People's United Financial, Inc.
Q1 2011 Earnings Call Transcript

Published: 21 Apr 2011

[Operator:]

Good day, ladies and gentlemen, and welcome to the People's United Financial Inc. First Quarter Earnings Conference Call. My name is Crystal, and I will be your operator for today. [Operator Instructions] I would now like to turn the presentation over to Mr. Peter Goulding, First Vice President of Investor Relations for People's United Financial Inc. Please proceed, sir.

[Peter Goulding:]

Good afternoon, and thank you for joining us for today's call. Jack Barnes, President and Chief Executive Officer; Kirk Walters, our Chief Financial Officer; and other members of our management team are gathered for the call. Before we get started, please remember to refer to our forward-looking statements on Slide 1 of our presentation, which is posted on our website, www.peoples.com, under Investor Relations. With that, I'll turn the conference over to Jack.

[John Barnes:]

Thank you, Peter. And good afternoon, everyone, and thank you for joining us today. We're very pleased to be able to share solid progress toward improved operating performance in the quarter which comes from everybody's hard work on executing to our plan. Before we go through the slides, I'd like to remind you that our objectives have been and continue to be straightforward and twofold

[Kirk Walters:]

Thank you, Jack. Before I start, as this is my first quarter here at People's United, I thought I would take a moment to share my perspective with you and explain why I have such high confidence in our ability to succeed. In this challenging economic environment, People's United has immense opportunities to drive growth through new markets, new products and increased cross-selling. We benefit from exceptional relationships built over 169 years and a balance sheet which is 93% funded by low-cost deposits and common equity. It's worth pointing out here that the current banking environment is very similar in terms of regulatory response that of the late 1980s and early 1990s when FIRREA and FDICIA were passed following the savings and loan crisis. These acts had the equivalent impact on the industry as Dodd-Frank has today. As banks began to feel the impact of these regulatory requirements in the mid 1990s, we saw a number of weaker operators begin to face a fatigue factor, encouraging consolidation in the industry. Our management team is experienced and has a record of strong operators who have survived and thrived in the banking crisis of the 1980s, 1990s, as well as through the most recent one. Furthermore, People's United conducts business in the nation's best commercial banking market, characterized by high density markets with well-educated customers and multigenerational businesses that provide additional credit support to the region. Importantly, a wave of consolidations over the past 20 years has created a void in relationship-based and customer service focused banking, which we are uniquely positioned to fill. Now I will return to the presentation. On Slide 4, you can see a breakdown of the elements contributing to the increase in our margin, which rose to 4.16%. An accretable yield adjustment for our People's United Equipment Finance business, formerly Financial Federal, added 16 basis points to the margin. This adjustment, which happens to coincide with the one-year anniversary of the Financial Federal transaction is brought about by better than expected credit experience and slower than anticipated prepayment activity, both of which have the effect of increasing the portfolio's accretable yield over the remaining life of the underlying loans. In the case of Financial Federal, the portfolio duration is shorter than that of a traditional bank portfolio, which has the effect of amplifying the extent of such accretable yield adjustments. That said, generally speaking, the credit experience within acquired loan portfolios continue to be better than originally expected. We will likely benefit from additional interest accretion as those portfolios run down. In the first quarter, investment mix and yields contributed an additional 12 basis points to the margin. During the fourth quarter, average balances for short-term investment and securities totaled $3.7 billion, yielded 1.6% and had a period end duration of 2.4 years. This compares to the average balances for short-term investments and securities for the first quarter of 2011, which totaled $3.8 billion, yielded 2.26% and had a duration of 2.7 years. The full quarter impact of Bank of Smithtown and RiverBank also added 15 basis points. As we've discussed, we did have 4.5% linked quarter annualized loan growth, primarily funded by deposit growth, which one would expect to have also positively contributed to our margin. And while it did, the impact was small because March was an extremely strong month accounting for more than half of the average loan balance growth. Accordingly, we will see an increased margin contribution from this loan growth in the second quarter. On Slide 5, you can see that our net interest margin has been growing steadily. Beginning in the first quarter of 2010, we have experienced healthy and sustained margin expansion. As of the first quarter of 2010, we held virtually all of our excess capital in cash to the Fed earning 25 basis points. In the second quarter 2010, we began to invest more of our excess capital and agency mortgage-backed securities. As a result of these investment decisions, since period end of the first quarter 2010, our net interest margin has positively been impacted by approximately 25 basis points. Whereas last quarter, we expected net interest margin to remain at the 3.85% level or above for the rest of 2011. Today, we would expect net interest margin to remain at 4% or above for the rest of the year. Slide 6 provides a breakdown of the elements contributing to our net increase in gross loans. We look at our portfolio as 2 distinct pieces

[John Barnes:]

Thank you, Kirk. On Slide 15, regarding capital deployment, you can see that our primary focus is deploying capital via organic loan growth in the new markets and by delivering new loan products and services throughout our franchise. We spoke earlier about the dividend and share repurchase. On acquisitions, our primary focus is in New England and New York City metro areas and secondarily in the mid-Atlantic region. I continue to build relationships with potential partners in these markets. On Slide 16, in summary, we offer a compelling investment opportunity based on our sustainable competitive advantage and improving returns as we leverage our excess capital. We have strong fundamentals that include a premium 169-year-old brand led by a renewed and strengthened leadership team. We have a high quality branch footprint characterized by wealth, density and commercial activity. Our brand of banking allows for a low cost of deposits and an above average net interest margin. Finally, we consistently deliver industry-leading asset quality levels. We are working to optimize our business, relationship-based thinking while efficiently going loans and deposits per share, which includes growth in two of the country's largest markets, the New York and Boston MSAs. We are significantly more asset sensitive than our peers so when rates finally do rise, we will experience a strong positive impact on our net interest income. Finally, our pro forma tangible common equity ratio is approximately 12%, leaving us plenty of opportunity for continued growth. This concludes our presentation. Before we take your questions, Peter has a few remarks about the Q&A session. Peter?

[Peter Goulding:]

First, with 18 research analysts owning our stock, we really like each of you to limit yourself to one question and one follow-up. If you have additional questions, please get back into the queue. And if you're not able to ask all of your questions on the call, know that you can follow up with me later this evening or in the days ahead. Now we'll be happy to answer any questions you may have. Operator, we're ready for questions.

[Operator:]

[Operator Instructions] Your first question comes from the line of Ken Zerbe with Morgan Stanley.

[Ken Zerbe:]

First question is an easy one. It might seem a little bit obvious, but is it safe to assume from our perspective that the regulators knew about your dividend increase before you announced it and they either give their implicit or explicit approval for the dividend hike?

[John Barnes:]

Yes, that is safe to assume.

[Ken Zerbe:]

Perfect. My follow-up question, I guess, is just in terms of the sustainability of the additional interest from FIF. If I understand that correctly, to get an additional, say, 16 basis points again, you would actually have to make -- you would have to assume that the cash flows are even better next quarter than you think they are this quarter. Am I thinking about that the right way? Because you mentioned that as a potential positive going forward quarters, but I wasn't sure if that's something that recurred or if that you think that actually cash flows might be better next quarter than you think they are this quarter.

[Kirk Walters:]

If the question -- it's Kirk. If the question relating to Fin Fed accretion that we saw, we expect to continue to see impact from that in future quarters, the answer is yes. Probably not at the magnitude that we saw the quarter because this was that first adjustment since the acquisition, but we do expect that there will be continued positive impact from the recast of that.

[Operator:]

Our next question comes from the line of Christopher Nolan with CRT Capital.

[Christopher Nolan:]

I guess, for Kirk obviously. ROA target of 125% something new. I haven't seen in earlier quarterly calls.

[Kirk Walters:]

Well, since I've been here a very short time, what I can tell you is that it's not relatively new. I've seen it in other materials. But certainly Jack or Peter could amplify how long that's been around.

[John Barnes:]

Well, I think that we've been talking about that, Chris, really since last year. I think since I was put in the seat as interim CEO.

[Christopher Nolan:]

Okay, great. I think you might have mentioned, what's the investment securities duration?

[Kirk Walters:]

The investment securities duration right now is 2.7.

[Christopher Nolan:]

Great. Thank you very much.

[Operator:]

Our next question comes from the line of Collyn Gilbert with Stifel, Nicolaus.

[Collyn Gilbert:]

Good afternoon, guys. Just a question on the expense front, that was a pretty remarkable turn in sort of curtailing the expense growth and just the expense levels in general. Can you give us a little bit more color, Kirk maybe or Jack, as to what specifically was going on there and maybe what you kind of see? I know, Jack, you said in round terms where efficiency ratio guide to peer levels, but just kind of talk a bit more about certain expense initiatives or maybe even what just happened in the quarter.

[John Barnes:]

Sure. I mean, I think there is a lot going on there because we are finishing bringing in the integration of the acquisitions that we've completed in the last year so far, that we've been executing very well on the integration front and realizing on the cost saves targets and exceeding them in each case, which has had a major positive impact. We continue to be very focused on the efforts that we started post-conversion. After our co-conversion, I've mentioned that we've had some assistance from Cornerstone, the benchmarking and beginning work there. So we're continued to work on improving our basic efficiency, and the combination of those efforts has helped us hold the expense line where it is.

[Collyn Gilbert:]

And do you think that that's fairly sustainable? Keeping it at that level? I mean, taking into consideration folding in Danvers but just for core People's?

[John Barnes:]

Yes, we obviously, there'll be an impact from Danvers in the hopefully the end of the second quarter and as we get into toward the remainder of the year. And so there's two aspects for that. But as it relates to the expense line, we would expect to fundamentally hold the level where we are in the coming quarter and then deal with absorbing Danvers and the branches and the related activity there.

[Collyn Gilbert:]

Okay. That's great. Thank you.

[Operator:]

Our next question comes from the line of Damon DelMonte with KBW.

[Damon DelMonte:]

I was wondering if you could provide a little bit more color for us on potential loan sales from the Smithtown portfolio. Roughly, I guess, what amount of loans would you be targeting to dispose of in the next coming quarters?

[Kirk Walters:]

Yes, I don't think at this point, Damon, that we have a number out there that we're actually targeting. But we continue to evaluate the trade-off between doing loan sales and what we think is whether the valuations, whether we're getting fair value for them or we're better off working out of them. We are very focused on working down the troubled assets that we have, not only within the acquired portfolios but even though our levels are relatively low in the originated portfolios, and those portfolios as well. So we will look at the various levers we can to move the numbers down, and this quarter did work well on the loan sales. And we do have a number of others in the pipe that we're evaluating.

[Damon DelMonte:]

Okay, great. Thank you. I guess my follow-up question, kind of changing gears a little bit, the Wealth Management line item this quarter seems to be strong linked quarter. Was that more seasonality or are you gaining more or traction in that regard?

[John Barnes:]

We're actually -- we're getting traction on all 3 business lines, if you will, within our Wealth Management business. We had a very, very good quarter in Insurance. That was the largest piece where our insurance folks have great sales momentum. And on the brokerage side, I know that in the last number of quarters, I've described for everybody the efforts to try to bring the legacy Connecticut, New York efforts and the success in the brokerage end to the northern parts of the franchise. And we've begun to see the fruits of the efforts there and the training and working with folks to become more successful in that product area as well. And the fundamental Asset Management Trust business also had a solid quarter.

[Damon DelMonte:]

Okay, great. Thank you very much, guys.

[Operator:]

Our next question comes from the line of Steven Alexopoulos with JPMorgan.

[Steven Alexopoulos:]

Jack, to start, just a follow-up on your comments that the regulators approved the dividend increase. I'm just wondering, is the OTS the only regulator that would need to sign off at this point? Or is it more joint approval from the OTS and your new regulators that'll take over in July?

[John Barnes:]

Well, the OTS is our regulator today, right? We, like others, are going through a discussion with our regulators regarding integration of the OTS into the OCC. The OTS is our regulator.

[Steven Alexopoulos:]

Okay. I just wondered when we passed July, is it safe to say that the dividend increase is safe here? Or does the OCC may think differently about it?

[John Barnes:]

I am not in a position, Steve, to speak for them. Obviously, our step would indicate our confidence in being able to support the dividend.

[Steven Alexopoulos:]

Okay, fair enough. Just a follow-up on loan growth. Could you talk about type of mortgage assets that you guys added during the quarter? Maybe talk about C&I. It looks like might have been down, excluding this reclass. And then did you restate period end 2010 loans are down? With this release, it looks lower than what you reported last quarter.

[Kirk Walters:]

Steve, could you repeat the last question? You faded out there.

[Steven Alexopoulos:]

The last question was when I look at my press release from last quarter, and your year end 2010 loan balances and this quarter, it looks like you restated year end loan was down by around $190 billion in the resi mortgage line? It just impacts growth number. Because I wasn't showing any growth in my model, but your current release does shows loan growth and because of that change in the resi mortgage balance.

[Kirk Walters:]

I'll take a couple of those and we'll let Jack talk about the residential mortgage product that we have that's been getting booked. In terms of the financials, one of the things we did is, previously loans and process were lumped in with the loans. And I think it's generally consistent out there, those are another asset. So those have been moved to other assets and also loans held for sale in our mortgage operation were broken out separately. So there is a couple of pieces moving around there that Peter can walk through as to what the numbers were. But when you look at C&I, the originated portfolio that we're focused on, there is a little bit of growth but it was modest. It was predominantly over in the Retail Business banking and the CRE/Multifamily portfolios. Jack can probably give you a closer color on the mortgage pipeline.

[John Barnes:]

On the residential mortgage growth that we are talking about, Steve, we continue, as we described again in prior quarters, we began to book loans, residential loans with the rate and structure that were attracted to us, mostly adjustables, I believe in the second half of last year, and that momentum has continued into the first quarter. We do think that the first quarter, the level of bookings was high as the pipeline coming out of the fourth quarter was very strong. So we feel that we'll continue to see growth in the residential portfolio. What the pace will be like will depend on the rate environment and how the pipeline continues to develop into the year here.

[Steven Alexopoulos:]

Okay. Thanks for all the color.

[Operator:]

Our next question comes from the line of Mark Fitzgibbon with Sandler O'Neill.

[Mark Fitzgibbon:]

I was curious, the yield on the securities portfolio went up by about 53 basis points this quarter. Was that due to extending out the duration, or were you buying some different types of securities?

[Kirk Walters:]

We're buying similar types of securities, but we are only buying a given amount each quarter so we're continuing to see the additional pick up and the additional benefit. We, as you can see the duration did extend for that group as a whole a bit, which certainly was part of it that helped it. But by and large, we're buying similar securities, and we are helped a little bit by the overall interest rate environment.

[Mark Fitzgibbon:]

Okay. And then just as a follow-up, could you share with us how large your commercial pipelines are right now versus, say, the fourth quarter numbers?

[John Barnes:]

We can't share exactly how large they are, but we can tell you that we're very pleased with the pipelines, that we've had growth during the quarter. We feel like we've got good momentum, and as we enter the second quarter here, we're feeling very good about continuing the pace that we're on.

[Operator:]

Our next question comes from the line of Bob Ramsey with FBR.

[Bob Ramsey:]

I just wanted to hop back to the margin question. I guess I'm not entirely clear, as you all look forward into the second quarter, do you start out at a base of 4.16% or is it more like 4%? Is the purchase accounting accretion onetime or is it around as long as those FIF loans are around?

[Kirk Walters:]

Well, I think as we discussed in one of the earlier questions, you'd probably start out at a base of 4%. We do believe that there will be continued additional accretion, but not in the magnitude of what we saw this quarter just because this was the first time we had adjusted it. So as we represented in my commentary, we would expect the margin to be running above 4%, but you do need to start off the base of 4%.

[Bob Ramsey:]

Okay. That is very helpful. And then I also was curious, I know you talked a little bit about the resi mortgage production that you all have been doing. What is the average rates on the new production that you are doing?

[John Barnes:]

It's not something that we can quote right here, but we can get back to you on that. Peter will give you the average rate.

[Bob Ramsey:]

Okay. All right. That will be helpful.

[John Barnes:]

It's going to be at it a reflection of where the market is currently, but ...

[Operator:]

Our next question comes from the line of Mike Turner with Compass Point.

[Michael Turner:]

Just wanted to quickly find out how much accretable yield is left on FIF and Smithtown? Just the dollar value that's still outstanding?

[Kirk Walters:]

This is Kirk. Obviously, a little bit been here for a fairly short tenure. And to be honest, I don't have that number right at my fingertips. But it's one that you can definitely get back to Peter or me, and we'll get it to you. But to be honest, I just don't have it right here at my fingertips.

[Michael Turner:]

No problem, but I have one follow-up. Just on the C&I growth or the increased pipeline, can you talk about how much of that is increased demand, and how much of it is that you guys feeling market share?

[John Barnes:]

I think it's fair to say -- I'd put in a couple of context, we do have some customers that are -- we see, I'll say anecdotally, going into positions where they're growing their business, and we're seeing some additional requests for financing to support that growth. At the same time, we continue to see line utilization staying flat. So we're watching that carefully and looking for that to expand as the economy begins to grow. Much of the rest of the growth would be taking market share.

[Michael Turner:]

Okay. Thank you very much.

[Operator:]

[Operator Instructions] Our next question comes from the line of Tom Alonso with Macquarie.

[Thomas Alonso:]

As you might imagine, most of my questions have been answered at this point in time. Just I wanted to get back to the asset sensitivity position that you guys are in. And it's been relatively stable where you say, a move, I think it's plus 100 is $40 million. I'm just curious how that math works given that a lot of the cash that you've had in the balance sheet has been put to work in securities that have a little bit longer duration and won't necessarily reprice as fast. If you can just kind of walk me through how you're thinking about that, I think that would be helpful.

[Kirk Walters:]

I mean, the numbers that we're reporting are based off of the current balance sheet that we're looking at. And we need to remember that the calculations that are normally floated out there with rates going up instantaneously 100 basis points, et cetera. So as rates ramp up gradually, you may have a little more gradual impact than what is shown there. But we have been keeping the duration relatively short on the investment side and certainly from a funding standpoint, which is the other side of the equation. If you look at the loan growth this quarter, it was funded by our own deposits, in our own branches, et cetera, at a lower cost. So really, we're able to fund the loan growth with our deposits that were which, of course, is powerful and preserving the rate sensitivity that we have there. So depending what your bet is on how rates move, you can be somewhere along the spectrum of that $41 million.

[John Barnes:]

To add a little color, this is Jack, what happened in the second half of last year and through the quarter was actually the $4 billion assets sensitivity number that we had used was expanding as we were taking in acquisitions and kind of the evolution of changes in the balance sheet was taking place. And at that same time, we were changing the investment mix. So we basically ended up in that same range, and I think those are some of the dynamics that might help you understand how we invested what we did, while at the same time we're ending up in relatively the same asset sensitivity spot.

[Thomas Alonso:]

Okay. Fair enough. Thanks very much guys.

[Operator:]

Our next question comes from the line of Frank Barkocy with Mendon Capital.

[Frank Barkocy:]

Do you see Wealth Management becoming a more important part of earnings going forward? And is this going to be just organic growth? Or will you look at acquisitions as well?

[John Barnes:]

We absolutely would love to see Wealth Management grow at an increased pace. And I think there's many reasons for us to feel like we can achieve that. Again, I'll go back to what I mentioned on brokerage. We've got some momentum in selling the brokerage product into northern New England where we didn't have that much momentum historically. We're going to be introducing it to Long Island where it wasn't available. And we'll be increasing our efforts in Boston as well. On the insurance front, we're making great progress. We've reorganized that business, and that entire team is really moving forward at a great sales pace. And it's still a soft market so if the market improves, we'll do well on our own infrastructure, if you will. And we look at the capabilities that we have and don't see a need to be acquiring further capabilities in the business. What we need is to sell into our footprint and our franchise, and that's what we're focused on in terms of going forward with the insurance business.

[Frank Barkocy:]

That's great. Just a quick follow-up, has the board granted additional authorization for share buyback when the [ph] Danvers deal is complete?

[John Barnes:]

We -- actually, the board authorized an additional 5% last quarter. And that is in place and substantially unutilized at this time. So when Danvers closes, then we'll have it available.

[Frank Barkocy:]

Thank you.

[Operator:]

Our next question comes from the line of Rick Weiss with Janney.

[Richard Weiss:]

I was wondering on the provision charge-off ratios, well it seems the provision exceeded the charges. Does that portend any higher charge-offs in the next couple of quarters? Or how is it best to think about that going forward?

[Kirk Walters:]

Yes, the best way to think about that is that we -- and we've noted in our commentary is that because we had good solid loan growth, we increased the allowance on a conservative basis to provide for that loan growth. So no, it is not something that should lead to additional charge-offs in the future.

[Richard Weiss:]

Okay. So we can just assume if the loan growth continues to be strong, then the provision will be kind of a little bit higher than charge-offs subsequently?

[Kirk Walters:]

I think that's a fair assumption. There's lots of moving pieces in the allowance, and we'll see how everything plays out as we go forward. But based on this quarter, that would be a fair assumption.

[Richard Weiss:]

Okay. Thank you.

[Operator:]

[Operator Instructions] And our next question is a follow-up from the line of Bob Ramsey with FBR.

[Bob Ramsey:]

Thanks for taking the follow up. Clearly, the Smithtown and RiverBank acquisitions have had a more favorable impact on your net interest margin than, I guess, you guys initially thought. How are you now thinking about the impact from Danvers Bank when that closes later this quarter?

[John Barnes:]

The way we view Danvers right now, we see an environment and a margin contribution that'll be similar to ours, that we'll be able to move in a direction where the average yield and the cost of funds will reflect our existing operations. So we're not anticipating any big impact on the margin there either way, where it is.

[Kirk Walters:]

I would suggest, though, in terms of activity that I find encouraging the momentum that has occurred in the 2 branches that were de novo branches opened by People's both at the Prudential and Milk Street, that I think will help lead the way for Danvers as we leverage out the brand in that market.

[Bob Ramsey:]

Okay. And I know that with FIF, you all mentioned that the benefits are, I guess, a little concentrated because the average life of the FIF loans, or the other average earning life, is relatively short. What is the expected remaining life on the FIF loans?

[Kirk Walters:]

I would say if you look at the expected life, it would probably be around 3 years.

[Bob Ramsey:]

And that's from today or from the time the loan was originated?

[Kirk Walters:]

From today.

[Bob Ramsey:]

Okay. Thank you, guys.

[Operator:]

Ladies and gentlemen, this will conclude the time we have for questions. I'd like to turn the call back to Mr. Golding for closing remarks.

[Peter Goulding:]

Thank you again for joining us today. We appreciate your interest in and support of People's United. If you have any questions, as I mentioned earlier, please feel free to contact me at [phone].

[Operator:]

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

[John Barnes:]

Thank you.

[Kirk Walters:]

Thank you.