M&A math during the call in response to the analyst'squestions. Executives said that they did not believe they had ever provided guidanceon the amount of dilution they would accept in a deal, and instead would judge themerits of a deal on its earnback. They said an acceptable earnback range was betweenthree and five years.

"Welook at both the static and the crossover method and while we understand the simplicityof using the static method, certainly the limitations there are that you're onlyusing one year's worth of potential income to help justify the dilution in a deal,"said COO Domenick Cama. "And so it's important to look at several methods sothat you … can think about a transition strategically and what it will add to thebottom line."

The twomethods of calculating earnback — and the different ranges they yield — have attractedattention in the wake of the HuntingtonBancshares Inc. acquisitionof FirstMerit Corp. Inthat deal some analysts expressed doubt about Huntington's expected earnback period,and management later disclosed information showing how they had calculated the earnback.The issue also came upin the Westfield Financial Inc.acquisition of , promptingfurther disclosures.

The focuson earnback means that Investors Bancorp's management is not entirely focused onthe hit to tangible book value dilution they may incur in a deal. When Havener Hunsickerasked if the company would entertain a deal that was a "great fit" butwas "15% dilutive, 20% dilutive" if it had an acceptable earnback, managementsaid yes.

"Youcan't just look at one part of the equation. The tangible book value dilution isjust one number. But the earnings accretion is the other number. And you have tolook at them together," Cummings said. "So when you have the potentialto expand again, one part is math, the other part is, like we said to you before,the strategic value. And that's where the earnings accretion comes in and the twoof them together is how we evaluate the transaction."

InvestorsBancorp reported net income of $43.6 million or 14 cents per diluted share for thefirst quarter, compared to $41.9 million or 12 cents per share a year earlier.