People's United Financial, Inc.
Q3 2011 Earnings Call Transcript

Published: 21 Oct 2011

[Operator:]

Good day, ladies and gentlemen, and welcome to the People's United Financial Third Quarter Earnings Conference Call. My name is Jeremy, and I'll 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 presentation over to Mr. Peter Goulding, First Vice President of Corporate Development and Investor Relations for People's United Financial. Please proceed, sir.

[Peter Goulding:]

Good afternoon, and thank you for joining us today. Jack Barnes, President and Chief Executive Officer; Kirk Walters, our Chief Financial Officer; along with Jeff Hoyt, our Controller, are here with me to review our third quarter results. 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 the Investor Relations section. With that, I'll turn the call over to Jack.

[John P. Barnes:]

Thank you, Peter, and good afternoon, everyone. On Slide 2, we provide an overview of our third quarter results. For the quarter, operating earnings were $67.3 million or $0.19 per share, with net income of $52.9 million or $0.15 per share. Once again, our objectives have been and continue to be straightforward and twofold

[Kirk W. Walters:]

Thank you, Jack. On Slide 4, you can see a breakdown of the elements contributing to our 4.11% margin results for the quarter. As you recall, core second quarter net interest margin was 4.09%, excluding the 4 basis point benefit from accretable yield reassessments. The effects of the change in earning assets mix and yield on both the acquired and originated portfolio was a 4 basis point drop. We experienced 3 basis points of benefit from lower deposit rates, excluding the impact of the Danvers acquisition. Finally, we picked up 3 basis points from Danvers by investing some of our excess cash and loans, which offer a higher yield than securities. On Slide 5, you can see that our operating net interest margin, excluding the impact of accretable yield reassessments, grew modestly in the quarter despite a continued environment of low interest rates and pricing pressure in the market. Operating margin is equal to reported margin as there was no impact from accretable yield reassessments in the quarter. As we've said in the past, we expect our net interest margin to remain above 4% for the rest of the year. Our strong margin is a product of our low-cost stable funding, good loan mix and strong capital levels, all of which means we do not need to stretch on credit. In addition, our margin is and will continue to be supported by $1.46 billion of accretable yield resulting from 5 acquisitions closed within the last 18 months. Let me provide you a little more detail on the next slide. Slide 6 links closely with our discussion of the net interest margin. This slide provides you with the remaining accretable yield by acquisition, as well as relevant credit information by acquisition. During the third quarter, we booked accretion of $72 million. It's also worth noting that the additional non-accretable difference of $374 million compares favorably to $242 million of acquired nonperforming loans. So if credit were to remain on its current trajectory, there may be additional yield enhancements as a result of future re-classes from the non-accretable difference or credit mark to accretable yield or interest income. Slide 7 provides a breakdown of the elements contributing to our net increase in gross loans. The loan portfolios produced total loan growth of 14.8% quarter-over-quarter annualized or 23% quarter-over-quarter annualized of originated loan growth. This marks the third consecutive quarter of originated loan growth greater than 10%, which reflects a strong momentum within the franchise. We believe we operate in the best commercial banking market in the United States and are one of the few banks that can credibly offer the full product suite of a large bank while maintaining the outstanding customer service standards of a small bank. Importantly, our customers and others within the market recognize that we did not pull back in the last economic crisis and supported them over the last few years. So much of the growth is word-of-mouth referrals from our long-term customers. Originated loan growth for the quarter totaled $878 million. 36% or $315 million came from the C&I category. Within C&I, we saw strength across all categories, but I would highlight 2 areas

[John P. Barnes:]

Thank you, Kirk. I'm pleased that the redefined strategic priorities of optimizing the existing businesses and efficiently deploying capital are driving high returns for our company. We have more work to do, but we're excited about the quarters ahead. This concludes our presentation. Before we take your questions, Peter has a few remarks about the Q&A session. Peter?

[Peter Goulding:]

Thanks, Jack. [Operator Instructions] Now, we'll be happy to answer any questions you may have. Operator, we're ready for questions.

[Operator:]

[Operator Instructions] The first question comes from Christopher Nolan with CRT Capital.

[Christopher Nolan:]

Quick question. On the efficiency ratio, 55% target. Have you guys have a particular timing in mind for achieving that?

[Kirk W. Walters:]

What we said on the 55% target when we announced it in the second quarter is that we expected to get to that in 2 years.

[Christopher Nolan:]

Great. And then just a follow-up on that. Do you anticipate achieving the 1.25% ROA to coincide with that? Or that could occur at a later time?

[Kirk W. Walters:]

The 1.25% return on average assets and the 55% efficiency ratio are linked pretty closely in terms of hitting both of those numbers in a similar time frame.

[Christopher Nolan:]

Okay. So we won't see the efficiency ratio go below 55% and reaching 1.25%, right?

[John P. Barnes:]

You made it pretty closely, I think...

[Kirk W. Walters:]

Yes, I didn't say they were linked exactly as I indicated, but one certainly helps the other. And I think from an efficiency ratio standpoint that we all know that lower is better.

[Operator:]

And your next question comes from Collyn Gilbert with Stifel, Nicolaus.

[Collyn Bement Gilbert:]

Could you just reconcile a little bit on the loan sale loss and the securities gains this quarter? And was the loss through -- was that part of the Smithtown sale? I was just trying to reconcile each of those line items in a little bit more detail, if you could, please.

[Kirk W. Walters:]

Yes. In terms of the loan sale loss that was -- which we have noted in the detail of the press release, it was $4.8 million and that was out of the bank Smithtown portfolio. And then the securities gains was that we decided to sell a piece of our mortgage-backed to reduce the premium of risk. And that generated $8.6 million of gains.

[Collyn Bement Gilbert:]

Okay. So all those gains were tied to that -- to the sale of the MBSs.

[Kirk W. Walters:]

That's correct.

[Collyn Bement Gilbert:]

Okay. And then Smithtown loss, the $4.8 million. How does that reconcile with -- in the slide I think you had mentioned there was $12 million or so in charge-offs in Smithtown for the quarter?

[Kirk W. Walters:]

No. If you look at change quarter-over-quarter, if you go back to the second quarter, we had a little over $7 million of gains on the sales of Smithtown loans. And this quarter, we had the $4.8 million of losses. So when you look at a change quarter-over-quarter, that's a $12 million number.

[Operator:]

Our next question comes from Damon DelMonte with KBW.

[Damon Paul DelMonte:]

Kirk, could you provide a little more clarity on the margin outlook going forward? I know, I think Jack commented you could see a little bit of reduction in deposit cost by about 2 basis points. But kind of in light of the actions this quarter with the prepayment on the FHLB borrowings and the security sales and kind of your outlook for asset yield, could you provide a little bit more color on the margins?

[Kirk W. Walters:]

I think as we look at the margin -- I mean, the guidance that we have given so far this year is we expect it to be above 4%. As we think into next year, certainly through the first and second quarters, we feel reasonably good that we will remain with a forehandle on it. And as you get in the third and fourth quarters, that we will feel some slight pressure on that number. We are not immune to the pressures that are out there in terms of loan yields and investments ratcheting down a bit, but we are aggressively working our deposit cost. And of course, we do have a fairly significant amount of accretion that comes through our margin as well.

[Damon Paul DelMonte:]

Okay, that's helpful. And then kind of perspective going forward. What's your expectation for additional loan sales in the Smithtown portfolio? Are you guys continuing to actively shop some of those loans?

[John P. Barnes:]

Yes. We've been actively working that portfolio since the day we really took control of it in -- last November, and we have made some very nice progress. I think there's 2 kind of perspectives on it. One is, we've really made some very nice progress on the large balance -- larger problems to this point. So the $100-plus million in movement we've already had has benefited from that. We do see though this coming quarter another good piece of progress. So the progress continues. We would expect, as we move through it quarter-to-quarter, rate of loan sales may start to slow in terms of dollar amount because of that dynamic I just described.

[Operator:]

Our next question comes from Matthew Kelley with Sterne Agee.

[Matthew Brandon Kelley:]

Just wanted to confirm on the Durbin, it's still about $4 million a quarter, is that right?

[Kirk W. Walters:]

I think what we had said previously is that we expected Durbin to impact us to the tune of about $20 million a year, which would be basically $5 million a quarter.

[Matthew Brandon Kelley:]

Okay. And what do have underway for changes in your deposit pricing strategy on checking to recoup some of that?

[John P. Barnes:]

What we've been doing really, for the last 12 months as the Durbin issue became an approaching reality is that we've been working a broad strategy to try to look at a variety of ways that we could offset the loss of that fee income within our business. So our strategy has been to look at the existing fee structure and make changes where appropriate, look at minimum balances and other pieces of our packages. And we have over time taken a variety of steps that are helping us offset the impact, and we are going to continue to work that as we move forward.

[Matthew Brandon Kelley:]

Okay. And then on mortgage banking, so I assume that those losses on some of loan sales ran through the gain on sale of mortgage loans, that line item. So is that going to return to levels that we saw in the first half of the year of $8 million roughly?

[Kirk W. Walters:]

Yes. No, if you look at that line, Matt, we give more detail when you look at the attached schedules to the press release. What generated the loss there was $4.8 million of losses that we took on the sales of acquired commercial loans out of the bank of Smithtown. So on a net-net basis, we actually had gains of a little over $1 million on our mortgage banking business.

[Matthew Brandon Kelley:]

Okay. All right. I was just looking in the first and second quarter. You guys were at $8 million, and that's a pretty good quarter for mortgage. So I was surprised...

[Kirk W. Walters:]

You have to remember once again in those quarters that in that line is gains from the sale of acquired loans.

[Matthew Brandon Kelley:]

Okay. All right. Got it.

[Matthew Brandon Kelley:]

Of acquired loans. So like in the second quarter, we had a little over $7 million. I think it was $7.2 million in gains for the sale of acquired loans.

[Matthew Brandon Kelley:]

Got it. Okay. In the mortgage warehouse line of business, where could you see those balances going as that group continues to ramp up? I mean, how large do you think that could become? And what are your earning for yields on that balance?

[John P. Barnes:]

Well, I'll start with the issue of the business. We're pleased with the establishment of the business and the fact that we've grown outstanding to the level that we have to date. I think, as you remember, we hired a very experienced group there that has used that experience and their network to ramp up pretty closely -- pretty rapidly. And we -- what we're expecting is to see them grow at a reasonable clip. There's a lot going on in that business right now. There are people getting in and people like ourselves getting in, and there are those getting out. And so the dynamics will be kind of changing rapidly along with the mortgage environment. So how that develops over time, I really wouldn't want to predict right now.

[Matthew Brandon Kelley:]

Okay. All right. And what do you earn for yields on that? You said there was $127 million balance in the ABL bucket. What are you getting for that?

[Kirk W. Walters:]

What we tend to get in the spread is 150 to 200 over LIBOR in terms of the spreads. But in that business, one of the things, no different line than like ABL is you get a fair amount of fees.

[Matthew Brandon Kelley:]

Okay, got it. And then on the expense items. What have you identified, just for near-term reductions, that we can expect to see in the next 2 to 3 quarters coming out of the core number, on the expense line item?

[Kirk W. Walters:]

We've identified a number of things that -- relating to our pension plan, the over $20 million in cost savings related to pension plan and different FTE reductions that we took during the third quarter, virtually that bulk of the cost savings on the pension plan kick in next year because that change is effective January 1. We also see continued reductions coming in from the completion of the Danvers conversion. Obviously, we realized some of those in the third quarter. But we successfully, as Jack indicated, converted them over the last weekend. So as this quarter goes, we'll continue to take the balance of the cost out there. And right now, it's looking like that number is running a bit higher in terms of the cost savings than what we thought. And as we've discussed before, we're working on the leverage in a lot of different areas, particularly leveraging our technology and the conversion to one operating system and working through the different organizational levels. So we are pushing on a lot of levers and expect to quarter-by-quarter continue to see that come down.

[Operator:]

And our next question comes from Bob Ramsey with FBR Group.

[Bob Ramsey:]

I just was hoping you could maybe talk a little more about share repurchases, obviously very active this quarter. How much of that maybe reflected the opportunity that the market gave you? How much reflected a desire to repurchase some of the shares from Danvers? And how much of it just sort of reflects a greater appetite for share repurchases in general?

[Kirk W. Walters:]

I think we've said that as we look at capital deployment, there are really 4 main levers that we pull. The first being organic loan and deposit growth, which we had very solid of that this quarter this quarter, continued strong dividend share repurchases and the M&A side. So during this quarter, we were more active in the share repurchases. And I wouldn't break it down into any one of the specific buckets other than to say we were more active, completed the existing share repurchase program. And as you can see, the board authorized a new 5% share repurchase program.

[Bob Ramsey:]

Okay. And with the stock still relatively close to where it was in the first -- or sorry, in the third quarter, I mean is it your intent to remain relatively active if the market gives you the opportunity?

[Kirk W. Walters:]

We never say whether we're going to be in the market or not. So as I indicated, the board did give an additional authorization for another 5%. And at this point, that's all we would give in terms of further indications on that.

[Bob Ramsey:]

Okay. And then maybe last question. Just given the shares you did issue for Danvers and the repurchases that you did complete in the third quarter, what's a good diluted share count sort of running forward?

[Kirk W. Walters:]

I don't have that right in front of me, Bob. So why don't you -- after the call is over, why don't you give Peter a call, and he'll give that to you. Peter is saying 350, but why don't you give Peter a call after, and he can give you the number.

[Operator:]

Our next question comes from Tom Alonso with Macquarie.

[Thomas Alonso:]

Actually, most of my questions have been answered, but I just have one on the fees that you were referring to on the mortgage warehouse line. One, where do they flow through on the income statement? And two, can you just give us a sense of sort of the size?

[Kirk W. Walters:]

We haven't given an indication. In terms of the size, it's still on a -- it's still on a macro basis, a relatively small business for us. But for people that are around that business in the ABL, the -- one of the good parts of it is that you do enjoy a fair amount of fee income every time you are drawn down the line for the loans and different things like that, as well as the margin. And so when you look at our -- where it flows through the P&L in terms of the loan fees, you would be seeing that other -- under other non-interest income.

[Operator:]

Our next question comes from Mike Turner with Compass Point.

[Michael Turner:]

On the loan yield, if I just kind of backout the $72 million in accretable yield, I'm backing into an effective loan yield on your portfolio of about 370. How does that kind of compare to -- maybe you could talk about gross origination yields in the current environment. I mean, that just seems pretty low compared to most other banks, and I just wonder how much real downside pressure is left.

[Kirk W. Walters:]

One, in terms of the calculation, your number sounds a bit low. But in terms of what we're seeing in current originations out there, generally, in the C&I business, we're seeing spreads running about 150 to 200 over LIBOR. And those tend to be floating rate businesses. As you understand, about 40% of our loan book is floating rate adjustable. I think if you're looking at business banking, which is a more important -- which is a reasonably more important part of our business because of the franchise and the size of the franchise, there we see the margin is better, tend to run 250 to 300 over. And I would say that in the -- in your CRE businesses, right now, you're in that 200-plus range over as well, 225 to 250. So I think in the different businesses that spreads have compressed them a bit quarter-over-quarter. We are still able in many of our transactions to get floors, which is helpful in terms of sort of mitigating some of the downside of it.

[John P. Barnes:]

Mike, we can definitely follow up later, but I think the calculation you're doing isn't excluding the earning assets. You'd need to put a denominator in.

[Operator:]

[Operator Instructions] And our next question comes from Yanni Koulouriotis with Buckingham Research.

[Yanni Koulouriotis:]

Can you provide some more color on your multifamily business, please?

[Kirk W. Walters:]

The multifamily business that we have is embedded in the -- in our commercial real estate portfolios. As far as an exact percentage of that, I don't have it off -- don't have one off the top of my head. But it's -- we are active in the multifamily business throughout our franchise, not only in the pure apartment side of the business but we do see a continued good demand and activity in student housing around the many schools and universities that are in our franchise as well. So it is intermingled in with all of our commercial real estate and part of the regular flow in that business line.

[Yanni Koulouriotis:]

Have you seen any increased demand over the past couple of quarters? What are the pricing pressures from that line of business?

[Kirk W. Walters:]

I would say from a demand standpoint, it's really been pretty steady in terms of what we have seen on that. And pricing -- both Jack and I serve on the loan committees, and as I reflect on the pricing, it feels like it's held relatively constant over the last couple of quarters.

[John P. Barnes:]

Yes, I agree with that. And certainly, one of the more competitive markets that way for sure. But just to amplify a little bit what Kirk described, we do have a reasonably sized book of the multifamily, but when you look at our total CRE portfolio, it's very well diversified, both in terms of property type and the geography where we work. And multifamily is certainly not a significant part and something, it's a business in an area where we continue to have interest and continue to work.

[Operator:]

Ladies and gentlemen, this concludes the time we have for questions. I'd now like to turn the call back over to Mr. Goulding for closing remarks.

[Peter Goulding:]

Well thanks for -- thanks again for joining us today. We appreciate your interest in People's United. If you have any questions, 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. Have a good day.