People's United Financial, Inc.
Q1 2018 Earnings Call Transcript

Published: 19 Jun 2018

[Operator:]

Good day, ladies and gentlemen, and welcome to the Acquisition of First Connecticut Bancorp Conference Call. My name is Elone, and I will be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Mr. Andrew Hersom, Senior Vice President of Investor Relations for People's United Financial Incorporated. Please begin sir.

[Andrew Hersom:]

Good morning and thank you for joining us today. Here with me to discuss our acquisition of First Connecticut Bancorp are Jack Barnes, Chief Executive Officer; David Rosato, Chief Financial Officer; Kirk Walters, Corporate Development and Strategic Planning; Jeff Tengel, President; and Jeff Hoyt, Chief Accounting Officer. Please remember to refer to our forward-looking statements on Slide 1, and the important additional information and where to find it on Slide 12 of this presentation which is posted on our website, peoples.com, under Investor Relations. With that, I’ll turn the call over to Jack.

[Jack Barnes:]

Thank you, Andrew. Good morning. As you all know earlier today, People's United announced the acquisition of First Connecticut Bancorp, a holding company for Farmington Bank. Before we get into the details, I would first like to welcome the Farmington Bank employees, People's United. We have respected your franchise for a long time and look forward to working with you. Together we will further strengthen and grow relationships with your existing clients, as well as build new ones. In addition, at People's United community partnership matters and we are committed to continuing [the legacy] shared by both companies of giving back to the communities where we live and work. Let's begin on Slide 2 and 3. I am very excited about this financially attractive in-market acquisition. The transaction has low execution risk given our significant knowledge of Farmington Bank and demonstrated track record of successful integrations. With the fourth largest deposit market share in Hartford County, a long standing relationship based approach to serving customers, complementary commercial and retail capabilities and similar culture, Farmington Bank further strengthens our well-established presence in the Central Connecticut and Western Massachusetts regions. The acquisition adds $3.1 billion in total assets to People's United and further enhances our position in the Greater Hartford area, particularly in the desirable banking markets of Farmington, West Hartford, and Avon, which are densely populated and have significant wealth. The transaction adds a talented group of commercial bankers that will complement our already strong team in the market, as well as provide branches that will strengthen our hub and spoke strategy of traditional and in-store locations. Both, our commercial and retail businesses will benefit from the addition of Farmington Banks long tenured and well-established customer base. Additionally, these customers will benefit from access to People's United enhanced technology and digital capabilities, as well as our seven day a week Stop & Shop branch locations. This transaction will deliver substantial value to shareholders as it is accretive to earnings per share and has an attractive tangible book value earnback period. The combination of the two companies provides a significant cost savings, as well as potential for revenue synergies that are not modeled in the economics of the deal. We have identified achievable cost reductions from the elimination of redundant functions as we integrate the two franchises. As part of our cost saving initiatives, we will also consolidate branches as 71% of Farmington's Bank’s branches are within two miles of a People's location and 100% are within five miles. Overall, we have identified savings which total 50% of First Connecticut's standalone expense base. However, it is important to note that while the cost savings are significant, we expect to retain many of Farmington Bank’s talented people who have driven the Bank’s successful growth. Farmington Bank’s strong customer base provides potential for revenue synergies as we will have the opportunity to market to them our more extensive suite of products and services in areas such as Insurance, Wealth Management, International Trade Finance, and Foreign Exchange. We will also be able to leverage the size and strength of our balance sheet to provide more comprehensive financial solutions to Farmington Bank’s larger customers. Additionally, as I mentioned earlier, this is a low execution risk transaction given our significant knowledge of Farmington Bank. We know the Company well from a long history of sharing business and competing against them. Many of their senior commercial relationship managers are well-known to us and highly respected in the market. As such we have a strong understanding of Farmington Bank’s culture, underwriting philosophy, and excellent asset quality, all of which fit extremely well within People's United. The combination of our similar client focused approach to banking and complementary credit cultures will create significant value for both customers and shareholders of each institution. Finally, while we continue to strengthen and grow our New York and Massachusetts franchises, as well as our national businesses, this acquisition affirms our commitment to Connecticut as evidenced by our deposit market share rank increasing from number three to number two on a pro forma basis. The financial challenges of the state and some of its municipalities in addition to the relocation of a few corporate headquarters have been well publicized. However, we are optimistic about the underlying economic strength of Connecticut along with its highly educated and skilled workforce. We are also encouraged by a number of sizeable job increase announcements made recently by companies located in the State, as well as hopeful infrastructure improvements such as the new Hartford commuter rail line, will have a favorable impact on Connecticut economy over time. With that, I will pass it to David to discuss the transaction in more detail.

[David Rosato:]

Thank you, Jack. On Slide 4, we provided summary of the key terms of the acquisition. We are very pleased with the transaction metrics from a financial perspective. We agree to acquire First Connecticut Bancorp, a holding Company for Farmington Bank, in a 100% stock transaction with a fixed exchange ratio of 1.725 shares of People's United for each share of First Connecticut. The total deal value is $544 million based on the June 18 closing price which equates to 17.4 times, First Connecticut's estimated 2019 earnings per share and 187% of tangible book value. The completion of the transaction is subject to customary closing conditions including approval from our regulators, as well as First Connecticut’s shareholders. The deal is expected to close in the fourth quarter of 2018. The transaction produces very compelling financial results. We expect earnings per common share accretion of $0.05 or 3% with fully phased-in expense synergies. We expect the system conversion to occur late in the first quarter of 2019, producing 100% of cost saves from that point forward. Tangible book value dilution is minimal at $0.20 or 2% with an earnback period of approximately 3.5 years using the crossover method. Based on our extensive due diligence, we believe significant cost synergies are achievable by eliminating redundant functions and branch consolidation. We have identified annual pretax savings of $33 million or 50% of First Connecticut 2019 expense base, which is expected to be fully phased-in by the second quarter of 2019. Together with Farmington Bank Management, we will evaluate the combined branch networks to understand how to best serve our combined customer base and structure the network accordingly. Revenue synergies are not included in our modeling assumptions. However, as Jack referenced earlier, we are excited by the opportunities to market our expanded menu of products and services to Farmington's existing customer base, as well as utilize the size and strength of our balance sheet to provide more comprehensive solutions to their larger customers. We conducted extensive credit due diligence reviewing almost 80% of Farmington Bank’s commercial loan portfolio and studied samples of the retail portfolio, as well as the overall loan underwriting and rating process. As such, we are very comfortable with our credit mark assumption. On Slides 5 through 7, we provide an overview of First Connecticut Bancorp. With total assets of $3.1 billion, loans at $2.8 billion, deposits of $2.4 billion, and 28 branches as of the end of March, 2018, Farmington Bank has a significant presence in Central Connecticut that extends into Western Mass. The Bank is particularly strong in Hartford County with the fourth largest deposit market share. The Company has delivered robust organic loan growth since completing its mutual conversion in 2011. Since that time, Farmington Bank has grown their diversified loan portfolio at a compound annual rate of 13% through the first quarter of this year by focusing on commercial relationships while maintaining its residential lending roots. As such, this growth has been broad-based across both their commercial and retail portfolios. Importantly, Farmington Bank has been able to achieve double-digit organic growth while maintaining excellent asset quality metrics, as evidenced by net charge-offs as a percentage of average loans of only four basis points for the first quarter of 2018, and two basis points for full year 2017. Farmington has also been successful in building its deposit base as evidenced by achieving a compound annual growth rate of 12% since 2011. The Company has built a strong core deposit base with a solid retail foundation and a growing commercial base. Turning to Slide 8, the acquisition of Farmington Bank further strengthens our franchise in Connecticut, particularly in the Greater Hartford area. Our deposit market share in this state rose from 12.9% to 14.5% on a pro forma basis and improves our rank from number three to number two. As Jack mentioned earlier, we are committed to Connecticut, which continues to be a very desirable banking market giving us well and attractive demographics. The Hartford area has a solid economy built on vibrant insurance and healthcare industries, large aerospace manufacturers and many subcontractors, universities, as well as emerging tech start ups. Within the Greater Hartford area is Hartford County, which is the second most populous county in the state and home to many of the businesses I just mentioned. As a result of the acquisition, our deposit market share in the county more than doubles to 10.9% on a pro forma basis and our rank increases two spots to number three. Importantly, the addition of the Farmington Bank branch network helps strengthen our hub and spoke strategy of traditional and in-store branches. Slide 9 dives deeper into Hartford County. As displayed on the map, the addition of Farmington Bank significantly bolsters our presence in some of the wealthiest and most densely populated suburbs West of Hartford such as Farmington, West Hartford and Avon. As you can see on the slide, the median and household income of over $106,000 and expected five-year growth rate and household income of 12% for these suburbs are significantly higher in both Connecticut and National levels. Turning to the estimated financial impact on Slide 10, the transaction enhances our return on average assets and return on average tangible common equity by approximately five basis points and 85 basis points respectively once our cost savings are fully phased in. In addition, the efficiency ratio improves 170 basis points on a pro forma basis, while the transaction has limited impact on capital as evidenced by only a 10 basis point decline in the tangible common equity ratio. Now let me turn it back to Jack to wrap up.

[Jack Barnes:]

Thank you, David. The acquisition of Farmington Bank stands on its own as a strong financial and strategic transaction. We believe this deal provides compelling financial returns and strengthens our franchise in this important geographic market. It is also important to evaluate the transaction as part of our broader operating strategy of balancing organic growth with the successful M&A program. Over the past several years we have been investing in revenue producing initiatives, while also improving operating efficiency. Simultaneously, we have used acquisitions to increase market share and profitability of our banking business, enhance growth and probability in our wealth management and insurance businesses, and bolstered our nation-wide equipment finance business. The acquisition of Farmington will continue the momentum generated from our most recent acquisitions of Suffolk Bancorp and LEAF Commercial Capital. Suffolk complemented our previous acquisitions and organic growth in the New York Metro area, while LEAF diversified our existing nation-wide equipment finance business into the small ticket leasing segment. Farmington provides us with the classic in market acquisitions of a high quality franchise that further strengthens our well established presence in the Central Connecticut and Western Massachusetts. Whether viewed as a standalone transaction or part of our broader strategy, we view Farmington transaction as adding significant value for shareholders. That concludes our presentation. Now, we'll happy to answer any questions that you may have. Operator, we are ready for questions.

[Operator:]

[Operator Instructions] Your first question comes from Steven Alexopoulos with JPMorgan. Your line is now open.

[Steven Alexopoulos:]

I wanted to start and look at the price 17 times 2019 earnings as a relatively full price. Was this a competitive bid situation? Or did you guys have relationship with First Connecticut?

[Jack Barnes:]

We have had a relationship actually for a long time Steve, kind of multiple dimensions, known bankers there for a very long time, we've actually shared a lot of credit exposure with them really for - I would guess right now more than a decade. They actually have a few people that worked at People's United through the year. So, really a very strong relationship over a long period of time and really just based on relationship building and touching base more recently in the early part of this year, the dialogue got more serious and move to this point.

[Steven Alexopoulos:]

So this was not an option, right, this was one-on-one?

[Jack Barnes:]

No, that's correct. It's a negotiated deal.

[Steven Alexopoulos:]

And then, I'm not that familiar with the company, but given that it was found in 1851 and it's only 3 billion of assets like I can't imagine the market sort of that fast growing, but since the IPO they have had double-digit growth. Can you give some context what really drove the double-digit growth since 2011?

[David Rosato:]

Well, the franchise was a mutual bank up until very recently and then there was a change in management and a lot of talent was added from variety of commercial banks from across New England. And so the growth that you're seeing post-conversion comes from a group of very well known talented bankers.

[Steven Alexopoulos:]

And then one final one, it seems like a lot of work only 3% earning accretion. Are their revenue synergies material here? I'd love to hear what this accretion could look like including revenue synergies? Thanks.

[David Rosato:]

Yes. Well, we feel very good about the - you know things as we talked about and execution as you know we've done a lot of acquisitions in this size range through last number of years. We've got very confident step that move through these events very, very well. So, we're confident in our execution and it's kind of the efficiency of moving through that. And we think that it still have a nice benefit kind of standing on the cost saves and the combination itself. We do see - I mentioned, we've shared a lot of credit exposure through the years. There's a number of fine customers that they have in the commercial book that we'll be able to support on a larger basis as they grow and their needs. Also we feel good about the potential for the synergies in both our product base and balance sheet benefit.

[Operator:]

Your next question comes from Jared Shaw with Wells Fargo Securities. Your line is now open.

[Jared Shaw:]

Yes. Were there any or are there anticipated to be any HHI issues with any of the branches. Do you think they'll have to be any divestitures or is that fairly clean?

[Jack Barnes:]

Yes. There are no HHI issues in the deal at all.

[Jared Shaw:]

And then as you look at future deals, I know you just said you have this team they can do these integrations pretty well…

[Jack Barnes:]

I'm sorry, Jared, could you speak up just a little bit, I'm having hard time hearing?

[Jared Shaw:]

Yes. Sure. Sorry. As you look at future deals do you think that you could continue to look at doing these smaller deals that have large cost takeouts in market? Or was this really a unique opportunity?

[Jack Barnes:]

No, I actually think, if you look across our footprints there are other opportunities to do a very similar type transaction.

[Operator:]

And your next question comes from Mark Fitzgibbon with Sandler O’Neill. Your line is now open.

[Mark Fitzgibbon:]

If you consist as a relatively small deal, could you envision a scenario where you might do another transaction before this one is completed?

[David Rosato:]

Yes, I think that is a possibility Mark. Although, we certainly appreciate that the regulatory environment around these transactions has improved significantly in the last year, and so we'll see how quickly we move through this. Our expectation is that will be complete by the end of the year.

[Mark Fitzgibbon:]

And then I know your tangible common equity ratio doesn't really go down a lot as a result of this transaction, but have your thoughts on perhaps raising some additional capital changed at all?

[David Rosato:]

Hi, Mark. It's David. I can't say that they have from this deal. It is just 5% of our asset size. It has a little larger impact on some of our risk-based ratios, so total risk-based capital will go down about 30 basis points. But we are starting to accumulate and accrete capital at a faster pace than we have historically. So as we stand here today we don't anticipate any future capital races in the near term.

[Operator:]

[Operator Instructions] Your next question comes from Collyn Gilbert with KBW. Your line is now open.

[Collyn Gilbert:]

Just a question I guess, David, for you perhaps on their NIM. So they operate with a fairly low NIM. Are there opportunities to do anything on their balance sheet either for them to do prior to closing or you do at closing to try to improve some of the NIM dynamics?

[David Rosato:]

I think overtime there are opportunities. They have to be small opportunity in the securities portfolio. And then as we look to integrate the branches their deposit costs are higher than ours and we'll be thoughtful in working with them as we put those two networks together to see where we can make some changes.

[Collyn Gilbert:]

Okay. That's helpful.

[Jack Barnes:]

Sorry, Collyn, it's Jack. I referenced lot of the other things that we've been doing like equipment finance et cetera and I do thing as they've had a pretty significant weighting of residential loans which have been low yielding and impacting that NIM. I think as we think about our diversified businesses and taking advantage of the core deposits. And we will ship the mix over time and that should benefit the NIM overall as we move through that.

[Collyn Gilbert:]

And then Jack, just back to the question and the comment that you sort made to on the - I guess the closing time of the transaction, I mean it's, you know by the end of the year that's a fairly closing time I recognized obviously that the regulatory environment has improved. Is that shorter closing time, just a message that you have confidence that you'll get that done just because of kind of ease of the regulatory environment or if you could give a little bit color around that?

[Jack Barnes:]

Yes. So I would start with - both institutions are in very good shape as it relates to those regulators and very healthy, very sound, very good CRA track record. And so that's a very good strong turning point. And then my meetings with our regulators and discussions and observing what's happen with other deals in the last year and listening to the controller, it's very clear that timeframe in the application processes are being at here too. And so we would expect that will move through the process in a much quicker pace than we did with Suffolk for sure.

[Collyn Gilbert:]

And then just one final question. It wasn't in a slide deck, I'm assuming what the answer is, but are they - I don't think it was in slide deck. But are you offering any board seats to any of the members of FBNK?

[Jack Barnes:]

No. There are no new board members with the deal.

[Operator:]

Your next question comes from Austin Nicholas with Stephens. Your line is now open.

[Jack Barnes:]

Let's move to the next question, please.

[Operator:]

And your next question comes from Matthew Keating with Barclays. Your line is now open.

[Matthew Keating:]

I just had a question - I know the Bank has been investing crossing over $50 billion for some time, now that we have had Regulatory Relief Bill passed, just curious to see if you see any meaningful expense or maybe the pace of expense growth slowing looking forward? I know you weren’t expecting material increase related to that but is there any changes as you think about the level of spending the Bank needs to make as it continues to grow both organically and through acquisitions such as this one?

[Jack Barnes:]

Yes, so - appreciate your kind of referencing our past discussions. We feel good about the investments that we have made to strengthen our overall environment, data governance, modeling capabilities et cetera. The movement in the city levels from 50 to 250 that kind of reflected with the Crapo bill will help us avoid spending for things like the writing and development of a living will, not moving through the liquidities coverage requirements at $50 billion. So, there’s a number of things I would say around the requirements of - seek our banks that we will avoid in the future. The money that we’ve spent and invested and how it’s going to strengthen the company is there and it’s in our run rate and we don't see any significant change going forward.

[Matthew Keating:]

And then just, a separate question on First Connecticut. I appreciate the chaos they’ve had since 2011, it does seem like growth has slowed a bit more recently, and so what’s going on in their franchise or maybe some of those growth trends has slowed, is that just the increasingly competitive marketplace, any color you can provide would be helpful. Thanks.

[Jack Barnes:]

Sure, in our discussions I would say, that the biggest challenge that Farmington has had, is been around continuing to grow deposits to provide the funding for growth on the loan side, the customer base and the relationship managers are strong and there’s a lot of confidence that with the right funding that pace can continue. So, I think that’s probably the key thing that came out of our discussions over a long period of time. The challenges around investing and marketing, to build household and create and continue to build that core funding as an industry issue and a big driver for the - as you point out recently being slowed in that growth rate.

[Matthew Keating:]

And just final question, are there any plans to sell any of the acquired assets from First Connecticut, obviously they have a little bit more ready mortgages or anything like about near-term plans once the deals closes that you think you look to change? Thanks.

[Jack Barnes:]

No, actually, not at all. If you think about the bulk of those assets you’ve got, commercial loans related to are out of those relationships which we very much value and then there are residential mortgages that relate to households and customers that we very much want to grow and expand. So, we’re excited about the opportunities around all of that.

[Operator:]

Thank you. Ladies and gentlemen, this will conclude the time we have for questions. I’d now like to turn the call over to Mr. Barnes for closing remarks.

[Jack Barnes:]

Thank you. As we discussed, this transaction is an attractive in market acquisition that further strengthens our franchise. It provides compelling financial returns bolstered by achievable cost saves and prevents no execution risks given our knowledge of the Company and demonstrated track record of successful integrations. Farmington Bank is an excellent fit with People's United due to its long standing relationship based approach to servicing customers, complementary commercial and retail capabilities and similar culture. Their confidence of combination of these two franchises will create significant value for both customers and shareholders of each institution. Thank you for your interest in People's United. Have a good day.

[Operator:]

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.