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People's United Financial Inc (PBCT) Q4 2018 Earnings Conference Call Transcript

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People's United Financial Inc  (NASDAQ: PBCT)
Q4 2018 Earnings Conference Call
Jan. 17, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the People's United Financial, Inc. Fourth Quarter and Full Year 2018 Earnings Conference Call. My name is Chelsea, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. Following the prepaid remarks there will be a question-and-answer session.

(Operator Instructions) 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.

Andrew Hersom -- Senior Vice President of Investor Relations

Good afternoon, and thank you for joining us today. Here with me to review our fourth quarter and full year 2018 results are Jack Barnes, Chairman and Chief Executive Officer; David Rosato, Chief Financial Officer; Kirk Walters, Corporate Development and Strategic Planning; Jeff Tengel, President; and Jeff Hoyt, Chief Accounting Officer.

Please remember to refer to our forward-looking statements on Slide 1 of this presentation, which is posted on our website peoples.com under Investor Relations.

With that, I'll turn the call over to Jack.

John P. Barnes -- Chairman and Chief Executive Officer

Thank you, Andrew. Good afternoon. We appreciate everyone joining us today. Let's begin by turning to the full year overview on Slide 2. 2018 was another noteworthy year for People's United. We continued to strengthen the profitability of the Bank as operating earnings increased 33% to $461.4 million, the highest level in the Bank's history. In addition, operating earnings per common share of $1.31 was up $0.27, marking the ninth consecutive annual increase.

These strong results generated an operating return on average assets of 1.02% and an operating return on average tangible equity of 14.6%, which increased 21 basis points and 280 basis points respectively from last year. In June, we successfully closed and integrated the acquisition of Vend Lease, an equipment finance company established in 1979 that operates primarily in the hospitality industry. The transaction further strengthens our network of specialty finance experts and bolsters our nationwide businesses.

In October, we also successfully closed the acquisition of First Connecticut Bancorp, a holding company or Farmington bank. The transaction is a classic in-market acquisition of a high quality franchise that bolsters our well-established presence in central Connecticut and western Massachusetts. The integration is progressing extremely well. The core system conversion will take place later this month and we are on track to realize the projected cost saves.

In November, we announced the acquisition of BSB Bancorp, a holding company for Belmont Savings Bank. The transaction will deepen our presence in the Greater Boston area, particularly in the suburbs west of the city, which are attractive banking markets. The addition of Belmont enhances our already robust team of commercial and retail bankers in Boston and complements the strong organic growth we have achieved in the Commonwealth.

We are confident the acquisition will close early in the second quarter pending regulatory and shareholder approvals. We are pleased with the advancements made in 2018 to strengthen organic growth capabilities and further position the franchise for long-term success.

We continued to invest in revenue producing initiatives and talent, highlighted by the addition of three senior bankers to lead our newly established franchise, finance, technology, and not-for-profit verticals. During the year, we also continued to improve our digital capabilities and technology infrastructure. Highlights include investing in a digital marketing strategy to engage clients, generate leads and increase sales productivity; engaging with our fin-tech partners to establish digital origination channels for deposits, consumer and small business lending, and wealth management.

Also, in 2018, People's United remained steadfast in its community support. Through the Bank's two foundations, over $3.8 million was awarded to more than 600 organizations. This commitment is a vital part of our culture, and helping communities across our footprint to grow and thrive is good for our business.

Finally, we are pleased People's United was ranked best employer among US banks and as the top company globally on the Forbes 2018 World's Best Employers Global 2000 List. This is a very noteworthy recognition for the Bank and a reflection of our guiding principles.

Looking at the full year results in more detail, we're very pleased with our strong financial performance. Total revenues of $1.6 billion increased 10% from 2017, driven by both organic growth and recent acquisitions. This increase reflects improvement in both net interest income and non-interest income. In addition, the performance was highlighted by a 14 basis point expansion in the net interest margin to 3.12%, marking the strongest full year result since 2013.

Total expenses, excluding merger related costs, finished the year at $985 million, an increase of $55 million or 6% from a year ago. We are pleased with these results, given the inclusion of Vend Lease and First Connecticut into the franchise during the year and having some -- and Leaf on the books for a full 12 months.

As a result of our revenue growth and well controlled expenses, we continue to enhance operating leverage as evidenced by a 3 basis points improvement in the efficiency ratio year-over-year to 57.4%. This is a particularly strong result as beginning with the first quarter of 2018 the metric includes the unfavorable impact of tax reforms, which results in lower FTE adjustments to net interest income.

Loan balances at year-end were $35.2 billion, an increase of $2.7 billion or 8%, driven entirely by the addition of Farmington. Excluding this acquisition, the loan portfolio was essentially unchanged from year-end 2017. As we discussed on our October call, we did not expect to achieve our 3% to 5% loan growth goal for the year, primarily due to continued headwinds in commercial real estate and the industrywide slowdown in the home equity market.

Our commercial real estate business was specifically impacted by the runoff of the transnational portion of our New York multifamily portfolio, which totaled $434 million for the year. In addition, other headwinds included heightened competition from both bank and non-bank lenders, lower demand, and above average payoffs.

However, it is important to note that we did experience strong stand-alone results across many of our businesses that were in line with our expectations for the year. For example, equipment financing grew 11%, driven by impressive lead production with middle market C&I and asset-based lending achieving growth of 4% and 9% respectively. These results highlight the importance and impact of our well diversified portfolio.

Moving on to deposits, period end balances finished the year at $36.2 billion, up $3.1 billion or 9% from 2017. This increase was driven both -- by both the Farmington acquisition and organic growth. Excluding Farmington, period end balances increased $821 million or 2%.

Consistent with our strategy of balancing organic growth and thoughtful M&A, we announced today the all cash acquisition of VAR Technology Finance. Founded in 1990 and headquartered in Mesquite, Texas, VAR with an exclusive focus on the technology sector produced approximately $180 million in originations in 2018 and ranked among the top independent privately held equipment finance companies nationwide for new business volume.

The transaction has closed and we are transitioning VAR from an origination for sale model to an origination to hold model. Similar to our acquisition of Vend Lease, VAR will become a division of Leaf, enabling it to leverage Leaf's technology platform, marketing and leading automation capabilities. The company is strong cultural fit as VAR and Leaf have shared a business partnership for many years, leaving us to have a deep understanding of their operating model and underwriting process. We are excited to welcome VAR and its strong brand and reputation in the technology sector to the People's United family.

Looking ahead to 2019, we expect the year to be similar to 2018 in terms of economic and political uncertainty. In particular, uncertainty around the Federal Reserve Monetary Policy and the ultimate impact on the yield curve will likely be the prevailing themes for the Bank this year. However, our long-term approach to managing the business has and will further enable us to move the Company forward regardless of these uncertainties.

Driven by our commitments to expense management, excellent asset quality and a diversified business mix, we have delivered improved returns even while experiencing subdued loan growth in certain segments. As shareholders and prospective shareholders, you can be assured we will thoughtfully manage through the upcoming year and continue to build a strong banking franchise for the long term

With that background in mind, let me outline our goals for the full year 2019 as listed on Slide 3. It is important to note the following goals incorporate a full year of Farmington and Vend Lease results as well as VAR technology. However, these goals do not include a pending acquisition of Belmont. Once the Belmont transaction is closed, we will update these goals accordingly.

The first goal is to grow our loan portfolio in the range of 3% to 5% on both a period-end and average balance basis. This goal excludes the transactional portion of our New York multifamily portfolio which is in runoff mode.

Period-end balances for this portfolio finished 2018 at $968 million while the average balance for the full year was approximately $1.2 billion. We expect the runoff in the transactional New York multifamily portfolio to be $400 million to $500 million for the full year. Secondly, our continued focus on gathering deposits is expected to drive deposit growth in the 3% to 5% range on both a period-end and average balance basis.

The next goal is for the net interest income to increase in the range of 10% to 12%. Embedded in this goal is the expectation for the net interest margin to be in the range of 3.15% to 3.25%. This net interest margin range is derived from many different factors, one of which is an assumption that no increases in Fed funds during the year. We expect non-interest income on an operating basis to grow in the range of 2% to 4% as compared to $376 million in 2018. Operating non-interest expenses, which exclude merger related costs, are anticipated to be in the range of $1.04 billion to $1.06 billion as compared to $985 million in 2018.

As a reminder, this range includes a full-year of results from Vend Lease, Farmington and VAR Technology. In addition, it assumes an increase of approximately $12 million in expenses as a result of adopting the new lease accounting standard on January 1st, 2019, which limits the type of lease origination costs eligible for deferral in our equipment financing businesses.

Previously, such costs were deferred and recognized as an adjustment of yield over the related lease term. We also expect to maintain excellent credit quality with a provision in the range of $35 million to $45 million. 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 the expectation that at year end, holding company Common Equity Tier 1 capital ratio will be in the range of 10% to 10.5%.

With that, I will pass it to David to discuss the fourth quarter in more detail.

David Rosato -- Senior Executive Vice President and Chief Financial Officer

Thank you, Jack. Our fourth quarter financial performance resulted in a strong finish to the year as evidenced by another quarter of record earnings and operating return on average tangible common equity of 15.5% and a 160 basis point improvement in the efficiency ratio linked-quarter.

Operating earnings of $134.2 million increased 18% from the third quarter and benefited from the Farmington Bank acquisition and further net interest margin expansion. The quarter was also favorably impacted by a lower effective tax rate.

It is important to note that fourth quarter included the following items which were deemed non-operating; a tax benefit of $9.2 million realized in connection with tax reform; security losses of $10 million pre-tax or approximately $8 million after tax, incurred in response to the current period tax reform benefit; and merger related expenses of $8 million pre-tax or approximately $6 million after tax.

Turning to Slide 5; net interest income of $332.6 million increased $26.2 million or 9% on a linked-quarter basis. The loan portfolio contributed $39.5 million of the increase to net interest income and benefited from higher yields on new business as well as the continued upward repricing of floating rate loans.

Net interest income also benefited $2.4 million from higher yields and balances in the securities portfolio. The largest offset to these increases were higher deposit and borrowing costs which collectively reduced net interest income by $15.7 million. Net interest margin of 3.17% expanded 2 basis points from the third quarter.

As displayed on Slide 6, this expansion was primarily driven by the loan portfolio which favorably impacted the margin by 17 basis points, as new business yields continued to increase and remain higher than the total portfolio yield. The net interest margin also benefited 1 basis point from higher yields is the securities portfolio. Conversely, higher deposit and borrowing costs lowered the margin by 14 basis points and 2 basis points respectively for the quarter. The addition of Farmington unfavorably impacted the net interest margin by approximately 2 basis points.

Looking at loans on Slide 7; average balances of $35 billion increased by approximately $2.9 billion or 9%, compared to the third quarter. This increase was entirely driven by the addition of Farmington. Excluding the acquisition, average loan balances were essentially flat. On a period-end basis, loans ended the quarter at $35.2 billion, an increase of $3 billion or 9% from September 30th, driven by both the addition of Farmington and organic growth.

Excluding the acquisition, balances increased $276 million or 1%. Organic growth benefited from strong production in equipment finance, ABL, as well as our healthcare and large corporate verticals. These results were partially offset by lower mortgage warehouse lending balances and continued runoff of the transactional portion of the New York multifamily portfolio. Period end balances in the mortgage warehouse lending portfolio ended the quarter at $802 million, down $80 million, while balances in the transactional portion of the New York multifamily family portfolio declined $79 million in the quarter.

Moving to deposits on Slide 8, average balances of $36 billion increased $2.9 billion or 9% linked quarter, while period-end balances were also up 9%. These results were driven by both the addition of Farmington and organic growth. Excluding the acquisition, average and period-end balances increased $576 million and $667 million respectively.

It is important to note the quarter-end loans to deposit ratio remained at 97%, despite Farmington's elevated loan-to-deposit ratio. While our deposit costs were up 10 basis points for the quarter, we continue to focus on controlling pricing.

Our interest-bearing deposit beta is 27% since the beginning of the current cycle of increase in interest rates. In comparison, our loan yield beta is 37% during the same period. Specifically, for the fourth quarter, our interest bearing deposit beta was 49% compared to 57% in the third quarter, while the loan beta was 40%.

Turning to non-interest income on Slide 9; fourth quarter non-interest income totaled $88.7 million. Late in the quarter, we sold approximately $236 million of securities with an average yield of 1.82%. As I referenced earlier, the $10 million pre-tax loss as a result of these sales was deemed non-operating and offset a $9.2 million tax benefit realized in connection with tax reform.

On an operating basis, non-interest income was $98.7 million, up $6.4 million or 7% from the third quarter. These results were primarily driven by an improvement in customer interest rate swap income of $3.5 million, higher bank service charges of $2 million, and an increase in commercial lending fees of $1.7 million. The largest offset to these increases was a $3.1 million decrease in insurance revenues.

On slide 10, non-interest expense of $262.7 million increased $21.4 million or 9% linked quarter. Included in the fourth quarter were $8 million of merger related costs with $3.7 million in professional and outside services, $3.5 million in comp and benefits, $600,000 in occupancy and equipment and the remainder in another. In comparison, the third quarter incurred $500,000 of merger related costs.

Excluding merger related costs, non-interest expenses of $254.7 million increased $13.9 million or 6% linked-quarter. The largest components of this increased were $12.3 million in higher compensation and benefit costs and a $2.4 million increase in occupancy and equipment. The increase in both categories was primarily driven by the addition of Farmington.

Overall, Farmington added $14.3 million to operating expenses in the quarter. The largest offset to these increases was a $2.6 million reduction in regulatory assessments, driven entirely by the elimination of the FDIC surcharge. As a reminder, payroll taxes, 401(k) matches and other employee benefit related expenses as well as winter-related operational costs are highest in the first quarter of the year.

Accordingly, based on historical experience, these expenses are expected to be higher in the first quarter compared to the fourth quarter. As Jack referenced earlier, we continue to enhance operating leverage as evidenced by improvement in the efficiency ratio as displayed on Slide 11. Efficiency ratio for the fourth quarter was 55.1%, an improvement of 160 basis points linked-quarter and 100 basis points from a year ago. We are very pleased with the significant progress we have made and we will continue to seek ways to improve operating leverage.

We remain focused on maintaining excellent asset quality, which is the result of our conservative and well-defined approach to underwriting. As demonstrated on Slide 12, originated non-performing assets as a percentage of originated loans and REO, at 61 basis points, was up modestly from a very low level in the third quarter. Net charge offs of 9 basis points were consistent with the third quarter and continued to reflect the minimal loss content in our non-performing assets.

Sustaining excellent asset quality is an important lever in building long-term value. As such, even though the credit environment continues to be benign and has been for an extended period, our risk management process remains extremely diligent across each of our portfolios.

Moving to returns on Slide 13, return on average assets of a 111 basis points increase for the sixth consecutive quarter and improved 15 basis points from a year ago. Return on average tangible common equity of 14.9% increase 40 basis points from the third quarter and 110 basis points year-over-year.

On an operating basis, for the quarter, return on average assets was 112 basis points while return on average tangible common equity was 15.5%. As we continue to build the earnings power of the Company, we expect further improvement in these metrics.

Continuing on to our final slide on Page 14; Capital ratios remains strong, especially in light of our diversified business mix and long history of exceptional risk management.

Now, we'll be happy to answer any questions you may have. Operator, we're ready for questions.

Questions and Answers:

Operator

Ladies and gentlemen, we are ready to open the lines up for your questions. (Operator Instructions) Your first question comes from Ken Zerbe with Morgan Stanley.

Ken Zerbe -- Morgan Stanley -- Analyst

Great. Thanks, Good evening.

John P. Barnes -- Chairman and Chief Executive Officer

Good evening.

Ken Zerbe -- Morgan Stanley -- Analyst

Maybe just a good place to start, not to be naive about this, but with VAR technology finance, can you just -- would you mind giving us an example, what is the type of lending that that technology does that would be considered an equipment finance loan?

John P. Barnes -- Chairman and Chief Executive Officer

Sure. So, a lot of what VAR does is finance the purchase of software and some hardware in the reselling market. So, there are many companies out there that will sell software for -- and hardware for the major companies. They want and allow people to kind of get in the middle of those transactions with companies like ours. We -- our IT department would hire -- excuse me, would buy software through a reseller. And what VAR does is, they offer financing for that transaction.

Ken Zerbe -- Morgan Stanley -- Analyst

Go it. So, I guess, what is the underlying collateral? Because, if something were to happen like, it doesn't seem or maybe I'm wrong, but it doesn't seem like the software itself would be a good piece of collateral to support that loan?

John P. Barnes -- Chairman and Chief Executive Officer

Well, the underwriting in those transactions are often done with very high quality companies. So, I'll go back to the example of us, many of their clients are in fact very high quality customers. And this is a company that's been around for 30 years and it is cycle tested and has a great track record.

Ken Zerbe -- Morgan Stanley -- Analyst

Got you, understood. Okay, it sounds different from a normal equipment finance loan which is why I asked, but I think that does clarify it quite a bit.

John P. Barnes -- Chairman and Chief Executive Officer

Sure. Yes it is -- yes, thank you. It is unique. Thank you.

Ken Zerbe -- Morgan Stanley -- Analyst

Yeah. And then just a small question, the -- aside from the $9.2 million tax benefit that you mentioned in the quarter, was there any other tax benefits included in that line? I think the net tax rate seemed a little bit low ex that item?

John P. Barnes -- Chairman and Chief Executive Officer

It was Ken, -- it's just the Q is coming in -- I'm sorry the K is coming in on a lot of our tax advantaged items, our low income housing tax credits et cetera. So, we filed taxes in October and you know the benefit was all in the last quarter of the year.

Ken Zerbe -- Morgan Stanley -- Analyst

Got you, OK. All right, perfect, thank you very much.

John P. Barnes -- Chairman and Chief Executive Officer

You're welcome.

Operator

And your next question comes from Casey Haire with Jefferies.

Casey Haire -- Jefferies -- Analyst

Thanks. Good afternoon guys. Just want to make sure I'm understanding the loan growth guide? So, is it the right way to think about it? You strip out the $968 million of multi-family and then draw that down another $450 million, say, and then the remaining -- you know the remaining loans of, let's call it $34.2 billion you grow that 3% to 5%. Is that the right way to think about it?

John P. Barnes -- Chairman and Chief Executive Officer

Yeah, that's exactly right.

Casey Haire -- Jefferies -- Analyst

Okay, great. Okay. And then on the -- the NII, I'm sorry if I missed it, but what was the purchase accounting impact in the fourth quarter?

John P. Barnes -- Chairman and Chief Executive Officer

About $3 million, Casey.

Casey Haire -- Jefferies -- Analyst

Okay. And was that -- was any of that excess -- you know accelerated pay down?

John P. Barnes -- Chairman and Chief Executive Officer

No, no.

Casey Haire -- Jefferies -- Analyst

Okay. So this was all scheduled accretion?

John P. Barnes -- Chairman and Chief Executive Officer

Correct.

Casey Haire -- Jefferies -- Analyst

Okay, great. And then lastly, just a big picture question, post the -- love to get some updated thoughts on your home state of Connecticut. How are you feeling about it post-election? You know obviously there has been two actions here with the Belmont Savings Bank as well as VAR Tech. Are you-- is this an indication of -- that you're not feeling as good about your home state of Connecticut and we should expect more out of Connecticut actions?

John P. Barnes -- Chairman and Chief Executive Officer

No, not at all. Clearly, the Farmington deal would demonstrate that we're still interested in Connecticut but, we just had the opportunities that came up from Belmont and as we said, we certainly want to continue to build out the Greater Boston area in the Massachusetts. And VAR continues to build out our capabilities in the equipment finance area. So all consistent -- glad to continue and we have had -- Connecticut middle market has been one of our best growing portfolios, continue to enjoy those -- the strength that comes from Connecticut, that's the earn-in deposits.

Casey Haire -- Jefferies -- Analyst

Great, thank you.

John P. Barnes -- Chairman and Chief Executive Officer

Thank you.

Operator

Your next question comes from Steven Alexopoulos with J.P. Morgan.

Steven Alexopoulos -- J.P. Morgan -- Analyst

Hi everybody. I want to start on the NIM. So you guys should benefit in the first quarter from the December hike and that should put you in your range. How do you think about the NIM trending after that if the Fed does stay on hold?

John P. Barnes -- Chairman and Chief Executive Officer

There is a basis point or two per quarter upward creep with the NIM is what we're thinking, really driven by new loan business being accretive to overall loan portfolio.

Steven Alexopoulos -- J.P. Morgan -- Analyst

Okay, that's helpful. And then, when we look at the new way you're providing the loan guidance, ex the runoff, 2018 is a little noisy with the deals closing. What would -- what was 2018 organic loan growth on the same basis excluding the runoff of multi-family organic?

John P. Barnes -- Chairman and Chief Executive Officer

Yeah. It was really flat for the year, inclusive of the run-off of multifamily. So if you back that out, it's about 1.5%.

Steven Alexopoulos -- J.P. Morgan -- Analyst

Okay. So what's the roadmap that gets us from 1.5% to up to 3% to 5% in 2019?

John P. Barnes -- Chairman and Chief Executive Officer

Do you want to walk through, Jeff, some of the kind of you know expectations in the different businesses and in different spaces?

Jeffrey J. Tengel -- Senior Executive Vice President, Commercial Banking

Yeah. So this is Jeff Tengel. We think we're going to benefit from some of the investments that Jack mentioned earlier. We've done -- we've hired some key people in some businesses that really weren't active in 2018 that we expect to get a lot of benefit from in '19 specifically in the franchise finance space, the technology vertical and our not-for-profit team. We also have had really strong performance in some of our existing businesses; asset-based lending being one of them, our healthcare business being another.

And so, we expect continued strong performance in those businesses as we move through 2019. And then, Jack also alluded to just our core middle market business in Connecticut and I would include Massachusetts in that as being just a really solid strong performer. So that's really what gives us confidence when you couple that with the robust growth we've had in our equipment finance businesses. So I think that's what gets us to the 3% to 5%.

John P. Barnes -- Chairman and Chief Executive Officer

Steve, the only other thing I would add is that we had just shy of $250 million contraction in our mortgage warehouse business that we wouldn't expect to repeat to that extent this year.

Steven Alexopoulos -- J.P. Morgan -- Analyst

Okay, great. Thanks for all the color.

David Rosato -- Senior Executive Vice President and Chief Financial Officer

Thanks.

John P. Barnes -- Chairman and Chief Executive Officer

You're welcome.

Operator

Your next question comes from Jared Shaw with Wells Fargo Securities.

Jared Shaw -- Wells Fargo Securities -- Analyst

Hi. Thanks. Maybe just -- actually following up on Steve's question about the margin, I mean, what would cause us, I guess, then to get to the low end of that to that guide, the 3.15% if we're not assuming any other moves. Would it be more potentially on the deposit pressure side or just not seeing that loan mix that you're anticipating when you get to that one to two basis points a quarter of growth?

John P. Barnes -- Chairman and Chief Executive Officer

It would be two things. On the asset side if -- I mean, we've operated this year in extremely flat yield curve but the second half of this year was worse -- of last year was worse than the first half. So, as the yield curve inverts or even farther out the curve inverts or continues to flat, would be number one. And then the other large driver will be deposit pressure. If the Fed does go on hold, you would expect more rationality in pricing in the CD market among commercial banks and that should -- if that doesn't happen, that would add pressure.

Jared Shaw -- Wells Fargo Securities -- Analyst

Okay, alright, thanks for the color. You mentioned good growth in the large corporate lending side, how much of that was shared national credit or is that really self-originated?

David Rosato -- Senior Executive Vice President and Chief Financial Officer

It's shared national credit.

John P. Barnes -- Chairman and Chief Executive Officer

Yeah, our large corporate business is all, for the most part, shared national credits.

Jared Shaw -- Wells Fargo Securities -- Analyst

Okay. And then, would you expect to see that grow in 2019 or are you happy with that as a level here?

John P. Barnes -- Chairman and Chief Executive Officer

No, we would expect that to grow. That market is -- you know, we don't have as much ability to kind of drive growth because it is not self-originated. We're buying loans, unlike the middle market, but we don't see anything on the horizon right now that would suggest it won't grow in 2019.

Jared Shaw -- Wells Fargo Securities -- Analyst

Okay. And then, I guess my final question is you know as you look at Boston and the Belmont acquisition, how do you feel you're positioned up there now? Do you feel that you have the mass to really be able to grow organically the way you want to or would you look at doing additional acquisition sort of an Eastern New England at some point to deepen that?

John P. Barnes -- Chairman and Chief Executive Officer

Yeah, sure. So I'll start with, we really are happy with the way that we've been growing organically in the Greater Boston area. And we really brought in a lot of great talent over the last, I don't know, now five or six years and through the period and we've built very strong teams that are long market participants, if you will.

So, there's a couple of really, really interesting nice things about Belmont for us. On the commercial side, they have a commercial real estate team, lending team that's been in the market for decades and very well-known; very well-known to the market, very well-known to our folks. So, we think that those people are going to help move our business forward.

And on the retail side, kind of interestingly, we've been in like Lexington, Wellesley and towns to the West and had great success. And Belmont is -- in Belmont and Cambridge and a few towns where we were wanting to get to.

So the combination of the footprint on the Western side of Boston is now going to be very strong, and that's why we're excited about that. We've spent a lot of time now with the bankers there. Our culture fit is really strong and in good shape. And they have some good commercial deposit generating efforts that we'll enjoy as well. So, (inaudible) looked at the map you'd see there's a really nice synergy is going on there that we're looking forward to enjoy.

Jared Shaw -- Wells Fargo Securities -- Analyst

And in terms of additional M&As down the road, you think that you're good where you are or that you'd evaluate opportunities in the future?

John P. Barnes -- Chairman and Chief Executive Officer

I think you know we would love to be opportunistic and continue to move forward in that area. I think there is a lot of opportunity for us to continue to do that.

Jared Shaw -- Wells Fargo Securities -- Analyst

Great, thank you.

John P. Barnes -- Chairman and Chief Executive Officer

Thank you.

Operator

Your next question comes from Brock Vandervliet with UBS.

Brock Vandervliet -- UBS -- Analyst

Good evening. Just following up on that other question, what would you say you're looking for in terms of the DNA of some of the franchises you're looking at or you have acquired. Is it primarily geographic or product or a bit of both? You seem to be one of the few franchises in the market who's an active buyer right now and I'm curious what the -- what you're looking for?

John P. Barnes -- Chairman and Chief Executive Officer

Sure. So, our first preference is for commercial banks that operate in a very similar manner to us, relationship oriented commercial banks and we are open-minded to looking at others, but that would be the starting point. We like in-market deals across our footprint. We are willing to look at adjacent markets as well. But if you look at Suffolk and Farmington and Belmont we think we think those are great deals for us that that move the company forward and make a lot of sense.

Brock Vandervliet -- UBS -- Analyst

And I realize the guide is ex BSB. Is there anything you can say about it, specifically with respect to the combined pro forma margin because I believe BSBs NIM is quite a bit below yours?

John P. Barnes -- Chairman and Chief Executive Officer

Sure, Brock. I mean you can look at their balance sheet and their margin and put the two together and you'll see some downward pressure on our margin. Over time, we will be working to remix their balance sheet. They have quite a bit more residential mortgages than we do and we will be remixing that more commercial and less residential over time. So we will -- the initial margin dilution over -- going forward will be reduced.

Brock Vandervliet -- UBS -- Analyst

Got it. Okay, thank you.

Operator

Your next question comes from Collyn Gilbert with KBW.

Collyn Gilbert -- Keefe, Bruyette & Woods -- Analyst

Thanks. Good evening guys.

John P. Barnes -- Chairman and Chief Executive Officer

Good evening Collyn.

Collyn Gilbert -- Keefe, Bruyette & Woods -- Analyst

Just want to clarify, what exactly is happening with the lease accounting changes, sorry, about that. Is it how we account for the lease amortization expense?

David Rosato -- Senior Executive Vice President and Chief Financial Officer

So Collyn, it's David. So, the new lease accounting is -- it basically says that currently part of the origination cost that we get to defer upfront through FAS 91, certain categories that those expenses are no longer deferral though. So origination expense will go up, that's the $12 million that we called out.

It's what will happen is the -- so on that next lease, higher expense originate but also higher yield over time. So, it's really just a time value of money concept, nothing different. If the average lease is four years, for example, across that portfolio, we will earn that $12 million back over -- pro-rata over the four years. That's the way you should think of that.

Collyn Gilbert -- Keefe, Bruyette & Woods -- Analyst

Okay, got it. Okay, so nothing is happening to the amortization of expense -- lease expense line. It's all happening more on the balance sheet yield?

David Rosato -- Senior Executive Vice President and Chief Financial Officer

Yeah. Yeah.

Collyn Gilbert -- Keefe, Bruyette & Woods -- Analyst

Okay.

David Rosato -- Senior Executive Vice President and Chief Financial Officer

So if you think about it, of the $12 million you know on -- that's an expectation based on number of leases we might do this year. It takes the life of the lease to get the full expense back through higher loan yields.

Collyn Gilbert -- Keefe, Bruyette & Woods -- Analyst

Okay. Okay, all right. And then, just some balance sheet question, just want to understand, with some of the movements that occurred this quarter. So you had a big cash build and kind of what -- and I presume that came from, you know deposit growth is really strong this quarter. So maybe just talk about kind of the deposit movement. How much of that perhaps is seasonal, and how we should think about the liquidity build going forward? Yeah, I'll stop there.

John P. Barnes -- Chairman and Chief Executive Officer

So, just the minor point, if you look at cash and due on the balance sheet, that was just really very end of quarter influx of cash. And the way that -- that's what's excess reserves at the Fed at 12-31. That's all that really was. That's already normalized.

On the deposit side, we had a very good quarter for deposit growth. The fourth quarter is usually one of our stronger quarters, so no surprise there. And I can't say anything unusual. You know it was broad based you know across money markets, DDA, commercial retail and government banking. Nothing unusual from a -- driving the increase.

Collyn Gilbert -- Keefe, Bruyette & Woods -- Analyst

Okay. And then, the borrowing, just kind of how you're thinking about the use of borrowings going forward. I know it's been kind of -- you know obviously we're seeing upticks in the cost there, but just how you're -- how you're thinking about the borrowing strategy going forward?

John P. Barnes -- Chairman and Chief Executive Officer

Sure. Well obviously the better deposit growth is the fewer Fed funds or short term home loan advances will be doing. What I would say is we talked about this for quite a few years now about the growing capabilities of our commercial banks to drive deposit growth, but we continued to benefit from that and as that continues to gain momentum, we will have a lower reliance on borrowings to fund growth. I mean in 2018 we had a particularly strong success in our government banking activities. Some large wins of large clients, and I think that momentum is going to continue as well.

Collyn Gilbert -- Keefe, Bruyette & Woods -- Analyst

Okay, OK. And then just --

David Rosato -- Senior Executive Vice President and Chief Financial Officer

And the only other thing Collyn I'd mention is, when we go through these acquisitions we're thinking a lot about funding and the benefit of the deposits that are coming in and we're thinking a lot about new households and so as we grow and we get into strengthen ourselves in markets, we're certainly turning on the marketing and looking to use some of our new digital marketing and online account opening strength to drive some growth on the retail side. So we're optimistic and certainly working at doing that as well.

Collyn Gilbert -- Keefe, Bruyette & Woods -- Analyst

Okay, OK. And then just a housekeeping item, what was the fee impact this quarter from FBNK?

David Rosato -- Senior Executive Vice President and Chief Financial Officer

It was about $3 million.

Collyn Gilbert -- Keefe, Bruyette & Woods -- Analyst

Okay, and then one last question. Can you just remind us what the historical loss rates have been in your equipment lease businesses now that you've rolled out so many acquisitions within that segment?

John P. Barnes -- Chairman and Chief Executive Officer

Sure. And it's really quite different by portfolio. So starting with our oldest PCLC, going back all the way to the financial crisis, the largest, on an annual basis, loss rate we had was in the low-to-mid 70s -- 70 basis points. The average over the last 10 years has been about 30 basis points.

PUEFC, so they've been with us since 2010, the old fin fed, their maximum loss rates we ever saw from them on an annual basis was about 21 or 22 basis points and their average under our ownership since 2010 has been 5 basis points to 6 basis points.

And then Leaf is a little different animal. It's been with us last time but the management team has been cycle tested for a long period of time. They will run loss rates in the low-to-mid 70s up to just under 1% through a cycle.

Collyn Gilbert -- Keefe, Bruyette & Woods -- Analyst

Okay. Okay, that's helpful. And then -- sorry, just one last question the SNC book, how big is that now and how big do you intend to grow that?

John P. Barnes -- Chairman and Chief Executive Officer

It's about a little over $1 billion and I would say it's been growing at about 10% a year or so. We would expect that to continue. I would also add, it's a pretty conservative book. It's generally BB-ish in terms of the credit profile, BB-ish or better.

David Rosato -- Senior Executive Vice President and Chief Financial Officer

And I would, Collyn I would just add to that, that our approach to what we call large corporates is, in our opinion, quite a bit different than some other banks. And what I mean by that is, it's predominantly a northeast oriented book. There's a lot of relationship if we have the ability to cross-sell to that customer base, that means -- and the group is highly, highly disciplined in cross-selling derivatives, foreign exchange, has a lot of success in getting deposits.

And then when I say also northeast base, we do a lot of bank at work with those organizations. So we get in there and get access to their employee base. So we just don't want to convey or leave the impression it's just purchased assets. There is lot more in that.

John P. Barnes -- Chairman and Chief Executive Officer

We have direct relationships with the management of the company and have a regular calling program with them, and as David suggested, I have enjoyed quite a bit of cross-sell success.

Collyn Gilbert -- Keefe, Bruyette & Woods -- Analyst

Okay, that's very helpful. All right, thanks guys. I'll leave it there. Thank you.

John P. Barnes -- Chairman and Chief Executive Officer

You're welcome.

Operator

Your next question comes from Matthew Breese with Piper Jaffray.

Matthew Breese -- Piper Jaffray -- Analyst

Good evening everybody.

John P. Barnes -- Chairman and Chief Executive Officer

Hi Matt.

Matthew Breese -- Piper Jaffray -- Analyst

Just to, start I was hoping to get some thoughts or some additional color on the competitive dynamics, as it relates to gathering deposits. And I know your earlier commentary you said that if the Fed does pause, hopefully there's some -- there's some lessening there. But have you seen anything change, as the Fed had changes its tone at the very least?

John P. Barnes -- Chairman and Chief Executive Officer

Have we seen a thing change you know since the Fed quote, unquote might have gone on hold is you know 30 -- in the last 30 days; no, I can't -- couldn't say that.

David Rosato -- Senior Executive Vice President and Chief Financial Officer

The only thing I would mention is that it does seem like there are fewer people in the market with great offerings right now. It may be there is a pause or a slowdown in that. We've seen several competitors that were out there with rates that are -- that are advertising other things right now.

Matthew Breese -- Piper Jaffray -- Analyst

Interesting. Okay. And then going to M&A, should we take your strategy to reduce the size of your transactional New York City multifamily portfolio as an indication toward your appetite to acquire banks having that echo (ph) in that asset class and in that geography?

John P. Barnes -- Chairman and Chief Executive Officer

Say that the less -- having less or having some?

Matthew Breese -- Piper Jaffray -- Analyst

Should we take your strategy of reducing York City multifamily as an indication of your appetite of buying banks having that asset class and in that geography?

John P. Barnes -- Chairman and Chief Executive Officer

Yeah, well I would say banks that are heavy in that asset class, I think I got your question, would we have less appetite for them? I would say yes.

Matthew Breese -- Piper Jaffray -- Analyst

Understood. Okay. And then following that M&A question line, I was hoping to just to get a little bit more color on the thought process of striking the right balance between you know EPS growth tangible book value dilution and creating long term shareholder value and how you go about you know a number of deals more recently, a lot of them made sense small, digestible, lots of cost saves. But how you strike that balance between growing the bottom line and growing tangible book value?

John P. Barnes -- Chairman and Chief Executive Officer

I mean -- I think probably the biggest -- we're it obviously looking for credible deals and the strategic aspects of the deals, I described the Belmont positives. And we're very attentive to tangible book value earn-back period and so we look at the deal as a whole with both of those issues you know fully in sight and look to balance the two. So you know, I think we think of -- much more about moving -- strengthening the profitability, moving the company, getting the expenses out, taking advantage of that, but also being very attentive to what's the impact on tangible book value.

Matthew Breese -- Piper Jaffray -- Analyst

Understood. And then, my last one is just around the subject of CECL, is there anything you can provide for us in terms of where you stand? What the impacts might be day one? What that true up reserve might look like?

David Rosato -- Senior Executive Vice President and Chief Financial Officer

Hey Matt, it's David. I would just say that we are busy as every other bank is on CECL. What we hear back from our industry peers as well as our regulators, we're right where we should be in building out our models and starting to run some scenarios and thinking it through. But we're not prepared to start publicly disclosing what we think the impact would be upon adoption.

Matthew Breese -- Piper Jaffray -- Analyst

Okay, that's all I had. Thanks for taking my questions.

John P. Barnes -- Chairman and Chief Executive Officer

You're welcome.

Operator

Your next question comes from Dave Bishop with FIG Partners.

David Bishop -- FIG Partners -- Analyst

Hey good morning -- Good evening, gentlemen. It's been a long day. Hey, I have a quick question -- a quick question for you. I think you mentioned in the preamble that loan yields benefited from higher new production and I was just curious in terms of new loan yields fourth quarter versus third quarter maybe just run us through maybe some of the current yield versus prior quarter new production yields?

John P. Barnes -- Chairman and Chief Executive Officer

Sure. We spend a lot of time looking at the differential between new business and the existing portfolio and we really saw no change linked-quarter of what that differential was. What I would say is the last two quarters have been the highest differentials that we've experienced so far in the last three years.

David Bishop -- FIG Partners -- Analyst

Okay. Then just -- maybe just the sense of you know new C&I yields, CRE yields. Just curious what they're coming on the books at?

John P. Barnes -- Chairman and Chief Executive Officer

I'm sorry. You were specifically asking about spreads in which product line?

David Bishop -- FIG Partners -- Analyst

Commercial and Industrial CRE loans as well.

John P. Barnes -- Chairman and Chief Executive Officer

Yeah. Middle market C&I is -- spreads are around 2.5% these days. CRE is a little bit tighter. You see spreads 2.0 to 2.25

David Bishop -- FIG Partners -- Analyst

And then, just one final question, shifting gears, noticed a little bit of an uptick in the commercial real estate not-accruals there. Just maybe some color in terms of what you're seeing on the credit front as it pertains to the non-performing assets?

John P. Barnes -- Chairman and Chief Executive Officer

Sure. That was just one loan that caused that uptick, nothing more than that. We get one once is a while and we'll work through that relatively promptly.

David Bishop -- FIG Partners -- Analyst

Got it, thank you.

John P. Barnes -- Chairman and Chief Executive Officer

Thank you.

Operator

Ladies and gentlemen, since there are no further questions in the queue, I'd now like to turn the call over to Mr. Barnes for closing remarks.

John P. Barnes -- Chairman and Chief Executive Officer

Thank you. Our 2018 performance was strong, as demonstrated by another year of record earnings and higher returns on both average assets and average tangible common equity. These results benefited from a further net interest margin expansion, improvements in operating leverage, and sustained excellent asset quality. We continue to make important strategic investments across the franchise in both talent and technology while further enhancing profitability.

We also strengthen the company by adding Farmington bank, Vend Lease, VAR Technology to the People's United family and look forward to bringing Belmont Savings on board soon. Looking ahead to 2019, we are excited about realizing on the opportunities across our diverse portfolio of businesses, deepening customer relationships and delivering value to shareholders.

Thank you for your interest in People's United. Have a good night.

Operator

Thank you for your participation in today's conference. This concludes the presentation you may now disconnect. Good day.

Duration: 61 minutes

Call participants:

Andrew Hersom -- Senior Vice President of Investor Relations

John P. Barnes -- Chairman and Chief Executive Officer

David Rosato -- Senior Executive Vice President and Chief Financial Officer

Ken Zerbe -- Morgan Stanley -- Analyst

Casey Haire -- Jefferies -- Analyst

Steven Alexopoulos -- J.P. Morgan -- Analyst

Jeffrey J. Tengel -- Senior Executive Vice President, Commercial Banking

Jared Shaw -- Wells Fargo Securities -- Analyst

Brock Vandervliet -- UBS -- Analyst

Collyn Gilbert -- Keefe, Bruyette & Woods -- Analyst

Matthew Breese -- Piper Jaffray -- Analyst

David Bishop -- FIG Partners -- Analyst

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