People's United Financial, Inc.

Good day, ladies and gentlemen, and welcome to the People's United Financial, Inc. Second Quarter 2020 Earnings Conference Call. My name is Andrew, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. Following the prepared remarks, there will be a question and answer session. If you would like to participate in this portion of the call, please press star followed by one at any time during the conference. If assistance is needed at any time during the call, please press star followed by zero and the coordinator will be happy to assist you. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to Mr. Andrew Hersom, Senior Vice President of Investor Relations for People's United Financial, Inc. Please proceed, sir.

Good afternoon, and thank you for joining us today. On the call to review our second quarter of 2020 results are Jack Carnes, Chairman and Chief Executive Officer, David Rosado, Chief Financial Officer, Kirk Walters, Corporate Development and Strategic Planning, Jeff Tangle, President, and Jeff Hoyt, Chief Accounting Officer. Please remember to refer to our forward-looking statements on slide one of this presentation, which is posted on our investor relations website, peoples.com backslash investors. With that, I'll turn the call over to Jack.

Thank you, Andrew. Good afternoon. Good afternoon. We appreciate everyone joining us today and hope you and your loved ones are remaining safe and healthy. Before discussing results, I want to take a moment to thank our employees, customers, and communities we serve for their perseverance and ability during this pandemic. Since the onset of the crisis, many have said we are all in this together. This sentiment is truly reflected in the daily interactions between our employees and customers to move forward in a socially distant environment and through our engagement with community organizations to provide relief to those most in need. Their ability to confront challenges together has in the past and continues today to forge and solidify relationships between People's United and our customers. We strive to further strengthen these relationships as we play a critical role in supporting the financial health of individuals, businesses, and communities throughout this crisis and beyond. As I mentioned last quarter, we entered this crisis in a position of strength. Our performance in the second quarter was not only indicative of this strength, but also the resilience of the franchise. Pre-provision net revenues of $210 million on an operating basis increased 15 percent from the prior year quarter and benefited from higher net interest income and ongoing success controlling costs. We also continued to produce positive operating leverage as evidenced by a 230 basis point improvement year over year in the efficiency ratio to 53.5 percent. These results are reflective of the material cost savings that we have achieved from recent acquisitions and helped to generate a tangible book value per share of $10.18, an increase of 7 percent from a year ago. The net interest margin of 3.05 was seven basis points lower compared to 3.12 reported in both the linked and prior year quarters. The margin compression mostly reflects the downward pricing of floating rate loans, partially offset by meaningfully lower deposit and borrowing costs. Period end loans and deposits increased 3% and 12%, respectively, linked quarter. Excluding PPP loans, loans decreased 3%, largely due to lower commercial real estate balances and our planned reduction in residential mortgages. Deposits primarily benefited from PPP funds, federal stimulus payments, and higher municipal balances. Notably, strong deposit inflows reduced the loan to deposit ratio to 91% from 99% at the end of the first quarter. Clearly, the pandemic has significantly impacted the economy, although as the second quarter progressed, we did see a modest uptick in business activity from the lows earlier in the period. In particular, mortgage warehouse results continued to be strong. As expected, residential mortgage originations were robust in our retail channel, but were more than offset by payoffs. In commercial real estate and C&I, originations remain modest. Unlike many banks, we did not experience a high level of line draws and C&I utilization rates have remained steady. This is a reflection of the strength of our customer base and their confidence in our ability to support their funding needs. New business and equipment finance has been subdued, with the exception of LEAF, where we have seen signs of increasing activity. While new business activity has been modest, our focus is on maintaining a high level of communication with customers. We have continued to serve customers in the manner in which they want to be served, either in person with a personal social distancing protocols, via our digital channels, or virtually through video meetings. This has enabled our relationship managers, branch personnel, and wealth management advisors to successfully transact with customers and be responsive to their needs. We are pleased that effective July 1st, all of our branches returned to normal operations, given the favorable pandemic trends across our footprint. With that said, our top priority remains the health and well-being of our employees and customers. Consistent with our history of providing support in times of need, we are committed to helping customers navigate through this crisis. As of July 15th, we have funded nearly 18,000 PPP loans totaling over $2.6 billion, which have supported the paychecks of more than 260,000 employees across the Northeast. Companies that receive PPP loans through us have an average of 15 employees. Top industries funded include social services, healthcare, retail, professional services, and construction. Approximately 80% of these loans were under $150,000. We also registered for the Main Street Lending Program to further support small and mid-sized businesses. Where appropriate, we granted loan forbearances. At quarter end, we have approved more than 14,000 loans for deferral, totaling over $7.1 billion. a price of $5 billion in commercial and $1.1 billion in equipment finance and $1 billion in retail. Positively, the trends in the initial forbearance request have slowed materially, and we have been pleased to receive payments from 38% of the accounts, representing 19% of loan balances since they were in deferral. We also continue to assess the needs of customers that may require extended relief. Second round forbearance requests are subject to a more extensive due diligence and credit analysis to confirm additional relief is needed as well as viability of the business in this new economic environment. While still early in the process, based on conversations across our customer base, we expect second round forbearance levels will be meaningfully less than the first. We believe this is a testament to our approach to relationship banking and reflects the strong capital and liquidity profile of our customers. Turning to slide three, clearly during the duration of the pandemic, it is unpredictable and the total impact on the economy is unknown. However, we remain confident that our long-held underwriting philosophy and diversified loan portfolio comprised of high-quality, cycle-tested customers will once again differentiate People's United. Our conservative business model is advantageous, especially in the challenging economic conditions. One of the strategic objectives of our risk management is running a diversified portfolio that that does not overly expose the bank to a single line of business. All of our relationship managers are highly credit trained and remain with customers through the entire lifecycle of the loan. This enables our sales force to develop significant knowledge of each relationship and facilitate detailed conversations with borrowers. As such, in times of economic stress, these deep relationships allow us to quickly transition from a new business mindset to a capital preservation focus that is empathetic with the needs of the customer. With that background in mind, on slide three, we have once again provided our exposure to sectors significantly impacted by COVID-19. Similar to last quarter, we have included the retail, hospitality, and restaurant sectors. As an update this quarter, We have refined the retail disclosure to display only loans managed by our commercial real estate lending teams. It's important to reiterate our conservative view of underwriting enables us to enter this crisis in a position of strength. Credit metrics across each of our portfolios, including these sectors, were at very strong levels. Balances in the Cree retail portfolio are $3.6 billion. Importantly, we do not have material exposure to enclosed retail malls, and essential tenants comprise approximately half of the portfolio. These include grocery stores, pharmacies, and big box home improvement locations. In addition, we have been pleased to see a meaningful improvement in rent collection trends for retail customers we deemed at risk. Pre-pandemic, rent collections were near 100%, but declined to 35% by the end of May. Based on conversations with customers, we expect rent collections to be approximately 70% by the end of July. Deferrals at quarter end were $1.5 billion for the Cree retail portfolio. Given the portfolio's concentration of essential tenants, we expect second deferral requests will be significantly less than the initial round. Balances in the hospitality portfolio are $1.1 billion, of which 90% is managed by our CREE lending teams. The majority of the portfolio is flagged by major hotel brands and comprised of economy to upper mid-scale properties. In terms of occupancy, these properties have fared better than upscale and luxury properties across the industry. Our top 10 clients account for over 70% of our pre-hotel exposure. Each of these sponsors are cycle-tested, have extensive hotel experience, and are long-tenured customers of People's United. The furrows were $876 million for the total hospitality portfolio at quarter end. While occupancy has steadily improved since the onset of the pandemic, we expect most customers to apply for a second deferral. Balances in the restaurant portfolio are $513 million, of which approximately 85% are managed within C&I, including the traditional C&I and the segment's franchise finance specialized industry verticals. The remainder of the portfolio is managed in equipment finance. The majority of the franchise portfolio is in quick service restaurants, which have experienced a lesser degree of disruption, especially where drive-thru traffic remains strong. Referrals at quarter end were $290 million for the total restaurant portfolio. Many of our customers are coming to an end of the first 90-day deferrals, and presently only a few have requested another round of relief. Before moving on, it is also worth noting the continued high rent collection rates in our multifamily and office building portfolios. The average collection rate for our top 15 multifamily loans is in the high 80% range. and in the high 90% range for our top 15 office building loans. Looking forward, undoubtedly the near-term impacts of the pandemic are top of mind for every bank's management team. However, it is clear to us the coming years will look much different from the past, and therefore we remain keenly focused on investing in the franchise for the long term. In particular, we are actively pursuing ways to further strengthen our digital capabilities and enhance our already broad array of products and services offerings to meet the ever-changing needs of customers. As such, we are excited by the recent formation of our Business Transformation Office, which is responsible for digitation, product strategy, management, process automation, and fintech partnerships. The Business Transformation Office is unlike any other group we have had at People's United and will further drive our ability to innovate and reconceptualize offerings. This team will not only provide a competitive advantage by enabling us to stay ahead of customer needs, but also ensure that our strategic plans successfully advance the franchise. Consistent with the theme of meeting customer needs, We're pleased to introduce Always Checking earlier this month. We are offering this premium digital identity protection service free to all personal checking account customers. People's United is proud to provide this level of digital identity protection benefits that will further differentiate the bank. This offering builds on our core value proposition of service and protection and we are confident always checking will further attract and retain customers throughout the franchise. Before turning the call over to David to discuss the second quarter results in more detail, I wanted to congratulate Dave Berry, our now former chief credit officer, whose well-planned retirement earlier this month concluded more than 28 years with People's United. His thoughtful leadership has been instrumental to the bank, as his many, many contributions. Thank you, Dave, for your dedication, and we wish you all the best. We are excited to welcome Rich Barry as our new Chief Credit Officer. Rich joins us from Key Corp, where he was Chief Credit Officer, and he brings with him more than 25 years of proven experience managing risk and growing businesses, including during times of adverse conditions. His deep knowledge of our Northeast footprint and experience working at larger peer banks, which also includes holding the role of Connecticut Market President at Citizens, will significantly benefit People's United. With that, here's David.