Investors Bancorp Inc. took steps to reposition its balance sheet and control costs, which will drag on fourth-quarter earnings with hopes of offsetting further margin pressure.
The Dec. 11 bond sale was another step executives have taken to shift the bank's funding base and protect the net interest margin in a rising interest rate environment, following the engagement of a $1 billion interest rate swap during the third quarter. They come at a time when the bank's future remains uncertain, having been the subject of merger and acquisition rumors. The company declined to comment.
Investors completed the sale of about $665 million in low-yielding mortgage-backed securities during the quarter for an estimated loss of $25 million, or 9 cents a share, after-tax. It reinvested the proceeds into securities yielding 160 basis points more than the ones it sold. This move will result in an annual earnings accretion of about 3 cents per diluted share, the company said.
"The 160 [basis points] of yield pickup will help to combat margin erosion emanating from a challenging yield curve and we would expect to see similar trades from other institutions," wrote Sandler O'Neill analyst Mark Fitzgibbon in a Dec. 11 note. He called the restructuring a "smart strategic move," highlighting the minimal impact to tangible book value.
It also elected to close four branches in its New York/New Jersey footprint in order to control costs and improve efficiency. The bank will incur a pretax expense of $2.8 million in the fourth quarter, but reduce annual operating expenses by $1.6 million.
These steps are the latest Investors has taken to keep margin pressure at bay in a rising interest rate environment. The bank's net interest margin fell 10 basis points from the second quarter to 2.67%, largely due to the rising costs of deposits. The bank has struggled to grow low-cost funds, with time deposits behind much of the year-over-year growth in the third quarter. Compared to the second quarter, the third-quarter cost of total deposits increased 20 basis points and the cost of interest-bearing liabilities rose 19 basis points.
Fitzgibbon believes Investors has positive momentum toward controlling expenses in 2019, with the branch closures, restructuring and the recent termination of its informal agreement with regulators. He increased his 2019 earnings per share estimate by a penny to 80 cents.
Investors is making these moves at a time when its fate as an independent company has become more uncertain. It is rumored to have engaged investment bank Keefe Bruyette & Woods to find a buyer for a potential sale. However, experts have said it could struggle to find a partner considering its size and funding structure.
Compass Point analyst Laurie Havener Hunsicker in a Dec. 12 report called these sale rumors "the bigger background story." She said the bank could be worth between $13.75 and $15 per share in a deal, which would value it between 137% and 148% of price to tangible book. Its size means it could be a "big bite" for a potential buyer, which she said could include BB&T Corp., Citizens Financial Group Inc., KeyCorp, M&T Bank Corp., New York Community Bancorp Inc., Sterling Bancorp, Toronto-Dominion Bank and Valley National Bancorp. However, she also believes the bank could stay independent.
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