Q4 2019 Earnings Call
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Good afternoon.
Thank you for joining us today here with me to review, our fourth quarter full year 2019 results or Jack Barn, Chairman Chief Executive Officer.
David <unk> Chief Financial Officer.
Walter Corporate development is strategic planning.
Yep, Tangle, President and Jeff Wade Chief Accounting Officer.
Please remember to refer to our forward looking statements on slide one Oh this presentation, which is posted on our website people dotcom under Investor relations with that I'll turn the call or to Jack.
Thank you Andrew but absent.
I appreciate everyone joining us today.
Let's begin by turning to the full year overview on slide two.
Yeah, we're very pleased with the Companys financial and operating performance.
2019.
It was another noteworthy here for People's United as we acquired two banks and the specialty Finance company enhanced our suite of banking technology and strengthens core capabilities.
As a result, we continued to build the earnings power of the company well further solidifying its foundation to generate consistent and sustainable growth in the years ahead.
Commitment to our strategy of balancing organic growth and thoughtful M&A was evident during 2019.
We began the year by acquiring bar technology.
And innovative specialty finance company with an exclusive focus on the technology sector.
Bar has been successful integrated into lease capital.
Excuse me and transitioned from an origination for sale model to an origination to hold model.
In April we closed the acquisition I'll be us be bancorp, the holding company for Belmont that.
And completed the poor conversion in July .
Belmont has added to the momentum our franchises generating in the greater Boston area.
We're particularly pleased with the synergies provided by Belmont commercial real estate team, which continues to generate strong production.
In November we also closed the acquisition of United Financial Bancorp, The holding company well United Bank.
The addition of United Bolsters, our already significant share of retail household and commercial clients across central Connecticut, and Western Massachusetts.
Integration is progressing well the core systems conversion will take place early in the second quarter.
We are on track to realize projected cost saves.
Our strong results. This year are a testament to the efforts of our employees, who successfully integrated bar completed the core system conversion for Belmont and advance the integration of United while continuing to deliver organic growth and enhance profitability.
This performance is further evidence that the integration of acquisitions as a significant core competency Oh People's United.
[noise] throughout 2019, we made further investments in technology platforms as consumers continue to shift to digital channels.
We launched several mobile device and online driven offerings this year, including our most recent offering of the digital small business solution for loans $250000 or less.
Looking ahead, we remain committed to providing enhanced digital access as we aim to deliver an integrated service model that blends the best in customer service with digital solutions.
As such we will continue to partner with Fintech companies to bring greater efficiency ease of use and scale to meet the evolving needs of our customers.
[noise] looking out the full year financial performance operating earnings increased 20% from a year ago <unk> to $552 million the highest in the company's history.
In addition, operating earnings of Dollarsthirty nine per common share grew for the 10th consecutive year.
These strong results generated an operating return on average tangible common equity of 14.7% an increase of 10 basis points compared to the prior year.
Total revenues of $1.8 billion increased 15% year over year, driven by both organic growth and recent acquisitions.
This increase reflects improvements in both net interest income and that noninterest income.
Net interest income of $1.4 billion was up 14% from 2018 or 11% excluding United.
Within our full year growth goal range of 11% to 13%.
As you'll recall, we updated our full year goals.
Earlier this year to include Belmont, but did not incorporate United as the acquisition had yet to close.
Despite the interest rate environment during the year and the easing of monetary policy by the Federal Reserve.
Our full year net interest margin expanded two basis points to 3.14%.
Excluding United the margin was 3.13%.
Which is within our 3.5 to 3.15 goal range.
[noise] noninterest income had a terrific year with it and especially strong fourth quarter.
Full year results of $431 million increased 18% or 13% on an operating basis.
Which far exceeded our 2% to 4% growth expectation.
This increase was driven by a variety of lines, including a particularly high level of customer swap income.
Operating non interest income, excluding United increased 11%.
From an operating perspective.
Total expenses.
Of 1.097 billion were up $112 million from a year ago.
We're pleased with these results given the inclusion of United Belmont and bar into the franchise during the year and having Farmington on the books for a full 12 months.
Excluding United operating expenses were $1.074 billion, well within our full year Bowl range of $1.06 billion to $1.08 billion.
As a result of our revenue growth and the ability to control costs, we while still make improvements and investments in the franchise. We continue to enhance operating leverage as demonstrated by a 160 basis point improvement from the prior year in the efficiency ratio.
To 55.8%.
[noise] period end loans and deposits increased 24, and 21% respectively from a year ago, driven both by recent acquisitions and organic growth.
Excluding United and the transactional portion of our New York multifamily portfolio Peary that loan balances were $38 billion.
Up 11% from yearend 2018.
In the middle of our 10% to 12% growth expectations for the year.
[noise] via this excuse me in addition to the inclusion of Belmont. These results were driven by strong results and mortgage warehouse lending equipment finance and our specialized industry verticals within see you not particularly Oh excuse me, partially offset by continued headwinds.
Within commercial real estate and home equity.
Period, and deposit balances, excluding United worth $38.3 billion, an increase of 6%.
Which was below our full year goal of 10% to 12% growth.
Well, we achieve meaningful growth in commercial deposits retail balances declined modestly from 2018 due to some manage run off of higher cost deposits from Belmont.
And Standalone People's United.
Furthermore, a managed decline in brokered deposits also impacted the balances at year end.
People are looking ahead. It is important to briefly reflect on the significant progress of our franchise.
Over the last 10 years, we have almost tripled total assets to nearly $60 billion.
Increased full year operating earnings per share.
At an average annual rate of 16% strengthened our presence in Metro New York and Greater Boston.
Deepens <unk> already strong positions within our heritage markets and expanded our national businesses.
At the same time, we have remain true to our roots are delivering superior service at a local level, maintaining exceptional asset quality and supporting our communities.
As we start a new decade already filled with economic and competitive uncertainties. We are confident our long term approach to managing the business will enable us to generate value for customers and shareholders, regardless of the operating environment.
With that background in mind.
Let me outline our goals for the full year 2020.
Listed on slide three.
It is important to note the falling goals incorporate a full year of Belmont and United.
Well first goal is to grow our core loan portfolio in the range of 2% to 4% on a period and basis.
A core loan portfolio excludes the run off of select United loan portfolios, which ended 2019 with an aggregate balance of $1.346 billion.
This balance is less than the approximately $1.8 billion in run off we referenced at the acquisitions and no announcement [noise] due to a subsequent decision to sell $492 million of these loans.
As such these balances are included in the loans held for sale line on the balance sheet.
We expect the run off of the select United portfolios to be in the range of 300 million to 400 million for the full year.
Core loans also excludes the transactional portion of our New York multifamily portfolio, which is in runoff mode.
Period end balances for this portfolio finished 29 team at $737 million.
We expect the run off in the transactional New York multifamily portfolio to be in the range of 300 million to 400 million for the full year.
After excluding these portfolios.
Balance at year end 2019 for core loans was $41.513 billion.
Included in the 2% to 4% core loan growth.
Is an assumption that residential mortgage balances will be unchanged from year end 2019, as we continue to remix the balance sheet to focus on higher yielding portfolios.
Secondly.
Area, then deposit growth is anticipated to be in a range of 2% to 4%.
As we continue to focus on gathering core customer deposits, while main managing down higher cost portfolios.
The next call is for net interest income to increase in the range of 9% to 11%.
Embedded in this goal is the expectation for the net interest margin to be in the range of 3% to 3.1%.
This net interest margin range is derived from many different factors one of which is an assumption of no change in the fed funds rate during the year.
Moving on to noninterest income as I mentioned earlier total.
Noninterest income had a true we had a terrific year end 2019, including a very strong fourth quarter.
The results were driven by a variety of lines, including some that have inherently lumpy results period to period [laughter]. Our assumption is for a level of normalization to occur in 2020.
As such we expect non interest income on an operating basis to grow in the range of 2% to 4%.
$424 million in 2019.
Operating noninterest expenses, which exclude merger related costs are anticipated to be in the range of 1.19 billion to 1.22 billion as compared to the 1.097 billion in 2019.
As a reminder, this range includes a full year of results from Belmont and United.
It is also important to note the poor system conversion for United is not expected until early in the second quarter.
We also expect to maintain excellent credit quality with approved with a provision in the range of $40 million to $50 million higher provision level reflects expected loan growth and the impact of seasonal.
In addition, we anticipate our effective tax rate for the year to be in the range of 20% to 22%.
Finally, we plan to maintain strong capital levels with an expectation that a yearend holding company common equity tier one capital ratio will be in the range of 10% to 10.5%.
This goal does not contemplate any share repurchases during the year as you'll recall, we position on the buyback program announced in July as an opportunistic capital management tool.
As such any decision to repurchase shares will be subject to market conditions.
With that I'll pass it to David to discuss the fourth quarter results. Thank you Jack.
We concluded 2019 were strong financial performance as demonstrated by another quarter of record earnings.
Operating earnings of 158.8 million increased 17% linked quarter and reflected the acquisition of United improved net interest margin and positive operating leverage.
It is important to note the fourth quarter included the following items, which were deemed non operating.
Merger related costs of 22.6 million pretax or 17.8 million after tax.
And intangible asset write off of 16, and a half million pretax or 13 million after tax related to the liquidation of our public mutual funds.
A game that as expenses of 7.6 million pretax or 6 million after tax related to the sale of eight branches in central Maine.
Transaction closed in October and included approximately $104 million and loans.
262 million in deposits and 240 million of assets under management.
Turning to slide five net interest income of 382.7 billion increased 34 million for 10% from the third quarter.
The loan portfolio contributed 23.2 million to the increase due to higher balances.
Lower deposit and borrowing costs benefited net interest income by 5.3 million and $2.7 million respectively.
In addition, higher balances in the securities portfolio added 2.8 million.
Overall, the inclusion of United added approximately $35 million to net interest income for the quarter.
As displayed on slide six net interest margin of 3.14% expanded two basis points linked quarter.
The margin benefited from continued disciplined management of deposit costs.
Re mixing up the loan portfolio and the net [laughter] that effective purchase accounting adjustments related to the United transaction.
Excluding these purchase accounting adjustments the margin was 3.09% for three basis points less than the third quarter.
Lower borrowing costs favorably impacted net interest margin by two basis points, while lower loan yields reduced the margin by five basis points.
Turning to loans on slide seven average balances of $42 billion increased by 3.7 billion or 10% from the third quarter driven primarily by the addition of United.
On an organic basis average balances increased $40 million or less than 1%.
Period end balances, a 43.6 billion increase 4.8 billion linked quarter, but were essentially flat excluding United.
Organic commercial loan growth of 314 million was driven by solid results in commercial real estate equipment finance and see at night.
Partially offset by seasonally lower mortgage warehouse lending balances.
The increase in commercial loans was offset by 343 million dollar decline in retail loans, mostly due to our planned reduction of residential mortgages as we continue to remix the balance sheet with a focus on higher yielding portfolios.
Commercial real estate organic growth was driven primarily by strong performance in northern New England, particularly in Massachusetts.
All three of our equipment finance businesses grew balances during the quarter.
With lead once again generating excellent production.
Seeing it I'd continues to benefit from our specialized industry verticals with especially good results in fun banking health care and franchise lending during the quarter.
Moving onto deposits on slide eight average balances a 42.2 billion increase three and a half billion or 9% from the third quarter. While period end balances of 43.6 billion were up 5 billion or 13%.
The higher balances were driven by the inclusion of United.
Excluding the acquisition average and period end balances decreased 97 million and 287 million, respectively for less than 1% on each basis.
Why we achieved solid growth in commercial deposits retail balances declined modestly due to some manage write off of higher cost deposits.
In addition, a manage reduction and broker deposits also impacted balances.
We remain focused on controlling pricing as evidenced by 13 basis point reduction in deposit costs during the quarter.
Similar to the third quarter, we remain disciplined and managing costs across the franchise.
Looking the slide nine we continue to achieve strong noninterest income with 124 million point too.
Million in the fourth quarter.
This result marks an increase of 18.2 million or 17% on a linked quarter basis.
Operating noninterest income, which excludes the $7.6 million gain net of expenses from the sale date Central Maine branches was 116.6 million.
Up 10.6 million or 10% from the third quarter.
The inclusion of United added approximately 5 million to noninterest income in the quarter.
By noninterest income category, the 10.6 million linked quarter increase was primarily driven by 3.3 million and higher customer interest rate swap income.
A 1.9 million increase in bank service charges, primarily attributable to the addition of United.
1.1 billion and higher commercial banking fees.
And a 7.7 million increase in other noninterest income.
This increase was driven by several items, including a 3.3 million dollar gain on the sale leaseback of our office building in Burlington, Vermont.
On a 1.6 million dollar.
Benefit to non interest income from the Mark to market of one equity security physician.
These increases were partially offset by $2.8 million decrease in insurance revenues, reflecting the seasonality of commercial insurance renewals and a 600000 dollar decline in investment management fees.
Which was partially related to the 240 million of assets under management sold as part of the Central Maine branch sale.
On slide 10, noninterest expense of 325.7 million increased 44.3 million linked quarter.
Included in the fourth quarter were 39.1 million of non operating costs in the following categories.
25.5 million in other expenses.
$7.5 million and compensation and benefits.
5.6 million in professional and outside services, and the remaining 500000 and occupancy and equipment.
In comparison, the third quarter incurred 5 million of non operating costs.
Excluding non operating costs non interest expense of 286.6 million was up 10.2 million or 4% linked quarter.
This increase was driven by the inclusion of not of United which added approximately 24 million to operating noninterest expense in the quarter.
By expense category, the 10.2 million linked quarter increase was mostly due to 7 million and higher octane occupancy and equipment expenses.
A 6.6 million dollar increase and compensation and benefits.
Hey, an additional 4 million in professional and outside service costs, and a 2 million dollar increase in regulatory assessments.
This variance was due to a lower third quarter assessment, resulting from an FDIC credit.
The largest driver offsetting these increases was 10.9 billion in lower other expenses.
As a reminder, third quarter other expenses were unfavorably impacted by certain legal and other onetime operational costs.
Turning to slide 11, the efficiency ratio of 53.7.
53.7% improved 310 basis points from the third quarter, and 140 basis points year over year, reflecting well controlled expenses and higher revenues.
Asset quality was once again exceptional across each of our portfolios as demonstrated on slide 12 originated nonperforming assets as a percentage of originated loans and Oreo at 55 basis points is a one basis point improvement from the third quarter.
And below our peer group and top 50 banks.
Net charge offs of six basis points were unchanged from Q3 and continue to reflect the minimal loss content in our nonperforming assets.
Briefly on slides 13, and 14 return on average assets and return on average tangible common equity declined seven basis points, and 120 basis points, respectively from the third quarter.
On an operating basis, both metrics improved.
Operating return on average assets was up eight basis points to 113 basis points.
Our operating return on average tangible common equity increased 80 basis points the 15.2%.
Finally capital ratios remained strong given our diversified business mix and long history of exceptional risk management.
This concludes our prepared remarks, we'll be happy to answer any questions. You may have operator, we're ready for questions.
Thank you, ladies and gentlemen, we're ready to open the lines up for your questions. If you wish to ask a question. Please press star followed by one on your Touchtone telephone. If your question has been answered we wish to withdraw your question. Please press the pound again, Chris one to ask a question.
Please standby for your first question.
My first question comes from Mark that's given with Piper Sandler.
Hey, guys good afternoon.
Our.
First question I had this just to clarify economy, Jackie made about the loan balances. So if we take the year end loan balances of call. It 43.6 billion and that grows sort of 2% to 4%.
And did I hear correctly that you're going to see run off of three to 400 million on the United portfolio. This year and another three to 400 from New York multifamily runoff.
Yes, that's that's correct mark.
So if loans split the difference on the growth two to four exceeds 1 billion three.
Yes, somewhere between six and $800 million of loan growth or run off I should say.
Okay.
Loan growth excludes.
No.
Correct, yes, so so.
If you.
If you take the ending total loans of 43.6 reduce.
The billion 346 of United and the multifamily bolt of 737 brings you down to.
41.5, so thats the base that the loan growth is off of than Additionally, we expect those two portfolios to run off between three and $400 million each during the year gotcha.
Okay, and then secondly can you help us think about the purchase accounting impact on them on the margin over the next maybe quarter too.
Okay.
Yeah. So we called out marked the five basis points.
In Q4 that.
That is a good number.
The way I think about its kind of.
Two components, obviously, the loan side on the deposit side.
Loan purchase accounting will be with us for about four years on the deposit side most of that markets around the CD portfolio, which has about a year.
So you're going to see a first half.
At larger than the second.
Well the second half will be a run rate for a couple of years, Okay. And then the 16 and a half million dollar write off for intangible asset what is the asset that the write off is on I didn't see than the release anywhere. So so that was the value that we attributed to the.
Mutual fund business.
At acquisition of Gerstein Fisher.
Okay.
And then lastly, Jack I wondered if you could comment on your your outlook for M&A in the northeast and has your view on bigger deals changed in light of.
So how will the market has received so well some of these larger transactions.
So I really don't see the pace of M&A generally changing.
So dramatically one way or the other.
The northeast I would say.
At this point.
And.
In terms of appetite for larger deals I will leave we've been willing to consider.
Larger deals if appropriate the right the right fix et cetera. So.
And again I don't think our our view has changed.
There's there's not many larger deals across our footprint will say that.
If you look at our footprint and what's out there.
Thank you.
Thank you. Our next question comes from Ken Zerbe with Morgan Stanley .
Great. Thanks.
Actually I had similar question line of third line. The thought here can you just give us the base that you're using for both the Eni and the fees that you're growing off of I just want make sure. We're on the same page.
The well starting with the the space is the for 24 that we reference the base for the.
And I is just what is in the press release, which is a billion for 12.
Gotcha, Okay perfect that's helpful.
And then.
Obviously, you're seeing your one target the tend to 10 and half percent does not including buybacks you just talked about how aggressive you might potentially be with buybacks I mean is it.
Could you get down to nine nine to now I'm trying to think of how how to think about layering in buybacks on top of Dot base number.
So kind of what I would say is.
When we announced the buyback and then in the call on the third quarter and today for the third time, we've used the term.
Opportunistic.
The the 10 to 10 and a half is the consistent capital levels that.
We put out as a goal for last year as well, we manage within that last year and our intention would be to manage within this year as well.
And.
Okay. So I guess I guess given.
Zero buybacks this whole year.
Then when you see opportunistic it would not be accretion assumption to assume zero buybacks next year as well.
That's one possibility is that correct.
Well there there is there's a full range of possibilities from no buybacks to the full completion of the 5%.
Based on our views.
The equity markets and obviously our stock in particular.
Okay understood. Thank you very much.
You're welcome.
Thank you. Our next question comes from Casey Haire with Jefferies.
Hi, Thanks, guys.
Doing.
Wanted to touch on the on loan growth, so that the 2% to 4%.
Which buckets are going to be.
Having that and should we it sounds like you guys are still.
Happy to run down resi mortgage what sort of headwind should we expect from rising mortgage and 20 point. So we're out.
That is where as we said in the script we're expecting.
Ready to.
Basically stay flat.
Year ends at year end.
There is actually a lot of activity in there as you can imagine.
Given amortization.
And payoffs, but.
So one of the things that I guess.
Hope is clear to everybody we were very committed to read the mortgage in terms of delivering the product.
To our customer base its important part of the retail part of our bank. So it's there there are some wholesale.
Channels, where we can do less and and as we've been saying our focus is signed to remix gradually.
So that we're booking more higher yield portfolios and and.
And a softening if you will the percentage of.
Reducing the percentage of residential mortgages overall on the balance sheet.
So that's where the resi is.
As I ask Jeff on tangled up to talk about.
You know the loan growth into other business lines.
Yes, and the picking the commercial business, we think it's going to be very similar to what we experienced this year, we're not expecting a lot of growth if any in our commercial real estate portfolio for all the reasons, we've talked about in the past and so.
Across the rest of our franchise, our core middle market business, particularly in our larger markets like Connecticut and Massachusetts.
Had growth in 2019, we think that will continue in 2020, we've seen a lot of good growth across a number of the the industry specialization.
Businesses that David referenced we think that momentum will continue into 2019, and our equipment finance businesses.
We also had good growth in 19 than we expect that to continue in 2020. So we feel really good about all of those commercial businesses.
And think that.
The pipeline there are in pretty good shape and feel pretty confident going into the year.
Okay great.
Okay. So just to put a number around our thinking about resi mortgages. If you go back to like.
June of 17, so before the last three acquisitions, we had about 21% of the loan book in resi mortgages.
At June of 19, it was up.
Almost 25% and so we're just trying to bring that number down a few percentage points without selling anything out a bit do it on a natural basis and that'll obviously bring up the commercial side, which yields more.
Understood.
Okay.
And then just switching to the reserve side of things with lot of moving parts here, but.
Just given all the the ups the the ups and downs within the loan portfolio, but as we think about Cecil and your adoption of it.
How do you guys see what do you see the go forward provision rate.
The loan loss reserve ratio.
Settling out as you adopt seasonal.
Well you know so we gave.
Provision guidance of $40 million to $50 million said that was inclusive of United So that and.
12, and a half million dollars a quarter.
Is the way.
We're thinking about it and you should as well.
Okay Alright.
Okay I'll leave it there thank you.
Thanks, guys.
Thank you. Our next question comes from Jared Shaw with Wells Fargo Securities.
Hi, guys.
Just a couple of questions I guess on on the margin. So here you with the the.
Lower accretion as we go into the second half the year, but are you know with the focus on the higher yielding loans as the area of growth I guess, where are you seeing more of that incremental pressure on the margin is it.
Repricing of the of the loan portfolio or is there really just not much more room to move on the deposit side.
I would say, it's a little bit of both the so.
Yes, we had we had three quick fed moves and kind of a compressed period of time in the third and fourth quarter I would say by the at the time to quarter was over the loan portfolio had kind of reprice any lags in there that caught had kind of come down remember about 44% at this point.
With that of our loan portfolio is really one month LIBOR driven.
And one month, LIBOR and down 34 basis points I think it was in in Q4.
We telegraphed are our guidance around.
Steady interest rates steady fed funds.
Right.
So I.
I think.
As the fixed piece of the portfolio roles, you'll see some downward pressure there I think if the fed does not do anything all year it will be harder to.
Bring down deposit pricing there'll be some positive role in our CD books.
The other piece of that is we're seeing good.
Restrain across the industry on on deposit pricing. So I, just think in a steadier and buyer meant.
The ability to make moves will be a little bit muted.
Okay. Thanks, and then on the securities portfolio.
No United had some close were those completely.
And by the end of the year and as a.
Secondly were part of that what I guess drove that five basis point growth in.
And the securities portfolio is how to.
A purchase effort on your part or is up more just a mark to market on the.
Portfolio that was acquired.
No so.
They did have a COO portfolio that portfolio never hit our books, meaning it was gone before.
We acquired them up we own we did exactly like we said we would when we announced the deal although securities were liquidated all that came over from their portfolio was.
A little over 300 million dollar securities that we would say are very much like the stuff that we out.
Within the quarter you saw I believe a five basis point improvement in the yield on the securities portfolio driven by the addition of.
Some municipal bonds.
Which.
In that portfolio as well is really good.
Low levels of prepayment activity across the mortgage backs so the email.
Amortization that went through the portfolios was really.
Well controlled in the fourth quarter.
Resulting in a higher yield.
Okay. Thanks, and just finally from me.
You know what the branches that were sold up in Maine.
In a more compact branch footprint now I guess in southern New England other areas, where you could actually see.
Are we could see the bank do some de novo expansion, whether its south shore mass or more infill on the Boston area or with any future footprint expansion really be driven by M&A.
Jeff I would.
We we just opened de Novo branch.
In the seaport area in Boston and.
Certainly would consider.
Looking at other opportunities there that branch by the way is really up to a great start and.
We also did Penn station.
In New York and again that that we're encouraged by that it's off to a great start and lot of activity there. So.
We definitely are open to denovo.
[laughter] love to build outs the Southshore Boston.
And that considering and looking at our options there.
And.
So we're open to it we actually are also closing continued to close branches. So.
No not working to optimize the branch footprint all the time.
Great. Thanks, a lot.
Yep.
Thank you. Our next question comes from Steven Alexopoulos with JP Morgan.
Hi, everybody.
Just a first follow up on NIM, what's the assume purchase accounting accretion benefit that's in the 2020 guidance.
Around five basis points.
Yes, just slightly below that.
For the full year okay.
And then quite a few moving parts of the loan growth guidance, what are the expectations for one or to total loans.
I'm, making any adjustments where do you see total loan balances moving in 2020.
Well it really is off it's that growth off that base that we gave that.
43.
0.5 base.
Yes to the 4% intuitive.
We've excluded some run off.
Yeah, I'm, sorry, I I said.
The wrong number off the base of 41.5, right I guess I'm trying to figure out when the position. The company is positioned to start showing total loan growth.
So it's more material EXL fees for one off items doesn't sound like its 2020.
Yeah, I mean I think.
One thing that's when the commercial real estate market.
No.
However, you want to describe it does it's clearly frothy and.
And it hits us in many different ways is our largest portfolio. So we've had.
We did Oh is it just a little over $2 billion in originations in 19, and and were basically flat so where we're active in the business, we're taking care of our customers, but we're getting payoffs from a shadow banking.
Companies were getting.
Sale of properties so.
It's hard to predict Steve when that changes other than that some kind of a change in my mind the change in the.
I was like a cycle change for us.
Maybe a change and rate environments, where.
That changes the dynamics.
That's why I think when Jeff you know kind of referred to whether its middle market business banking.
The leasing companies the verticals were actually doing quite well in a lot of our businesses.
And.
Moving ourselves forward, but.
That's challenge.
Okay and then thanks, and then finally on expenses.
Are you for the guidance you guys still assuming 75% phase phase and have you BNK cost saves in 2020, that's still the assumption, yes, yes, no change Okay and then the expense picture, it's been a little bit model because of all the deals given how do you think about just organic expense growth for the franchise ex any acquisition.
Yeah.
Yeah. It's.
I think about that at about.
A 2% growth 2% rate.
Yes.
And we we've.
I know every year.
There has been M&A activity in there, but thats really what it works out today.
Okay.
Okay. Thanks for taking my question.
You're welcome.
Thank you. Your next question comes from Collyn Gilbert CBW.
Thanks, Good evening everyone.
Just just a few.
Sure housekeeping items, David what was the balance in the mortgage warehouse portfolio.
This quarter.
With.
1 billion 4 billion for.
Okay.
And is your expectation for that and I mean for balances to drop as you guys that you're kind of thinking about the book in total total loan book.
But you could see balances drop in 2020 for that line.
Yes.
A small amount.
I mean, they came off a little bit in Q4 about $180 million are so we expect a little.
A little bit a decline next year subject.
Once again I mean, the mortgage book was completely different than we thought at the beginning of the air subject to level interest rates and re Fi activity.
Okay. Okay, and then on the loans that you have in that held for sale. The resi mortgages that you guys are selling whats the blended yield on on those.
Well, so just to be clear the the half a billion dollars that you see that showed up on the loans held for sale, our United Bank portfolios that subsequent to the deal we decided to.
Sell at that work is in process.
Okay.
Hey, So does that mean you can't offer what the yield was on those.
Loans, yes, yeah, we'd rather not okay. Okay. Okay, and then just going back to the dynamics of the NIM. So David you know I understand you're saying that just if we're in a steady rate environment Theres, probably less movement to see here, but can you just.
Talk.
A little bit about what you're doing with your deposit offering rates right. Now and then you know is there I would do we see a catalyst that putting rate aside that would cause you to kind of drop your deposit rates again, just trying to think about the flow through.
Potentially lower funding going forward.
Sure. The so I would say number one the.
You know I would stress that.
In the since the fed started moving down.
The ended July .
We've been very disciplined around deposit pricing across all of our businesses, but we've also would say that the industry has been well disciplined as well, which which is important because when it when you have one or two players who are.
It's difficult so for example today.
Our.
That's the offer out there is a six month CD at a one seven days right. So slightly below the top end of the fed.
Target range.
The other thing that we did on the retail side.
As.
Become less aggressive on money market promotions so those.
Offer rates are lower relative to where.
Fed funds target is.
And that's been another dynamic in the last six months I don't see.
Those type of that type of behavior changing.
In 2020 at least in the near term.
So I just I think it's that day to day, our frontline folks.
Being in front of customers trying to generate.
Growth in new accounts, and serving our customers, but we're able to do it.
In a slightly less.
Promo environment.
At the other thing I would add on as.
We're really pleased with the work that our relationship managers have done going out proactively and having the conversation with customers about.
The fed raise rates than we raised the.
Deposit pricing now the fed has lowered rates and we need the lower pricing and and because of relationships and good communication, we feel really good that we've had.
Nice success.
Okay. Okay. That's helpful and I guess, along those lines. If we think about recognizing obviously the incremental growth in the portfolio is gonna be fairly low, but just the margin on the new the new business. That's coming on you know in the wake up well I guess, we saw that curve steepens itself.
Very narrow, but are you kind of structurally seen kind of a NIM benefit.
Longer term that you're you know the incremental spread that you're putting on the balance sheet is more than that 3%.
Or is it less what I would say actually a call on a little bit the other way. So we last quarter, we reference that differential came down from about 50 basis points in the second quarter, two about 30 basis points in the third that has has moved.
Down.
A bit in the in the fourth quarter.
Subject to mix.
And shape of the yield curve I think that's going.
That dynamic.
We'll we'll slowly come in not expand.
Okay.
Okay.
And then I'm sorry, Okay, and just finished that thoughts. So there's two components that right. There's interest rate benchmark interest rates and credit spreads and what I would say is the driver is benchmark interest rates, our credit spreads have been pretty steady in the back.
In the back half of last year, and we don't expect that to change.
Okay.
Okay, Alright, that's helpful and then.
The decision around selling the mutual fund how many mutual funds. It can you just walk through that or <unk> or is that.
Like specifically tied to the branches or just trying to understand what yeah. You guys are doing well well we did not sell the mutual fund so we.
They were public mutual funds as low over 500 $550 million we.
That were in Gerstein Fisher, we just stop using public mutual fund as the vehicle for those customers to invest we're still managing that money. We just are doing it back in what we call. Our managed account group so same customers same.
Investment strategies, just not in a public mutual fund format, where we have higher costs.
To serve those customers.
Okay. Okay. That's helpful. Okay and then.
Just think about the initial accretion targets for you be NK.
It was like seven cents a share that you guys are looking for EPS accretion, how do you sort of see that folding in because I think.
If we align what your some of the targets are well, let me just [laughter] asked that question. How do you see that seven cents holding and so so that seven cents, which was on a fully phased in cost basis right.
So and as Jack referenced the conversion will will be done early in the second quarter and then there's so little bit of time before we get everything out all the cost out and get to that the the permanent a few will run rate.
So everything around that transaction from.
Purchase accounting accretion.
It's all on target.
So no change in our expectations the only change really is.
The rather than running off a billion a.
Loans, we've decided to take that half a billion and sold out so that means that half a billion of assets will be gone sooner than we originally thought but it's actually not go into the material to the financial projections that we gave.
Okay, so that doesn't change that okay.
Okay that is.
That's helpful Alright, I will leave it there thanks guys.
Thank you.
Thank you My next question comes from Matthew Breese Steven.
Good evening everybody.
New Matt.
Just wanted to confirm quick on Cecil the initial reserve guidance increase 40 to 60 million does that still hold and is that they should we expect to similar impact to capital.
So so that's just try everyone's benefit that's what we we referenced on the third quarter call. As a reminder, that did not include United Bank.
Hard work around.
Diesel continues we now think that will actually be.
Just around the lower end of that number when all said and done so.
Plus or minus $40 million.
And then there will be some additional to United but that work is still in progress as well.
Could you give us some sort of range perhaps is.
Significantly last or or or more than the 40 million just for ballpark purposes, just for United Yes sits below its below that okay.
Okay, and then considering once we true it up considering the moving parts you'll be running off some of the you'd be in K you are mix shifting more towards commercial the overall reserve level relative to loans.
Then increasing or decreasing number.
I think it's about the saying.
The.
The credit discipline of the company is unchanged the changing.
Nature are complex in the credit risk on the balance sheet is not significantly different from where we have been historically.
Okay. So despite the mix shift.
It will stay flat understood.
Just securities portfolio, just going back to Jerry's question, just wanted to confirm because prior commentary was that you would sell roughly 550 million.
Should we expect these $7.8 billion securities portfolio should we expect that to hold flat for 2020 is that a good modeling.
Yeah, Yeah yeah.
Yeah, Thats fine as I said.
Everything we said, we would sell out of United We did.
And actually some of it was.
I referenced on the on the COO shows.
They actually did it prior to acquisition.
And so today those securities portfolios about 13% of total assets as we've been there for a while that less than.
Yes, some some years, we're running 15%, but where the level of interest rates.
Pretty modest steepness of the yield curve.
We're pretty much going to keep things, where they are as we see it today.
Understood Okay.
And then my last one just concerning your your your actions on the branch network. Your comments on taking a look at physical branch network.
Could you just remind us of the shop in shops supermarket branches. How many are there how are the performing or the performing to expectations. If theres a contract associated with them. When did when is that up for renewal and just wanted to get a sense for did you consider the branch network, whether or not the supermarket branches are part of the long term story.
Sure I'll give you a couple numbers and that Jack wants to make any other comments so.
So today or at year end, we had about we have 450 branches across the franchise the.
Stop in shops across New York and.
Kinetic yet are about 150 million.
Hundred 50 of the 450 branches.
They are a critical part today and have been up our of our branch.
Network, there at low cost delivery.
Source for Us and then the contract.
We talked about before is up in about two years, we also.
An option to extend that if we want.
I would say just add that we're working with stuff in shop too.
To look into the future and and kind of if you will bump model that we're using and we're having some very constructive conversations about that so.
Well that all that but just.
Work, our way through that period.
Well we go.
Understood Okay.
And then just my last one.
Ticky tacky really just concerned loan yield quarter over quarter equipment financing bucket only decreased five basis points I was little surprised by the movement. There could you just give us or a reminder of the typical equipment finance loan structure.
Variable floating versus fixed.
How much lead with the higher yielding component played into what was relatively a small move in that bucket.
So I will interpret your question as you were pleasantly surprised.
By the performance.
The.
Lee is the highest yielding portfolio up to three.
So everything across our three equipment platforms is fixed rate production right. Unlike our mortgage warehouse Arabia, which is 100% one month LIBOR. These are fixed rate cash flows for a predominant amount of our fixed rate cash flows.
And.
Yeah.
Spreads and yield spreads don't change that often and they're not the business, especially in leaf and.
Pete you, we see the old former since that are.
It's a rate driven business and they don't move that often.
So thats, how that yield even in a down 75 basis point fed funds environment.
Holds up the largest of our three platforms PCL C is lower yielding and more market sensitive but that is the business that we have held flat from an outstandings perspective.
Over the last.
For the last three years or so and then don't forget.
This was the year that at the beginning of year, we bought far technologies and we brought them into the fall and there are really nice high yield originator as well.
Understood could you give us an idea what the Lee fielders and that's my last question.
Sure. So so that you I just want a coupon yield ignoring.
A nice fee income is yields from.
Call it seven in a quarter to about 8%.
Great. That's all I had thank you.
Thank you thanks.
Thank you and our next question will come from David Bishop with da Davidson.
Yes, good evening dividend, most like Hey, good evening, both my questions have been answered, but sorry, where and how it has been a hard time here in new David.
Yes, most of my questions have been answered, but from a housekeeping perspective, the the buyback the current authorization Where's that stand again, but could you remind us.
We really have only bought it diminimus amount of of shares back so essentially.
Zero.
Got it and then from a purchase accounting accretion impact this quarter do you have that from a dollar amount perspective, what that with that benefit was in the fourth quarter relative to the third quarter.
Fourth quarter.
Pertaining to United was about six and a half million dollars.
And then the core legacy purchase accounting accrue interest income from Belmont and others.
Those numbers have have gotten.
Quite a bit smaller at this point, yeah, David we'd have to come back in.
Give you the details on that.
We can take that offline I can't remember exactly where Belmont was at this point.
Got it would follow up offline okay. Thank you guys.
Thank you you are welcome.
Ladies and gentlemen, this will conclude the time, we have for questions I would now like to turn the call over to Mr. Barnes for closing remarks.
Thank you little closing another quarter of record earnings provided a great finish to a strong 2019 for People's United We were pleased with our performance during the fourth quarter, which was highlighted by improved net interest margin.
Lower deposit cost continued remixing of the balance sheet with a focus on higher yielding portfolios solid organic commercial loan, though positive operating leverage strong noninterest income and sustain excellent asset quality.
Thank you for your interest in People's United has a good night.
Thank you for your participation in today's conference. This concludes the presentation you may now disconnect good day.