PBCT
#Good morning, and thank you for joining us today.
Here with me to review our first quarter 2018 results are: Jack <UNK>, President and Chief Executive Officer; <UNK> <UNK>, Chief Financial Officer; Kirk Walters, Corporate Development and Strategic Planning; Jeff <UNK>, Commercial Banking; and Jeff Hoyt, Chief Accounting Officer.
Please remember to refer to our forward-looking statements on Slide 1 of this presentation, which is posted on our website, peoples.com, under Investor Relations.
With that, I'll turn the call over to Jack.
Thank you, Andrew.
Good morning and we appreciate everyone joining us today.
Let's begin by turning to the first quarter overview on Slide 2.
Our first quarter performance demonstrates our success in enhancing earnings power of the company, while continuing to build the franchise for the long-term.
We are pleased to report record quarterly net income of $107.9 million or $0.30 per common share and a return on average tangible common equity of 13.8%, an increase of 420 basis points from a year ago.
We continued to execute on revenue-producing initiatives and synergies created by recent acquisitions.
As such, we're also pleased, total revenues of $386 million increased 2% from the fourth quarter and 16% from a year ago, driven by both higher net interest income and fee income.
The net interest margin was 3.05%, a 2 basis point decline from the fourth quarter, primarily due to the unfavorable impact of tax reform on our municipal bond holdings and tax preferenced items in our C&I portfolio, as well as 2 fewer calendar days in the first quarter.
These declines were partially offset by higher yields on new business and upward repricing of floating rate loans.
On a year-over-year comparison, net interest margin was up 23 basis points.
While the first quarter is seasonally higher for expenses, total non-interest expenses increased only 2% from the fourth quarter, reflecting our continued focus on controlling cost.
The seasonality in expenses and the unfavorable impact of tax reform on fully taxable equivalent revenues were primarily ---+ the primary drivers of the increase in the efficiency ratio on a linked-quarter basis.
Average loan balances were $32.1 billion for the quarter, a decline of less than 1% linked quarter.
While the first quarter is typically seasonally slower period for loan growth, production was also unfavorably impacted by customers remaining cautious across our portfolios.
Commercial real estate balances were lower primarily due to continued slow market conditions, heightened competition and elevated payoffs.
In addition, commercial real estate balances reflected greater than expected runoff in the transactional portion of our New York multifamily portfolio.
Despite the modest decline in the loan balances for the quarter, given our diversified business mix and strong commercial loan pipelines at quarter-end, we remain confident the company can achieve the 2018 growth goal of 4% ---+ 6% that we announced in January.
Moving on to deposits, average balances were $32.8 billion for the quarter, also a decline of less than 1% from the fourth quarter.
We remain focused on gathering deposits across both our retail and business ---+ commercial businesses.
As I discussed last quarter, we will continue to enhance technology and marketing capabilities to better serve clients.
We're also investing in digital marketing capabilities with new tools and the usage of data.
We are aligning technology-based offerings with our expert bankers across business lines, including mobile and online capabilities, putting human interaction at the center.
Therefore, we were excited to launch our new retail checking campaign in February, which is themed, where the technology is as helpful as the people.
The campaign is promoting quality of our customer service and the relevance, effectiveness and convenience of our technology.
Also, during the quarter, branch associates once again recognized People's United for its commitment to service with 5 excellence awards in middle-market banking, both nationally and in the Northeast.
It's an honor to be recognized as it reflects the success of our unwavering commitment to service and the ability to offer a full suite of products that help clients achieve their financial goals.
Our solutions oriented approach to banking continues to differentiate People's United.
Finally, our prudent capital management has enabled us to grow the business organically and invest strategically in the franchise, while also providing a consistent cash return capital to shareholders.
As such, we are proud to announce the company's 25th consecutive annual common dividend increase.
We remain committed to our strategy of annually increasing the common dividend, while also continuing to reduce our common dividend payout ratio by growing earnings.
It's important to note that the common dividend payout ratio was 56.3% for the first quarter, down from 78.3% a year ago.
With that, I'll pass it to <UNK> to discuss the first quarter in more detail.
Thank you, Jack.
Turning to Slide 3.
Net interest income of $295.8 million increased $3.5 million or 1% on a linked quarter basis.
The loan portfolio contributed $10.7 million of the increase to net interest income due to higher yields on new business and the upward repricing of floating-rate loans.
Net interest income also benefited $2.7 million from higher average balances in the securities portfolio.
The largest offset to these increases was a $6.1 million reduction in net interest income from higher deposit and borrowing costs.
In addition, 2 fewer calendar days in the quarter lowered net interest income by $3.8 million.
As displayed on Slide 4, net interest margin of 3.05% was 2 basis points lower than the fourth quarter.
Excluding the unfavorable impact of tax reform on our municipal bond holdings and tax preference items in the C&I portfolio, net interest margin increased 4 basis points from the fourth quarter.
Net interest margin continued to benefit from the loan portfolio, which favorably impacted the margin by 10 basis points, as new business yields remained higher than the total portfolio yield.
Conversely, 2 fewer calendar days in the first quarter reduced the margin by 4 basis points, while higher deposit and borrowing costs collectively lowered the margin by another 6 basis points.
In addition, a lower securities portfolio yield decreased the margin by 2 basis points.
Turning to loans on Slide 5.
Average balances were $32.1 billion, down $175 million or less than 1% linked quarter.
Average balance growth of $120 million in equipment financing and $31 million in residential mortgage was offset by lower average balances of $168 million in commercial real estate, $114 million in C&I and $44 million in home equity and other consumer.
We continue to be very pleased with the addition of LEAF, as their average loan balance grew 8% from the fourth quarter, in line with our expectations.
Period-end loans were also $32.1 billion, down $471 million or 1% linked quarter.
As Jack referenced earlier, loan production during the quarter was unfavorably impacted by customers remaining cautious across our portfolios.
Commercial real estate balances were lower, primarily due to continued slow market conditions, heightened competition and elevated payoffs.
In addition, commercial real estate balances reflected greater than expected runoff of the transactional portion of our New York multifamily portfolio.
Write off from the New York multifamily portfolio was $145 million in the first quarter, which was higher than our quarterly expectation, due to 1 relationship with 10 loans, totaling $54 million, paying off earlier in the year than anticipated.
Average deposit balances for the first quarter were $32.8 billion, down $54 million or less than 1% linked quarter.
As you can see on Slide 6, growth in interest-bearing checking and money market balances of $121 million was offset by $175 million in lower average balances collectively across savings, noninterest bearing and time deposits.
Period-end deposits were $32.9 billion, down $163 million or less than 1% linked quarter, driven by a $199 million decrease in time balances and a $64 million decrease in noninterest-bearing deposits.
The declines were partially offset by growth in interest-bearing checking and money market balances of $68 million as well as savings balances of $32 million.
Deposit costs were up 3 basis points for the quarter.
We continue to focus on controlling deposit cost as demonstrated by an interest-bearing deposit beta of 16% since the beginning of the current cycle of increasing interest rates.
In comparison, our loan yield beta is 26% during this same period.
Looking at Slide 7, noninterest income of $90.4 million increased $3.1 million or 4% on a linked-quarter basis.
As you will recall, noninterest income in the fourth quarter included $10 million of net security losses incurred as a tax planning strategy, which were offset by a tax benefit associated with tax reform.
Noninterest income in the first quarter benefited from $2.9 million in higher insurance revenues, reflecting the seasonality of commercial insurance renewals, which are higher in the first and third quarters of the year.
Commercial banking lending fees were also up $1.8 million in the quarter, primarily driven by higher C&I loan prepayment fees.
The largest offset to these improvements was a $3.7 million decline in customer interest rate swap income, which had a very strong fourth quarter.
As a reminder, the other noninterest income line item in the fourth quarter benefited from a $2.6 million gain on the sale of 2 acquired loans as well as a $1.2 million gain from the sale of Suffolk's headquarters building in Riverhead, Long Island.
On Slide 8, noninterest expense of $243.5 million increased $3.8 million or 2% from the fourth quarter.
The first quarter did not have any merger-related expenses, while the fourth quarter included $1.6 million of merger-related expenses with $1 million in professional and outside services and $600,000 in compensation and benefits.
Excluding merger-related expenses, noninterest expenses increased $5.4 million during the fourth quarter.
The primary driver of this increase was $8.6 million in higher compensation and benefits, primarily reflecting seasonally higher payroll and benefit-related costs.
Additionally, professional and outside services were up $900,000 from the fourth quarter.
The largest offsets to these increases was $2.8 million in lower amortization of core deposit intangibles, relating to certain acquisitions, which were fully amortized as of year-end 2017, resulting in approximately a $2.6 million lower quarterly expense in 2018.
This reduction was contemplated in our full year 2018 expense goal provided in January.
Additionally, regulatory assessments were $1.3 million lower in the fourth quarter, due in part to a reduction in average assets.
Turning to Slide 9.
The efficiency ratio of 59.4% increased 330 basis points from the fourth quarter, but was flat compared to a year ago.
As Jack described in his remarks, the seasonally higher payroll and benefit costs in the first quarter as well as the unfavorable impact of tax reform on fully-tax equivalent revenues were the primary reasons the efficiency ratios increased from the fourth quarter.
Tax reform added approximately 90 basis points to the efficiency ratio in the first quarter as a result of a lower FTE adjustment to net interest income, while seasonally higher payroll and benefit costs added approximately 150 basis points.
Looking forward, we remain committed to enhancing operating leverage through revenue growth and effective expense management.
Our strong credit culture and conservative underwriting standards continue to drive exceptional asset quality as demonstrated on Slide 10.
Originated nonperforming assets once ---+ as a percentage of originated loans and REO at 58 basis points is once again well below our peer group and top 50 banks.
Net charge-offs of 6 basis points improved 2 basis points from an already low level and continue to reflect the minimal loss content in our nonperforming assets.
Moving on to slide 11.
We are pleased with the progress we have made improving our profitability metrics.
Return-on-average assets of 98 basis points improved 28 basis points from a year ago, while return on average tangible common equity of 13.8% increased 420 basis points over the same period.
As we continue to build the earnings power of the company, we expect further improvement in these metrics.
Continuing on to slide 12.
Capital ratios remain strong, especially in light of our diversified business mix and long history of exceptional risk management.
In addition, capital ratios were favorably impacted by approximately 11 basis points, due to the reclassification of $38 million from AOCI to retained earnings, representing the stranded tax effects arising as a result of tax reform.
The final slide on Page 13 displays our interest rate risk profile for both parallel rate changes and yield curve twist.
We remain asset sensitive in spite of rising interest rates, and we continue to be well positioned for further increases in interest rates, as approximately 43% of our loan portfolio at quarter-end was either 1-month LIBOR or prime-based.
Now we'll be happy to answer any questions you may have.
Operator, we're ready for questions.
Now, <UNK>, it's <UNK>.
No, the ---+ those loans were scheduled to pay off in the third quarter of this year and they paid off late in March.
So our original guidance that we gave back in January of payoffs of $250 million to $300 million, is still our current expectations.
Yes, the balance ---+ $1.250 billion is the outstanding balance now.
Well, we had a nice capital build in the quarter.
Part of it, we talk to the 11 basis points I just mentioned.
Capital levels were a little higher than we expected just because the size of the balance sheet was a little smaller than expected.
Our expectation would be that if we do have the opportunity to acquire in the banking space it would most likely be a 100% stock deal.
So in no way would we think that our capital levels would be an issue around any type of acquisition.
Well, this is Jack, <UNK>.
I think there's certainly some of that.
There's as always, I guess, in my mind, a mix of opportunities and challenges for the people that we have relationships with and that we talk to.
And rates are coming up, people are hopeful about the economy and that makes them optimistic about progress.
But on the other hand, there's a lot of challenges around growing deposits, spending money on technology, et cetera, that weigh on people.
So I think we are very anxious, waiting on Washington, given our size and the benefits of the Crapo bill.
Those that are smaller, it's less of an urgent issue.
There's obviously some potential progress and relief in the proposal.
So I would say, it feels pretty normal right now.
Yes, Mark, we do.
The ---+ that guidance was predicated on 2 Fed tightenings as we said.
And it looks like there will be 3.
So I would call that a tailwind.
We were ---+ the margin came in where, basically, where we expected in the first quarter.
We had guided to 5 basis points impact of tax reform, it actually turned out to be 6.
A lot of that driven just by a smaller balance sheet.
So the ---+ that guidance is still exactly where we think it should be.
Potentially reduce expense.
All right.
So, we've talked for, well, couple of years now, about our B50B project.
That project has remained in place.
As we've described, there are many things that we continue to work on around things like data governance that incrementally we have built into the expense run rate.
We are making very good progress there.
And those are the kinds of things, Mark, where we would continue to work on given that regardless of SIFI designation, going to ---+ we're a $44 billion bank, we're going to be a $54 billion bank.
We need to have very solid governance and control around our data.
So there's a lot of different components.
I've mentioned in the past, where we kind of understand the living will.
We're not spending any time or money or building one.
We know it's not appropriate and it would be a waste of resource, so we avoid those kinds of things.
So I would think ---+ I think the way for everyone to think about it is, there are many things that we have built to be prepared to cross $50 billion that are beneficial to the company and are in our run rate.
And there are many things that we could avoid like a living will or the impact of the liquidity ratio, et cetera.
And some of those things will be net benefits as we avoid them, but we wouldn't see an expense reduction in the sense of avoiding them.
We just wouldn't have to incur it in the future.
Sure.
Take a peek at it.
But maybe first I'd ask Jeff <UNK> to give you a sense of where the pipelines are in his conversations from the different business lines.
Thanks, Jack.
Yes, so our pipelines have really been growing over the course of the quarter, and I think we've experienced some momentum as we moved through the first quarter.
At the end of the quarter, we had particularly strong pipelines in some of our larger markets.
I would point to Massachusetts as one example and Boston in particular in both our C&I and commercial real estate businesses.
And we're also seeing particularly strong pipelines and good activity in Long Island, which is where our bankers from Suffolk County National Bank have really started to show some momentum.
If you recall, about a year ago ---+ or it's been about a year, since we acquired Suffolk County National and so we're through a lot of the transition.
So we're back to just doing kind of the good business that we've always done in other parts of the company.
Maybe just on the equipment financing growth this quarter.
I think, typically, the first quarter is a little weak for that business.
It looked strong.
And as I look at some of the indices that track that lending area, they also look good.
Can you maybe give your outlook for that business and any benefits you're seeing from a tax reform perspective.
Yes.
So let's start with the second part.
We're really not seeing any benefits yet from the tax reform.
We're expecting to see the favorable impact of the reform on depreciation to motivate people to move forward.
I think the people are in those planning processes now, that's just my take, but I'd say, we're not seeing the signs of it yet.
And our expectations in the business, generally, on the larger and more, kind of, historically PCLC and the [old fin fed], I would say, we have reasonable growth expectations this year that are in line with our overall guidance on the loan portfolio.
LEAF, obviously, is net new and incremental, and we expect a very healthy double-digit growth from LEAF through the year.
Sure.
So I would say the, kind of, heightened competitive environment is coming in at multiple directions, but ---+ and we do see this typically in the first half of every year.
For instance, in the commercial real estate area, the insurance companies come back into the market, seems to be a little more activity with funds that are competing for deals.
And then, I think, the reality is, as we've seen in the industry, the loan growth has been soft.
And so, you've got an environment where, I like to say, too much money chasing too few deals.
So competitively the opportunities are very ---+ are in situations that are very competitive, kind of, across the spectrum.
And we are sticking to our underwriting discipline.
And we're sticking to our ---+ I should say we actually had a slightly improved spread this quarter.
And that was encouraging given the business that we did and the improvements.
But I think our biggest opportunity in terms of competing well, holding the line on pricing is all of our long-standing customer relationships.
So it's when you have a good relationship banking business model and you've got customers that have been with the bank 10, 15, 20 years, we obviously have an advantage competitively.
They know us, they depend on our good solid execution and that helps them, kind of, plan and operate.
And we can get appropriately rewarded for that.
Yes.
So we have naturally a process and regular discussions about our ---+ about pricing and where we're positioned in different markets.
We manage it on a geographically.
I think is the way to think about our markets in the various states and then respond to what's going on within those markets.
We're seeing, I'd say, pressure across the board.
People are moving, certainly CD rate is up.
There's a lot of specials out there in different markets with different institutions.
And then there's people moving money market rates up.
On the very large balances across government banking, commercial and retail, it's really kind of an exception pricing environment.
So discussions based on large dollars and what people's appetite is for.
It's definitely what you would expect, and I think what we're seeing as the deposit betas change.
Yes.
The only color I would add to that, <UNK>, is the competition is heating up, but I would still characterize it as fairly well controlled to date.
I think it's a combination of both, <UNK>.
We have had higher pay downs, actually, I'll say roughly through the last 4 to 6 quarters.
It's ---+ so it's been inching up.
And I think a lot of that are either people deciding to sell properties in an environment where they feel like they're just getting a very good offer that they should take, or as I mentioned, insurance companies come into a deal and get very aggressive about competing for it.
On the origination side, we feel very good about the businesses.
One of the first places that I go in my mind in terms of our opportunities is the diverse nature of our portfolio.
And so you've got a lot of different, very specialized focused lending platforms and they all have strength and they all have good people and they have an ability to grow.
Obviously, real estate has been ---+ it's been a challenging period and we continue to move through that.
Again, we've got a lot of very good people in that business and a lot of very good customers.
So we expect to keep moving forward.
The pipeline, what.
The pipeline yield.
It's consistent with what went on with the books this quarter.
So the way we think about that is we look at existing portfolio versus new business that goes on each quarter.
And we talked about that an awful lot.
That averaged in the mid-20s, mid-to-upper 20s, the last couple quarters, and that has moved up about another 20 basis points.
So that differential is around 50 basis points these days.
So think about a pipeline yielding about 50 basis points more than the existing aggregate loan book does.
Sure.
So the ending balance at 3/31 was $865 million.
The ---+ everything about that acquisition is tracking where we expected it to be.
So very favorable from a growth perspective, from a yield perspective.
Their yields range in the mid-7.5%.
Yes.
We are concerned about that.
I would say, some ---+ in some deals that we lose, we certainly would draw conclusions that some people may be ---+ we are trying hard not to do that and hold the line.
But I would say, there's some pressure.
We'll see how people play it out.
I think ---+ we're not going to have a real good feel for that until we get into half or through the year to really understand how aggressive people will get.
The only thing I'd add to that, Matt, is for all the pressure we see and feel as a bank and as an industry, the fact is, that our credit spreads actually widened a few basis points in the quarter.
That's the one hard fact that we have.
Thank you.
In closing, our strong first quarter performance was highlighted by another quarter of record earnings, continued revenue growth and effective expense management.
Significant year-over-year improvement in both return-on-average assets and return on average tangible common equity, sustained exceptional asset quality and further reduction in the common dividend payout ratio through earnings growth.
Finally, given the importance of the common dividend to our shareholders, we were also proud to announce the company's 25th consecutive annual common dividend increase.
Thank you for your interest in People's United.
Have a good day.
