United Financial Bancorp's (UBNK) CEO Bill Crawford on Q4 2015 Results - Earnings Call Transcript

| About: United Financial (UBNK)

United Financial Bancorp, Inc. (NASDAQ:UBNK)

Q4 2015 Earnings Conference Call

January 27, 2016 10:00 AM ET

Executives

Marliese Shaw – Executive Vice President, Investor Relations

Bill Crawford – Chief Executive Officer

Eric Newell – Chief Financial Officer

Brandon Lorey – Executive Vice President, Head of Consumer Strategy

Mark Kucia – Executive Vice President, Chief Credit Officer

Analysts

Kevin Fitzsimmons - Hovde Group

Mark Fitzgibbon – Sandler O'Neill

Travis Lan – KBW

Matthew Breese – Piper Jaffray

Eric Grubelich – Private Investor

Operator

Good morning, and welcome to the United Financial Bancorp, Incorporated Q4 2015 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Ms. Marliese Shaw, Executive Vice President, Investor Relations. Please go ahead.

Marliese Shaw

Thank you, Gary. Good morning everyone. Welcome to our fourth quarter conference call. Before we begin, we would like to remind you to read our Safe Harbor advisement on forward-looking statements on our earnings announcement. Forward-looking statements, by their nature, are subject to risks and uncertainties. Certain factors could cause actual results to differ materially from our expected results. Our comments today are intended to qualify for the Safe Harbor reported by debt advisement.

And now, I would like to introduce Bill Crawford, our Chief Executive Officer.

Bill Crawford

Thanks, Marliese. Good morning and thank you for joining us on today’s call and for your continued interest in our company. With me this morning, I have Eric Newell, our CFO and several other members of our executive team.

Today I’ll make a few comments regarding fourth quarter 2015 results, focus on some significant actions taken by management in the fourth quarter, and share with you our thought processes and give you an update on where the Company is headed.

First, I want to thank all of our United Bank employees for their tremendous effort in 2015. And our first full year, as new United Bank, we earned $49.6 million or $1 per share, that was 87 basis points ROA, 8.08% ROE, at 10.35% return on tangible common equity. The efficiency ratio was 60%. We grew loans 18%, we grew deposits 10%. We also paid out $0.46 per share on a dividend to our shareholders. We grew tangible book value of 5.2%, while maintaining excellent asset quality and near neutral interest rate position.

I think 2015 is a year of solid progress. In the fourth quarter of 2015, we made some important management changes. I want to thank Marino Santarelli, our former Chief Operating Officer for his significant contributions over the last five years. Marino helped to grow our retail and mortgage business, led merger integration, along with the IT and many back office functions and has been a key contributor for many years.

In the fourth quarter of 2015, we made a decision to eliminate our Chief Operating Officer and Chief Technology Officer roles. Brandon Lorey had already begun leading our consumer banking segment in July 2015. As I looked at our organizational needs in the fourth quarter, it was clear we needed one position, which consolidated information technology, project management and operations and a role of reporting directly to the CEO.

Since 2011, we’ve grown from $1.7 billion to $6.2 billion and the technology world continues to change and change dramatically. Technology likely is now banking at greater strategic risk and opportunity. Through a national search process, we hired John J. Smith, from CIT Bank in New York. John is a very experienced industry-leading technologist and proven executive leader. Technology, managing strategic partners and projects and operational excellence is that they are very hard for everything we do. These are also areas where we will invest more in terms of people and systems and you will see that in some of our forecasts.

I’m confident John can help us driving some better customer experience, lower costs and protect our banking clients, as we face new opportunities and risks in years ahead. The fourth quarter of 2015 was typically a slow quarter. Our retail and commercial teams grew DDA at 32% annualized. And commercial loans grew 13% annualized. In addition to solid improvement reflected in our Greenwich Associates net promoter scores, operating non-interest expense/average assets was 2.17% reflecting our attractive cost structure.

United’s 2015 year-to-date ROE and ROA compares equally if not favorably to the largest publicly traded banks headquartered in Connecticut and most all other banks in Connecticut. We have a very strong credit culture, for example, our originated non-performing assets, NPAs, are 0.36% of total assets. Over the last five years, our net charge-offs have averaged less than one-tenth of 1%. In short, we know how to lend money.

Over the last five years, we’ve improved our average return on equity from 2% to 8.12%. While our headline GAAP earnings per share for the fourth quarter of 2015 was only $0.20 per share, we actually had record quarterly operating earnings of $11.3 million or $0.23 per share in the fourth quarter.

During 2015, we looked at numerous specialty finance options, while we will continue to grow traditional business lines and build franchise value. We’ll grow some of these lines at slower rates like mortgages on our portfolio. I want to now share with you some actions we’ve taken to help improve our pre-tax, pre-provision, return on assets or PT, PP, ROA.

Hervé Bonnet joined us, late in the fourth quarter after having – spend last 15 years as an Executive with Societe Generale or SocGen. His last seven years, he headed up at SocGen subsidiary known as CGI Finance in Europe and North America. The North America subsidiary began around 2008 in the business model worked as follows.

Hervé and his team has build relationships with Europe’s premier luxury brand, marine manufacturers, and these clients want Hervé and SocGen’s help financing their dealers in North America and providing retail boat financing. The select manufacturing clients are financially very strong and care deeply about their brands. So they’re willing to write credit enhancement on behalf of qualified dealers.

Additionally, if and when a retail boat loan defaults, the bank, the servicer, the dealer and the manufacturer work together to get control the bank, the boat and resell it at a highest possible price. These premier manufacturers do not want their boats sold at auction to low prices because it harms their brand value.

In the third quarter of 2015, as we investigated the acquisition of various loan portfolios we identified CGI finances remaining $176 million marine loan portfolio and subsequently identified Hervé and the team which were employees at Mid-Atlantic Bank.

Late in the fourth quarter, we acquired $176 million portfolio and lifted out the 13 person SocGen team. The team is located in Baltimore, Maryland. The manufacturing clients are mostly in Europe and most of all the dealers are in the United States.

So our plan is simply to run SocGen’s former North American marine business model, adapted to our operating and credit underwriting standards. This business is about becoming a trusted partner of a select manufacturers and dealers and making sure that we provide exceptionally customized personal service to the retail clients. These clients can get loans anywhere. Our job is to simplify the process, we’re not interested in a mass market marine lending strategy. We will pursue business with select manufacturers and dealers based on the information business model.

We really like the client base. We can develop all relationships with these manufacturers, dealers and even retail clients, using our expanded mobile and cash management capabilities. The risk-adjusted return on capital or RAROC on this business line is very attractive.

In 2016, we anticipate we have originated about $100 million in variable rate floor plan loans and about $100 million retail marine loan production. We want to gradually build this business over the next few years and keep its size appropriate for our balance sheet. Retail loan portfolio duration is around four to five years and the floor plan lines are generally annually renewable. So ROA of this business unit is expected to be at least double our company’s ROA on a fully costed basis. We also purchased two consumer loan portfolios totaling $150 million from two new strategic partners while selling $119 million residential first mortgage as to secondary market.

The equity line portfolio is our highly granular portfolios, with strong FICO and debt service borrowers. We spent significant due diligence time with our two new strategic bank originators, like we did when evaluating legacy United Bank’s lending process as in portfolios. The two portfolios have very attractive mostly variable rate risk-adjusted returns. While we like these niche portfolios did not make sense for us to invest in the infrastructure to originate these credit ourselves. We have originated $706 million in mortgages in 2015 and sold $404 million.

In 2016, we expect to sell much higher percentage of mortgage production. The $115 million acquired portfolios help to diversify our consumer loan book and marginally reduced loan book duration while improving ROA. Our best path forward headquartered here in New England, I think is as follows. One on the best RAROC or risk-adjusted return on capital, we can in our core markets, while maintaining discipline around credit and duration risk. This will also help to build even stronger franchise value.

So on the margin, we want to identify higher net margin loan in core deposit specialty businesses and portfolios, where we can earn better margins, but we want to stay in the prime and uber-prime on the credit side. We also want to keep these right-size relative to the bank. Obviously our first focus is making sure, we have crisp plans to manage credit, liquidity and operational risk, anytime looking at something new. We also want to make sure we did not create revenue, earnings or balance sheet concentration risks. Diversification and granularity for balance sheet income statement remain key operating principles for us.

Banks with strong, which maintain strong asset quality diversification through the economic cycles ultimately proved to be long-term winners. We expect continued revenue growth from commercial banking, retail banking and financial advisory in 2016, including high single-digit fee income growth for the new teams we invested out in late 2014 early 2015. Overall, in 2016 we expect double-digit operating revenue growth with mid single-digit expense growth which should yield attractive operating leverage.

We expect high single-digit loan growth in low double-digit deposit growth with double-digit DDA growth. Our focus in 2016 is to grow our operating pre-tax, pre-provision, return on assets. So we move from around the third quartile in $2 billion to $10 billion banks nationally to near the first quartile over the next few years.

2016 should be the end of fair value accretion for us. Currently our effective tax rate is anticipated to change from 11% to 25% in 2016. By moving from third quartile PT, PP ROA to near first quartile will drive stronger core earnings. By improving our DDA in core deposit mix over time, we should improve franchise value as well.

Based upon our projected earnings less dividends, we expect to generate capital internally to fund additional balance sheet growth. We’re now at $6.2 billion in assets, third largest bank headquartered in Connecticut and we have created significant franchise and scarcity value which is not currently reflected in our share prices.

Over the next few years, we have the opportunities significantly enhance franchise value, grow operating PT, PP, ROA grow GAAP earnings per share and grow tangible book value. Our focus will be traditional organic growth and building profitable niche books that are right-sized with our business lines, where we can earn a favorable RAROC.

The new normal for bank returns I think 1% GAAP ROA and 10% ROE are the right targets for us to pursue over the next few years. Do the math and you could see when I get into these levels in 2016 due to accretion headwinds, tax rate, interest rate environment.

Our progress in this PT, PP, ROA should become even more evident in the third and fourth quarters of 2016. We’ve assembled a large, deeply talented team and we’re well positioned to significantly enhance the value of our company in the next few years. Along with the broader equity markets in the financial sector, our share price has declined significantly since fourth quarter 2015 due to overall market conditions.

Our focus remains on serving clients, winning new clients, maintaining a strong balance sheet, growing revenue and operating leverage. Over time as we continue to improve operating earnings, tangible book value and franchise value, we believe our share price will improve along with overall equity markets in the financial sector.

Now I’d like to turn the call over to Brandon Lorey. Brandon, Head of Consumer businesses and he’s going to talk a little more in depth on our marine business and some of our portfolio acquisitions. Brandon?

Brandon Lorey

Thank you, Bill and good morning, everyone. As indicated by Bill, this is not a general marine portfolio nor is it a general marine growth plan. As we are not lending to aspiration, we will not be lending to aspirational boat owners. This is a partnership between high-end, long tenured manufacturers and their dealers, coupled with corresponding uber-prime retail originations.

The team that was brought on was responsible for the seasoned originations of the purchased portfolio which carries a historical lost rate below 60 basis points. The delinquency rate is also consistent with our overall consumer portfolio right around 1%. As stated in the investor deck, the 56 month seasoned purchased portfolio has a weighted average FICO of 749, loan-to-value add origination of 76% and then debt-to-income ratio below 32%.

These credit characteristics or what we will expect for our go-forward retail originations. As we slowly build out the program. We are deploying the same structured retail credit philosophy with this line of business as we do with our other consumer and retail originations.

Now additionally, following significant due diligence the bank also purchased two smaller consumer loan portfolios during the period reflecting high yield, high quality paper and providing strong geographic diversification for the institution. So first being a home equity line of credit portfolio and second installment portfolio, with this 90% guaranteed by HUD.

The combined portfolios carry a weighted average FICO score of 755 and a debt-to-income income of 36%. In order to originate at this level, the bank would have had to move significantly down the credit spectrum which is outside of the institutions credit philosophy.

Now Mark can share some color as to the day-to-day underwriting and risk management specifically related to the marine line of business. Mark?

Mark Kucia

Thank you, Brandon. Once again this is an established team with a long track record of successfully managing this business line. We will independently underwrite each manufacturer, dealer and retail customer. We will have direct contracts with the manufacturers whereby they will either guarantee or agree to repurchase inventory to support their dealers.

We employ robust credit administration and risk management around our existing portfolios. We will exercise the same level of robust management around this business line. We intend to build this business over many years in a thoughtful measured way, actively monitoring its performance and the economic environment.

Now I will turn the call over to Eric Newell, our CFO.

Eric Newell

Good morning, everyone. Our GAAP financial results in the fourth quarter were impacted by a notable decline of purchase accounting effect on the margin. As well as one-time cost associated with executive separation and investment banking fees as well as investment banking fees associated with the loan purchases we discussed.

On a pre-tax basis, the unfavorable change of accretion benefit was $2.5million, separation costs were $1.8 million and investment banking fees were $1.6 million for a cumulative total of $5.9 million impact in the quarter. In our tables in the press release, we've disclosed operating net income, which totaled $11.3 million for the fourth quarter, a modest improvement over the linked quarter at $10.9 million but it is also a record for the company.

I mention this because, despite the noise in the quarter, fundamentally the company is continuing to show improvements in profitability from favorable operating leverage from investments we've made over the last several quarters. With the additional assets we purchased late in the fourth quarter, and a completion of our budgeting process for the 2016, we are in a position to discuss expectations for 2016.

Details were provided in our earnings release deck – released last night along with our press release. 2016 will show continued core strength as evidenced by operating pre-tax, pre-provision revenue as it relates to average asset. The measure which in the fourth quarter was 1.03% continued to show improvement, as we move forward in 2016.

When we look at publicly traded peers, similar in size towards nationwide as well as in New England and the Mid-Atlantic we expect to improve to 78 percentile among our peers over the next couple of years. We expect to accomplish this by achieving positive operating leverage in 2016 due to expected double-digit revenue growth, offset by a more modest mid to high single-digit expense growth.

We are expecting to have a stable operating net interest margin for the year, as compared to 2015. You will note the significant decline in mark-to-market benefit, we expect in 2016, declining to a range of $4 million to $5 million from $12.6 million benefit we experienced in 2015. While this will certainly have an impact on our GAAP net interest margins, our operating net interest margin is expected to be stable for 2016.

In the fourth quarter, our operating net interest margin was 2.9%. We expected this to improve by 10 basis points in the first quarter of 2016, due to loan purchases and then compress about four to five basis points per quarter through 2016. We expect GAAP NIM to behave similarly.

We reported GAAP NIM of 302 in the fourth quarter. We expected to improve about 10 basis points in the first quarter of 2016 and then compress about five basis points per quarter through 2016. We expect a similar level of provisioning to average loans in 2016, as we experienced in 2015 run 33 to 36 basis points on an annualized basis, relative to average loans.

We expect high single-digit fee growth and a quarterly run rate of NIE at $33 million. This level of non-interest expense will result in continued improvement in the ratio of NIE to average assets and expect that will be – and we expect that will be in the top quartile of our peers on this measure. The higher level of expenses in 2016 reflect the addition of our specialty marine’s finance division, investments in additional staff and technology and risk management department, as well as investments in revenue producers and our wealth management department which will start to meaningfully contribute to our profitability in the second half of 2016. As I mentioned in the middle of 2015, we do expect a higher effective tax rate for 2016 at 25%. Keep in mind this reflects current investments we’ve made.

Thank you for your time this morning. And the management team and I will be happy to answer questions.

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Kevin Fitzsimmons with Hovde Group. Please go ahead.

Kevin Fitzsimmons

Hi, good morning everyone.

Bill Crawford

Hi, Kevin.

Eric Newell

Hi, Kevin.

Kevin Fitzsimmons

Just a couple of questions. First, Eric you just mentioned on the tax rate. So was that going to slowly build up to that level or we going to assume 25% over the course of the year. And then is there any kind of accompanying change we should be aware of – in the net loss on limited partnership investments in the fee income area or is that going to stay roughly where it is?

Eric Newell

It will – the effective tax rate will jump up to the 25%. So it will be the same starting the first quarter. And good question on the partnership, I actually put some guidance out on that. I believe in the third quarter earnings call and unfortunately I don’t have that in front of me. But I did put something out on that, probably not the last earnings call, but the one before and where I did – give some expectations on the partnership loss in 2016 which would be lower than what we experienced for the full year 2015.

Kevin Fitzsimmons

Okay, great. I can look back on that. Just a quick follow-up, you guys announced the additional buyback authorization. Just wondering if you can comment about your likelihood of utilizing that because it seems like you put it in place but then you didn’t buyback shares in the fourth quarter. And you made a point to say that you look to leverage your capital by – on the balance sheet. So if you could just give us a little color there? Thanks.

Bill Crawford

Sure. This is a Bill. We always want strategic optionality. Today we believe that we’re going to be able to grow our loan book in a nice way and provide stronger earnings through that path for we like to have – we always like to have a buyback in place in the event market conditions change and where we decide that it is better to slow loan growth and look at buy back. We always like having that tool available, and we've certainly used it significantly in the past.

Kevin Fitzsimmons

Okay, thanks Will.

Bill Crawford

Thank you.

Operator

The next question comes from Mark Fitzgibbon with Sandler O'Neill. Please go ahead.

Mark Fitzgibbon

Hey guys, good morning.

Bill Crawford

Good morning.

Eric Newell

Good morning.

Mark Fitzgibbon

On the marine portfolio I wondered if you could give us a sense for the rough annual cost of having that team of 13 people down in Baltimore. What that will add to expenses?

Bill Crawford

I would say that we are probably, we are seeing at $1.5 million to $2 million a year.

Mark Fitzgibbon

Okay

Bill Crawford

But keep in mind, I mean that is an ROA business, that is nearing 2%.

Mark Fitzgibbon

Okay

Eric Newell

And as into projection that are now in our forecast.

Mark Fitzgibbon

Okay and then that team, they got a portfolio now of $176 million, how big do you think you - they are likely to grow that portfolio. How big would you be comfortable with them growing the marine business too?

Bill Crawford

Yeah, Mark, we want to get in there and grow the business, but do it in a thoughtful and responsible way. Most interesting compelling piece to it is really the floor plan business, because we want to serve those manufacturers. That's the need they are really trying to do, so maybe we do a $100 million floor plan over the next 12 months. On the retail production, maybe that is a $100 million. But we don’t really - we were looking at growing this thing, gradually over time and making sure, we like the risk characteristics of it, as we go forward in time.

Eric Newell

And just to the follow-up on the that, Mark, this portfolio has a CPR of almost 20% to 25% . So well while Bill mentioned $100 million on the retail side, you're going to have some significant pay down. So I wouldn’t just take the $100 million and add it the $176 million.

Mark Fitzgibbon

Okay, and then the other two consumer portfolio, as you bought. Could you just give us – I apologize if I missed, what kind of consumer loans are those?

Bill Crawford

Sure, yes, so we have about$100 million of it is a home equity line of credit portfolio, it is a straight high prime keylock, and then the remaining $15 million was its title I, so it's 90% title I home improvement loans, so it's secured by real estate, but guaranteed to 90% by HUD. So again, they're standard consumer lending portfolios that we would do but the infrastructure it would take to build that out internally is greater than we would want to spend

Mark Fitzgibbon

Okay. And then lastly, on your expense guidance, it didn’t look like in your 2016 forecast outlook there was a number on expenses – actually, I apologize. It is here. My mistake. Thank you.

Operator

The next question comes from Travis Lan with KBW. Please go ahead.

Travis Lan

Thanks good morning everyone.

Bill Crawford

Hi Travis.

Travis Lan

Bill, hi. Bill, when you referenced double-digit operating revenue growth, I assume that excludes accretion benefits. Is that correct?

Bill Crawford

Yes.

Travis Lan

Okay. And then the purchase loans were included in non-covered loan segment in the presentation. So did those come with some kind of credit mark that you can quantify?

Bill Crawford

They did go into the non-covered, and we did apply a credit, Mark, but I don’t take we are probably going to be disclosing that in the…

Eric Newell

We record…

Bill Crawford

Yes, and the recorded fair market value I would say that it’s not very significant, though. It’s not a big markup on that at all.

Travis Lan

Okay. And as you think about marine finance business, do you have a sense for why SocGen was willing to sell the portfolio was willing to sell the portfolio or allow the team to leave at this point?

Bill Crawford

Yes they did that in 2014 and as you know there was a lot going on in Europe that was just the strategic decision that they made and back we think we will have an opportunity to partner with them because basically there’s very strong relationships between Hervé and his team. Those were long-term SocGen employees, and so I think there will be some interesting synergies with them.

Travis Lan

Can you comment on what kind of synergies you are thinking about? Just in the marine business as it is, or are there other types of business that you think there could be synergies there?

Bill Crawford

No, it’s just assistance in the marine business with common clients they’re focused on Europe are doing the same thing we’re focused in the United States.

Travis Lan

Okay. So I guess after the MOE and then you guys have made some commercial lending additions, the narrative was that the team was in place to kind of capitalize on these market share gains that were available across the footprint from larger players. What do the lone purchases say about those opportunities in your market, and do you expect to kind of have to supplement some of the organic growth with additional purchases, going forward in various segments?

Eric Newell

Yes, Travis what I would say about that is we could generate almost any commercial loan probe that number we wanted. So that is really not the issue. When we look at commercial lending, we are doing very well there, we have nice growth rates, we are building very nice franchise value there. But when you look at the lending markets, whether it is here in Connecticut or Massachusetts already go to Boston, wherever you go, what you find is RAROCs are very low in that business. You have to really pick your spots and for example, in Boston we looked at a real estate project we were willing to finance $33 million on it someone else did the deal at $44 million, at 35 basis points less. So we love the commercial business, we’re really good at it, we’re going to keep growing it very nicely, but we don’t want this to be our only lever. We are going to slowdown growth on the single-family residential I to IV portfolio, and that’s why we want some growth in the consumer space that’s variable with better RAROCs.

Travis Lan

Okay, that’s really helpful color. I know you guys are making the best decision but you think are available under your RAROC model. And Bill, you'd reference kind of the stock price performance recently. How do you kind of – sort of explain I guess the divergence between you making the best decision that you think for the company under the RAROC model, and then the way that the stock has kind of performed? Do you have a way to bridge the gap there, at least how you guys think about it?

Bill Crawford

Well, how about this. We created enormous franchise value through this transaction, through the merger. And when you look at the stock, when you look at price performance certainly since the fourth quarter, it’s been very tough all around. So I think that we’re in a very tough equity market obviously. But I think what we’re going to have to do is just continue to drive consistency in performances. I think when you look at our 2015 results, while the headline ROA was strong, one of the highest in Connecticut when we talked about our pre-tax, pre-provision was like third quartile and so out of $2 billion to $10 billion banks nationally. But I do think getting pre-tax, pre-provision revenue up or ROA up is going to be a key to ultimately driving towards a better stock price.

Travis Lan

Got it. Okay, that's really helpful. And then the last one I just have is, as you kind of balance the potential independent path to driving or improving shareholder returns and then kind of mix that against the opportunity to maybe partner with somebody that can maybe accelerate your own goals, how do you guys think about that, going forward?

Bill Crawford

Well, I would say, I’m a significant shareholder in the company as is our Board, as is our executive management team, and so we have a clear idea of what we think the company’s worth, and we also have a pretty clear plan as to over the next two or three years. What should we think we can accomplish and how do we close the gap between what we might be worth in a strategic transaction where we are now and we think we have a good plan around that. Obviously a lot that depends on how the economy goes and everything else. But we think we’re well positioned to grow revenue, grow earnings and do that responsibly and outperform which we look at us, even in 2015 on a ROA or an ROE basis, Travis you would be hard to find anybody headquartered in Connecticut that had a better ROA or better ROE, and that was just our first year as a combined entity.

Travis Lan

Yes, okay. I appreciate that. I mean I would just kind of say that you obviously have the tax benefits that help and you were getting aided by accretion, so I just don't know it’s an apples to apples comparison but I do appreciate it. So Anyway I appreciate the commentary. Thank you.

Bill Crawford

Thanks.

Operator

The next question comes from the Matthew Breese with Piper Jaffray. Please go ahead.

Matthew Breese

Good morning, everybody.

Bill Crawford

Hi, Matt.

Matthew Breese

On the marine acquisition and the marine portfolio, I just wanted to get a better sense of what these loans will look like, and where they will end up. So maybe we could start with the actual floor plans? What are the rates, the sizes, the types of dealers you will be dealing with? And then secondly, geographically, where are those opportunities?

Eric Newell

Mark, go ahead with dealers.

Mark Kucia

Yes. So we’ll have relationships with the manufacturers and then we will have contracts in place that will then support a portion at some level of their dealer networks. The dealers that – individual floor plan lines are probably anywhere from $1.5 million to $2.5 million, we’ll have a master agreement financing handful or more of dealers per manufacturer, the dealers are located in North America. And once again, these are the team that we’re taking on here that we brought on. These are their relationships that exist currently and we’re looking to bring those relationships over. So they have a lot of experience with the manufacturer, with the dealership.

Eric Newell

And Matt, to expand a little bit, I mean where are boats? They are in Newport, Rhode Island, they are in Baltimore, they are down in Fort Lauderdale those dealers are generally in coastal places, about 21% of existing portfolio is California, 22% is in Florida.

Bill Crawford

And Matt, they float off LIBOR. So depending on the relationship that could flow anywhere, LIBOR plus 275 to 475.

Eric Newell

Yes. 275 to 475.

Bill Crawford

And keep in mind, Matt, with that, these manufacturers, if you look at our risk rating system, one through nine, these manufacturers would be either a three or a strong four on our system. So really those are floor plan loans, it is like we have a loan to somebody who who's rated three or four at those kinds of rates. So that is what is very attractive. For them, it’s just the service convenience thing. The dealers themselves are actually probably, they’re five rated, they're certainly a pass-credit. And we believe they're financially strong. But understand, we're not financing all of some boat dealer's inventory.

We're only financing the boats related to our manufacturer, and we have either a guaranteed or repurchase agreement. So the risk is very nominal. We also have an independent company that is doing all the floor plan and all that examination process, and we have deep processes, procedures from an audit perspective to prevent fraud and that sort of thing. But that's a pretty solid piece of it. On the consumer piece, we are getting very strong down payments. These are very strong borrowers. And what if we don’t like the deal, we don’t do it. It’s that simple.

Matthew Breese

How does a guarantee work for the dealer network?

Bill Crawford

Matt, how about this. For some reason the boat doesn't sell, goes out of term, they start to curtail the loan. At some point, let’s just say the dealer goes bankrupt or whatever. The manufacturer takes the thing back and sends us a check. We have to make sure these manufacturers are very strong, we're underwriting them. We will have relationships with their CEO's. We've already been making calls there, and we have access to them. Obviously, let’s just say the economy gets bad marine starts to go down with the economy. I think what you’d see, these manufacturers have been through economics cycles certainly 2008 most of them are 20, 30, 40 year companies.

And so, I think, what you would see happen, if the economy really turned down, they would manufacturer less boats, we would floor plan less boats, they would sell less boats, we would finance less boats, and the business would just grow much lower. But there is still be some people to buy boats. We are able to watch how these companies perform through the crisis of 2008, 2009, and that’s what happened, they just sold less boats, and the portfolios performed well.

Matthew Breese

Okay. And then the portfolio you acquired $172 million, how much of that was to the floor plans, and how much of that was retail?

Eric Newell

That was all retail. Originated by the same team.

Bill Crawford

Yes, originated by the same team, Brandon, reiterate sort of the losses on that over.

Brandon Lorey

Yes, so the historical portfolio loss rate on this portfolio is under 60 basis points and it is – again, this is a seasoned portfolio that add 55, 56 month season at origination, the loan-to-value was 76%, it’s going to be lower at this point, and we have an attrition rate somewhere between 20% and 25% on the portfolio itself.

Bill Crawford

Yes, generally, the customers don’t hold these the whole term, what happens with these boat owners, we usually we’re not financing first time boat owners. These are second or third time. And what happens is they either decide, you know what, I don’t like boating, and they sell it and get out or I love boating and I want to get a bigger, different boat and that’s why it doesn’t go full-term.

Matthew Breese

But these are our – so who are the actual borrowers? Can you describe the typical client that walks in and wants to buy a $200,000 boat?

Bill Crawford

The average price on those boats going to be somewhat in the north of $200,000 as the average loan size is in that range. These are borrowers with significant liquidity and reserves. Again, the average FICO is in the high 700s. These are individuals that could buy the boat outright, three and four time over at a minimum. These aren’t folks that – I have to borrow money in order to get the boat. These are not, again aspirational boat owners trying to get their first 20 foot throw onto the local river. So these are again very high-end, very liquid, high net worth individuals that are purchasing these boats.

Matthew Breese

Okay.

Eric Newell

Yes, I think Surgeon, business owner, those kinds of people.

Matthew Breese

Okay. And Bill, I think you had mentioned, yes, you want to keep the core competency of the overall institution in commercial lending, plus these ancillary business lines, but what else could that mean for potential portfolio or business lines acquisitions? I mean the marine portfolio came as a surprise to me, was not on my radar. What else is on your radar?

Bill Crawford

We think about what we might be able to do in the deposits space, we’re studying that very carefully. I do think that technology is going to give us the opportunity to work with different niche opportunities and we’re studying that. Because now we have a very strong cash management, we have much stronger mobile offerings. So I think, we’re interested in niche businesses. But again, we want to – we’re going to be a bank that has a couple of niche businesses with nice returns. We’re not going to be a specialty finance company or specialty anything company.

Matthew Breese

Could that entail, like, going into the prepaid card space, or HSA space? When you say deposits, what kind of interesting niches would that be?

Bill Crawford

It's kind of premature. We are looking at different things, but it's – think about fiduciary, things like that. I mean things where there's really nice deposits or some compelling reason. We are still studying – we're still very much studying this stuff. How about this, I think that to go out there and start building retail branches in Connecticut to get retail business, I think that’s a loser strategy. I just think that the markets are very much over-banked and we are really preparing to do business online. That’s why hired John Smith, I mean he joins us from CIT very strong technologist.

And we’re really preparing for the world where we can do business with clients in terms of mobile, online. We certainly value our branches that are very important to our existing clients, we see commercial opportunities, we’ll have some physical presence. But I don’t think growing retail through de novo branching is a great idea.

Matthew Breese

Okay. My next question. Eric, your margin assumptions for 2016. What kind of interest rate assumptions are in there? How many Fed hikes are you assuming?

Eric Newell

We do not assume any increases or any Fed hikes there. But the reason I’m confident that we would achieve that even if there were additional movement – additional movement from the fed is just given our neutral interest rate risk position.

Now let’s say if you did see – a yield curve the two time spread if you did see that kind of continued to flatten I think that’s – that wouldn't necessarily impact our 2016 results. That's going to take some time to get into the spread. But probably more of a problem for 2017.

Matthew Breese

Understood, that’s all I had thank you.

Operator

The next question comes from Eric Grubelich, a Private Investor. Please go ahead.

Eric Grubelich

Yes, hi good morning. A lot of my questions have been answered on the – your foray into boat lending. But can you just tell me something about the consumer portfolios that you bought? Are you servicing those portfolios, and did you buy them from one entity?

Bill Crawford

Brandon?

Brandon Lorey

We purchased them from two different entities. They both have expertise in those, servicing, and the servicing is remaining with them. They both have long-time experience and loss rates on the portfolios have been historically very, very low better than our own internal loss rates on the consumer portfolios.

Eric Grubelich

Okay. So was this a bank entity or non-bank entity that originated?

Brandon Lorey

Bank entity.

Bill Crawford

Yes, good question. These are all bank entities.

Eric Grubelich

Okay. And then on the – just getting back to the marine lending business. So, you made it clear what type of credit the portfolio that you bought and you are going to do on the consumer side of the boat buyers, but it sounds like on the floor plan – so, the floor plan is all on the come? These people have done these loans before, but for some reason the floor planning business didn't come in the transaction? Or the bank didn’t want to give up those relationships? Is that right?

Bill Crawford

How about this. SocGen exited the whole thing in 2014, and in North America or primarily United States, and then we lifted this team out of a small bank in the mid-Atlantic. So the floor plan – the key is the team we lifted out has very strong relationships with the manufacturers. That is our entree into the dealers.

Eric Grubelich

Okay so again, they are going to try and migrate the existing floor planning relationships that those dealers have to you, but someone else…

Bill Crawford

Yes.

Eric Grubelich

Is it that existing bank relationship or someone else that has those floor plan loans now?

Bill Crawford

When SocGen exited the business, the manufacturers and dealers went to various institutions. And so fortunately, this team still has relationships with those manufacturers and dealers, and we are in the process of reaching out and rebuilding.

Eric Grubelich

Okay. And you did say I think in the earlier comment, just for clarification, that even though you do not have these floor plan loans now on the books, you expect to – you have the infrastructure in place and the people to check everything when those loans start coming in and make sure, as you mentioned, that there isn’t any kind of fraud or double pledging of titles or anything like that. That is all there, now?

Bill Crawford

Yes, and Mark, why don’t you elaborate on our due diligence on examining, really checking out that team?

Mark Kucia

So, the team itself has successfully managed these lines and relationships over the years. We will have a robust credit administration risk management program around it as well. First and foremost, employing what we do on a day-to-day basis. But specifically to these portfolios, there is an independent company that audits quarterly to ensure that all of the lines are in trust.

We have an individual who also be down there who’s got 30 years marine, floor plan et cetera, doing credit administration review, audit et cetera. So we will have very robust – a very robust program here. And once again, I guess the final thought is this team has successfully managed these lines in this line of business for many years.

Bill Crawford

How about this. These guys are expert at what they do, but I will say this I came from Wachovia, Wells Fargo, Southtrust. We have competitors, for example, who are in asset-based lending. They are in equipment landing et cetera, et cetera. Those are definitely I think much more complex businesses than this. That’s only going to send a boat over from Europe to a dealer, is a very strong company, and we’re going to have a loan that has the ability to go back to that very strong dealer. We have to make sure the boat stays there, we have to make sure it’s insured. And then we have to be able to make a retail boat loan. And another real key, though, is these manufacturers that we are dealing with, they do not want us to repossess a boat and sell it for $0.50 on the dollar. It damages their brand. And so we are very careful about which manufacturers we choose to do business with.

Eric Grubelich

And you didn't mention, approximately how many of these European brands do you expect to deal with?

Bill Crawford

That’s going to – it’s like a dozen. We don’t want to throw names out right now, because we’re calling on these companies and developing relationships…

Eric Grubelich

That’s fine.

Bill Crawford

How about this. It’s the most established ones. You’re going to look at these companies, they’ve been in business 20, 30 years. Some of them longer than that so very strong, very established brands. We will be monitoring their financial performance. They would have to fall very far before they even got near our five rated land.

Eric Grubelich

Okay, okay. So it sounds like your consumer portfolio should be making money day one, correct?

Bill Crawford

Yes.

Eric Grubelich

Because of the yields on the loss rate. What do you expect is the – where does this, the indirect – excuse me. The floor planning portfolio, where does that start to make money for you? Do think you are going to be making money in a year from now, or how long does it take to get to a level of profitability?

Bill Crawford

Yes, the good thing is, with the existing portfolio – with retail portfolio, I mean, we are earnings per share accretive very nicely, right now. The floor plan that will involve loans. We will have some deposits, there’s fees, it’s a very attractive RAROC. Those RAROCs are well north of 25%. Because of the really good credit quality and its variable rate, and the fees and the deposit relationship. So, that’s why we are doing it. But we were already profitable, and so the ROA, ultimately on this business, fully costed, will easily be double what our bank is.

Eric Grubelich

Okay. Thanks a lot Bill.

Bill Crawford

Thank you.

Operator

The next question is a follow-up from Matthew Breese with Piper Jaffray. Please go ahead.

Matthew Breese

Thank you, everybody. Just a couple of follow-ups. I noticed in the deck, you know with the portfolio that there is a servicing element, and the portfolio financial servicing company has $32 billion under management. What is that, and what are the fee income opportunities from the marine finance acquisition?

Brandon Lorey

So, PFSC is the servicing company that we have hired that’s servicing and we’ll continue to service these loans. They have been servicing. This is their niche business. That $32 billion – of that $32 billion, I believe $8 billion is direct servicing, or then they’ve got another portion that is outside of that. But this is the company that has been servicing this particular portfolio and saw it through the 60 basis points in loss and low delinquency under the management and guide of the team that we were able to lift out.

So it is – again, another reason why we didn’t want to bring that in-house, we want to make sure that the experts that have been doing it continue to service that for us.

Bill Crawford

And Brandon has been out there and met their CEO, toured their facility, everything. So that is a very strong strategic partner for us.

Matthew Breese

Okay. And then what are the fee opportunities from this line of business? You mentioned that there would be some.

Bill Crawford

Yes, it is just on – I mean sometimes you have – you are able to charge loan fees essentially, is what that is, on floor plan lines. Unused fees, things like that.

Matthew Breese

Okay. And then you also mentioned you are going down the path of getting series 6 and series 7 folks in-house, develop your wealth management business. What contribution will that have to non-interest income in 2016?

Bill Crawford

Eric, I will let you take that one.

Eric Newell

I would say, I don’t want to be specific about what that bottom-line contribution is, but I would say that, that line of business was not contributing in 2015 to the bottom line, and will probably be - actually, would probably be lose us money in 2015…

Bill Crawford

Okay, lost us money in 2015. We are going to be break-even in the first half, and then you will start to see some benefits in the second half.

Bill Crawford

Yes. We were able to lift out a team there from First Niagara, their leader, and then we lifted out some excellent bankers, and we’re really excited about this. This was a business that Wachovia, Wells Fargo, run and essentially what you’re doing is helping clients with their financial needs. They are already customers. We have some very top talent there, and what you find is, when you are able to help clients with their investment needs, you end up doing a lot more deposit business with them and a lot more investment in loan business. So we’re very excited about this. It’s a need that our customer has, and we were able to really pick off some great talent, there.

Eric Newell

I would say Matt, I mean that the single-digit fee income growth that I guided to is inclusive of that benefit that we’re going to get in the second half, and as we start getting some traction there, we may provide you some more information.

Matthew Breese

Got it, thank you. That’s all I had.

Operator

In the interest of time, this concludes our question-and-answer session. I would like to turn the conference back over to Bill Crawford for any closing remarks.

Bill Crawford

Okay. Well, thank you for your interest and your time today, and we are looking forward to strong 2016. Take care.

Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

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