First Connecticut Bancorp's (FBNK) CEO John Patrick on Q1 2018 Results - Earnings Call Transcript

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About: First Connecticut Bancorp, Inc. (FBNK)
by: SA Transcripts

First Connecticut Bancorp, Inc. (NASDAQ:FBNK) Q1 2018 Earnings Conference Call April 19, 2018 10:30 AM ET

Executives

Jennifer Daukas - IR

John Patrick - Chairman, President and CEO

Greg White - CFO

Mike Schweighoffer - EVP and Chief Lending Officer

Analysts

Damon DelMonte - KBW

Laurie Hunsicker - Compass Point

Brody Preston - Piper Jaffray

Operator

Good day and welcome to the First Connecticut Bancorp, Inc. Q1 2018 Earnings Call. All participants will be in listen-only. [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. Jennifer Daukas, Senior Vice President, Investor Relations. Please go ahead.

Jennifer Daukas

Thanks, Rachelle, and good morning, everyone. Before we begin our presentation, 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 expected results. Our comments today are intended to qualify for the Safe Harbor afforded buyback advisement. Thank you.

And now here is John Patrick, our Chairman, President and CEO.

John Patrick

Thank you. And good morning, and thank you for everyone for joining the call today. It has been our practice I'll give some opening remarks, Greg will give a little granularity and then we'll open it up for questions. And again we're pleased to report our earnings for the first quarter of $6 million or $0.38 per diluted share, 18% increase over last year. Our earnings were driven by good loan growth for the quarter, which also is indicative of the strong asset quality that we've had and continue to maintain.

We had good deposit growth in the quarter, $9.3 million bring us to about $2.4 billion for our deposits, which is a 7% increase from a year ago. And then one of the other things in the quarter our expenses as you know are a little higher than was anticipated and I just want to spend a couple minute and talk about those and understand that we did open Manchester, our office in the first quarter, which we had been anticipating that we were going to do. But I don't want to miss lead anybody to say that that is the only reason for a little bit of the expense increase.

One of the things we did in the quarter, we did a deep dive and I think as many people know we made a management change in our mortgage banking area midterm last year and we took a deep dive into our mortgage banking practices in the first quarter. We believe that we had a very good mortgage banking operation and that was validated. And that’s something that we look at and we believe we will continue to grow and continue to expand.

And from that stand point we had a local bank in the marketplace that decided I think it was probably in the fourth quarter of last year that they were going to completely exit the mortgage banking business, we're able to pickup couple of originators from there and another very well-seasoned originator during the quarter. So, there was a little bit of additional expense as those originators come on and they get ramped up which they have gotten ramped up.

And as I said before our Manchester office is opened, we are off to a great start, I think we've been open three weeks -- three or four weeks at this point in time, we've got $25 million in deposits with 480 new customers that have already come to the company to generate those deposit accounts in that office.

And so I think that there is a variety of those things and there were some small severance and some other things we described in the release relative to variable compensation that was in the first quarter from the expense perspective.

Again loan growth was strong primarily mortgage banking growth, which has been indicative of our practice over the last several years is to add to the balance sheet in the first quarter from a mortgage banking perspective. Our pipelines in mortgage banking are double where they were a year ago and have been since the beginning of the year.

So we see that as a -- we have a very good runway there as we have also a very strong commercial pipeline today. But from the mortgage banking perspective, we put those on in the first quarter. We stratify that portfolio and then through the reminder of the year we’re able to make moves relative to where we are from an algo perspective or gain on sale and a variety of other things.

So we really haven’t strayed at all from the strategy that we’ve talked about the last couple of years, I think that this was just a very, very good strong quarter for us, based upon our origination pipeline and which is primarily purchased mortgage at this point in time.

Let me turn it over to Greg to give you some granularity on some other things and then we’ll come back.

Greg White

Thank you, John. As you could see we had a pretty good quarter for net interest income growth it was up 2% versus the prior quarter, up 9% from the same period last year. Our fully tax equivalent margin was down a basis point compared to the prior quarter, but had there been no change in the corporate tax rate, our reported margin actually would have been 4 basis points higher than the 290 we’ve reported, so would have been 294 versus the 290. In other words up 3 basis points compared to the fourth quarter of last year.

John covered expenses pretty good, I’ll just add our payroll taxes as expected were up $245,000 in the first quarter compared to the fourth quarter of last year. Those should trend down from here as the year progresses.

Also worth mentioning, we had over $200,000 in expense again compared to the fourth quarter, related to third-party services mainly audit, consulting, tax and legal work. We would expect those expenses to kind of revert to that fourth quarter level as well. And again I’ll just remind everybody about $200,000 of expense savings converts to about $0.01 per share for us.

And that’s all I have John.

John Patrick

Thanks, Greg. Again as I talked about and I forgot to mention on the expense side, when we take a look at things. Anytime we invest in something for example, say mortgage or branch and a variety of other things, I’ve talked to shareholders and analysts obviously that we look at building scalability within what we do. And we think that and we believe that when we make an expense in an investment that there is a pretty quick return on invested capital on that expense that we would anticipate that coming back to us relatively quickly this year.

Again we’re off to a great start with our Manchester office, we have net new customers coming in across the board from our company’s perspective. It continues to remain very competitive in our marketplace, but that’s we compete every day, we compete in life every single day and so that’s kind of what we do.

We are going to stay disciplined on the commercial banking side, as I said before asset quality continues to remain very, very strong. And historically we have seen especially in the first quarter, you get the wheels coming off some other competitors in the marketplace. And several mutuals we try to bulk up in the first quarter and we see some duration terms scratching, we see some guarantees -- yields with no guarantees that should have guarantees and things of that sort.

So, we’ll stay disciplines, as we have before, we are confident based upon our pipeline that we will continue the loan growth as we had anticipated as well as our deposit growth. So deposits and loans will grow again hand-in-hand as they have over last couple of years.

And then lastly, I just want to really -- I know a few of you have asked me about the Connecticut economy. While we have some fundamental structural challenges here in Connecticut, I am very positive on where we are from an economic perspective. We have several companies that need employees and we are seeing job growth in our markets and United Technologies needs to hire 1,000 people, Electric Boats needs to hire, they are down in Eastern Connecticut they need to hire between 1,000 and 1,500 people.

Mike and I spend a lot of time with our customers and potential customers, every costumer that we have been to in the last quarter, in fact we even had one in here yesterday a service type company, they need two or three employees highly skilled labor. So, I think we continue to see companies invest in Central Connecticut.

Not to say that, I was actually pretty optimistic, when Jim Smith said he was going to run for governor, but he since pulled out of the race, but I think those things will change, with the change in leadership that we’ll have here come in the fall.

But overall, the economy here I think has stabilized and we're seeing very, very good pockets of growth. And as you know while we don't deal directly with the United Technologies and the Electric Boats of the world, we do work very, very closely with the companies that are providing them their products and services and a variety of other things. So that continues to grow and expand. Just not at the same level that we've seen throughout the rest of the country.

So I'll leave it there on the Connecticut economy and appreciate that all of you have a very busy day today. And so I'll open it up for questions.

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Damon DelMonte with KBW.

Damon DelMonte

Hey, good morning guys. How is it going today?

John Patrick

Good morning, Damon.

Damon DelMonte

So I guess my first question, just wondering if you could talk a little bit more about the mortgage banking initiatives. And you mentioned you hired some originators, just wondering are those folks based in the core part of your footprint or is it in one of the newer markets that you've expanded in or maybe in adjacent states? Just maybe a little bit of more color on that.

John Patrick

Yes, no it’s not in adjacent states. Although we're seeing very good flow up in Massachusetts, I will tell you that Damon, but it's in the core markets of our footprint. And then one of them is more down state. But still that's generating good flow in the Fairfield area.

Damon DelMonte

Got you, okay. And then you mentioned that your pipeline remained strong, what is the breakout between purchase mortgages and refinance business at this point?

John Patrick

I think purchase mortgage is a close, I'll let Mike take, he knows the numbers specifically. Because I'll give you…

Mike Schweighoffer

Hi, Damon. Ballpark we are looking at funded loans, recently funded loans about 75% purchase versus refi.

Damon DelMonte

Okay. And then with regards to the outlook for loan growth, what parts of the footprint do you feel the best about? Are you seeing more opportunity in the Southern part of the state or are you seeing maybe better opportunities in the Greater Springfield area.

John Patrick

I think we're seeing it all around. So I think again, it's very competitive from a mortgage banking perspective, we're seeing it throughout the company as well as on a business perspective we're seeing it throughout the state. So there is no one pocket. We're not focused on Fairfield we have that office done, we're not focused on that and driving it. The interesting thing is as well the pipelines doubled also. The number of units the dollar amount is much smaller, so we're doing we've actually got more flow going from that perspective. And so that's really indicative of more of our footprint Damon.

Damon DelMonte

Got you, okay. And then just lastly on the mortgage Greg, more on the margin. Greg, could you just talk a little bit about -- little bit more detailing your thoughts here with the expectation of some additional rate hikes? And kind of how you're balancing off increasing deposit competition with hopefully higher rates on the asset side? And kind of where you see the margins projected from here?

Greg White

Yes, from here, I would say each 25 basis point tightening by the Fed we’re been pretty conservative here, but we would say should convert to a basis point in margin increase. I’d just add for us a basis point margin is about $0.015 of EPS. But that we're thinking that should prove to be a conservative answer.

Damon DelMonte

Okay.

John Patrick

Unless the tenure pops.

Greg White

Yes, I'm assuming the tenure kind of stays in this range here.

Damon DelMonte

Yes, and so if you look back in previous calls, I think that guidance was around 4 or 5 basis points benefit to the margin for every 25 basis points increase. Are you just seeing is it more competition on the loan pricing side or is it on the deposit side as funding costs are catching up.

Greg White

It's a little of both. But I would -- if I'm not mistaken last call I was 2 to 3, 4 to 5 was a while ago, but it’s -- to get to the answer it’s kind of both side. And certainly most recently if you look at most of our growth came in was hybrid residential mortgages, which tends to certainly below our average loan yield. So that weighed on the quarters well and then our mix for the quarter certainly investments grew as a percentage basis faster than loans as well. So those weighed on margin a little.

Damon DelMonte

Got you. Okay, that’s all I had for now I’ll hop out and come back if anything else comes up. Thank you.

John Patrick

Thanks, Damon.

Operator

The next question comes from Laurie Hunsicker with Compass Point.

Laurie Hunsicker

Hi, good morning.

John Patrick

Good morning, Laurie.

Laurie Hunsicker

Just wanted to follow-up where Damon was I guess in terms of cost of deposits if I'm stripping out all your CDs you had a pretty big jump this quarter in your core deposit costs you went from 46 basis points to 53. Is that -- or I guess I should ask how much of that is related to how you’re thinking about your de novo branches?

John Patrick

I think that is driven by muni, so we’ve seen stiff fund which is a State of Connecticut fund kind of move up that’s probably the primary thing that’s moved up Laurie when you take a look and we look at and analyze our deposit costs. And then there is a large international bank that we still work for that’s out there for some reason they are probably about where I have been told is about 20 or 30 basis points higher than everybody else going to municipals trying to bring in deposits.

They have been losing deposit market share in Connecticut for the last three years. And so it seems as though they are on a mission right now to drive deposits in at no matter what costs. So where some of the relationships that we have we’re obviously not matching them, but we’ve seen the most price increase and interest increase pressure on that side of thing. So that’s really what’s driven it. When we still take a look at our overall regulatory deposits, we still have $1.3 billion on the 25 basis points.

Laurie Hunsicker

Okay, great. And then your munis, what was the cost of that in the quarter?

John Patrick

I don’t have that number right off the top of my head.

Laurie Hunsicker

Okay.

Greg White

About 95 to 98 basis points.

John Patrick

About 95 basis points.

Laurie Hunsicker

95 basis points, okay. And that was -- if I remembered it correctly that was around 90 last quarter?

John Patrick

Yes it was.

Laurie Hunsicker

Okay. And then the new deposits the $25 million already in Manchester, congratulations that’s a big number. What is the costs of deposit?

John Patrick

So we run special out there and I am not going to get -- I personally like to not to get into specific details, but what we really do is we do a reverse tiered type of rate on that. So we pay a little bit more for the first amount that comes in, we cap it out. So it’s just not hard money, we cross sell into it so it’s got also the new relationship, new dollars coming into the bank. But I think when we look at that the overall average cost of that is probably a little over 2%.

Laurie Hunsicker

Okay.

John Patrick

And so then that gets cross sold and a variety of other things that as we go through. And then what we do is then we’ll slowly lower those rates to bring it in line with everything else.

Laurie Hunsicker

That makes sense. And then on the de novos that you’ve done the eight sort of de novos that you’ve done in 2015-2016 where did those stand in terms of total deposits?

John Patrick

They’re across the board, but I would still say they’re averaging over $50 million for all those. Again the initial ones that we did the South ones or Glastonbury, east of the river and some others are in excess of $100 million core deposits but I even take a look at East Hartford, which probably has a little less in total deposits in that marketplace, which we expected than the others but from a fee revenue perspective, it’s outperforming some of the others.

Laurie Hunsicker

Okay. And then just on the growth, can you just refresh us here, I mean, just looking at the resi loan growth of 28% annualized that's a big number. How we should think about that?

John Patrick

Yes, again we typically take a look at that in resi origination apply it to the balance sheet. A lot of variable rate in the first quarter. Again we will look now to continue to sell a lot of that flow into the secondary market. We can take that portfolio, which is around $1 billion stratify it, look to see where rates are, take some gain on sale if it make sense, make some adjustments based upon where we want to from an Alco [ph] position perspective, but always making sure that we have room to add good commercial assets that will provide adequate yield.

Laurie Hunsicker

Okay. And then just in terms of your loan to deposit ratio that seems a little higher. How do we think about that?

John Patrick

I think we're going to keep it in line with what we said we're going to do. We're going to bring in more deposits than we are going to for loans for the year. And now it's just I think that's just more of a timing situation where municipals were and some more larger corporate that we have. But I'm really comfortable with where we are from that perspective. So I think that we're going to bring that down marginally year-over-year. And we'll be on track for that.

Laurie Hunsicker

Okay. And then just going over to expenses again. Just wanted a little help obviously expenses were higher appreciate you hitting that straight up. But the other line the $3.161 million just even versus last quarter of 2.6 million, you mentioned that there were $200,000 of nonrecurring. Is there anything else nonrecurring in that number?

Greg White

Not really, but it's one of those quarters.

John Patrick

There nits and nets and they add up.

Greg White

Yes our office supplies, phone, payroll, processing like everything a lot of $5,000 to $10,000 type of numbers that add up. It was, nothing nonrecurring, but I would expect next quarter to be better there.

Laurie Hunsicker

Okay. And just again just sort of summarizing here, when we look at the jump in salaries and benefits and jump in occupancy. Most of that is Manchester with obviously you have the new originators in that number as well, correct?

Greg White

Not -- yes, I mean, I can tell you so salaries, it isolating just salaries we’re up $128,000 versus the fourth quarter. And I'm not 100% on that answer Laurie, but I would guess, yes.

John Patrick

And some of that was right in the last pay period, and in March rates just kicked in.

Laurie Hunsicker

Okay. And then you mentioned, I'm sorry -- you mentioned a servants' payment that hit in the first quarter. And I just, did see that how much…

John Patrick

Yes, it's not big. It's not big.

Laurie Hunsicker

It's not big, okay. And then just -- and I realized you've got a planning strategic planning session I guess simply later this summer. But can you just share with us how we should think about de novos just in terms of other expense and growth modeling? I mean, is it maybe -- and I realized you're probably going to refresh all this, but is it maybe 1 to 2 a year or is it watch this one and let it season and then revisit, or how should we think about that?

John Patrick

I think it's 1 or 2 a year if it makes sense. So we'll model something out from that perspective. There won't be another one this year, let's put it that way. We're looking at something right now potentially for next year. But as I take a look it again as how we’ve built the franchise out, there is more of a dimension return going further east and more of a dimension return going west.

So we'll take a look at the north south corridor. See where there is opportunities for market disruption there, see where we can continue to see pockets of large based core deposits that some of the larger banks hold where we would have garnished good market share. So it's just not about putting branches in, to put dots down in the map, it's making sure that from a return on invested capital perspective we can be as successful as we have been in the past with those.

Laurie Hunsicker

Okay, great. Thanks, I'll leave it there.

John Patrick

Yes.

Operator

[Operator Instructions] The next question comes from Brody Preston with Piper Jaffray.

Brody Preston

Good morning, guys.

John Patrick

Hi Brody.

Greg White

How are you doing?

Brody Preston

How are you? So I guess just touching back on loan growth, obviously the run rate this quarter was a little bit more than the $200 million that you guys had originally outlined. And you sort of addressed what’s going with the resi portfolio. So, I guess, you expect to saw some of that into the secondary and as you said stratified a little bit. But I just wanted to get a sense for if you expect to this type of run rate, quarterly run rate moving forward throughout the rest of the year and I guess like which categories of loans you’re -- you guys most confident in growing moving forward?

John Patrick

Yes, I think we are confident in growing, as I kind of spoke about before. I think that again the commercial pipeline remains strong, but we’re going to be very selective in the deal flow that we see out there. And as I mentioned it’s competitive from that perspective especially on the commercial real estate side we are seeing some real head scratchers, but that’s a way like it is, and you need to be competitive every single day.

On mortgage -- I wouldn’t anticipate, we’re going to work -- let’s we bring in $300 million of deposits, we’re going to bring in -- we are going to stay right in line with our loan growth as we talked about before. So, it’s one quarter there was great quality in that quarter, there was variable rate -- a lot of variable rate production and it just -- it made sense to do that bring it on and get the full year revenue out of that that production also at this point in time.

And on the commercial banking side, one of the things that we saw in the first quarter, which I think is probably a little bit indicative of the quality that we have on the books, we had a company -- couple of companies that sold for cash and we had some payouts and things like that.

I think that as I take a look at earnings releases across the board, that we’re seeing that people are taking advantage of some of the low cap rates and taking their money and running in. So, that kind of all balances it out, but the mortgage banking business for us is a very good business. So we can adjust the flow and we have a lot of flexibility within that book.

Brody Preston

Okay, that’s great. And on the deposit front, we talked about the munis was there any other seasonal impacts there that we should expect to flow back in next quarter or is it just the municipal?

John Patrick

No, there was a little bit of commercial also, again I think the tax impact had a little bit of effect on that that’s my guess, it’s not a positive thing, but as you grow a larger book of corporate and commercial cash management accounts, you’re going to have a lot -- a little bit more variability relative to flow.

We’ve got a good deep dive like we always do in taking a look at our attrition and taking a look at customer impact, we’re not losing customers, it’s not attrition, it’s just seasonal flow in and out. So, hopefully we’ll see some of that back, but we’re out there be in the street trying to bring in new commercial in consumer deposit accounts.

And again I think that’s reflective of the fact that just start checking accounts year-over-year are up 4,000.

Brody Preston

Okay. And sorry to go back to this, my phone cut out when Laurie was asking the question. The $200,000 was just the -- that was the only one-time expense line item this quarter?

Greg White

Yes.

Brody Preston

Okay. And then you touched on competition, just wanted to get a sense for the CREs very competitive based on what people are saying the spreads are coming in pretty hard there and some of your other competitors are indicating that tax reform is starting to be computed away a little bit by loan pricing? Just wanted to get your views, and if you shared any of those thoughts.

John Patrick

Yes, I think tax reform, I think that discussion -- I think that’s too cerebral like just competitive marketplace and it always has been. And what happens is especially in the first quarter is that the mutuals load up, they come in very, very aggressive, they get their book built in the first five months of the year and then I don’t want to say they sit back and relax, but they’ve achieved their goals.

We also see some of the larger banks in the marketplace, I mean, here is where it’s more structure than it is necessarily pricing, although the pricing is just as competitive. We just saw closing for a B, a B plus property in our marketplace that was about a 500 unit apartment building, 10 year term, five year interest only, 30 year amortization. That's not something we're going to play in. And so, it's right in the middle of our marketplace, it's again B type property, but that's the type of thing we're seeing the $24 million mortgage.

So, we'll be selectively we always have been but I'm confident we've got a very good seasoned team, we don't need to add lenders or anything like that to get to our volumes and I'm very confident we're going to have continued good mix of good quality loans within the portfolio we turnover a lot of deals and look at a lot of deals in the marketplace our centers have influenced continue to provide us with opportunities as well as us knocking on doors all day long. So that’s what it’s about just grinded out every single day.

Brody Preston

All right, great. Thanks, guys.

Operator

[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to John Patrick for any closing remarks.

John Patrick

Again just thank you for your interest in our company. Thank you for following us for those investors that are on the call. I appreciate your investment and your confidence and guidance with us. And we look forward to speaking with you in the future. Have a great day.

Operator

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