Why this regional bank is dumping N.Y. multifamily loans

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People’s United Financial in Bridgeport, Conn., has made progress repositioning its loan portfolio.

The $51 billion-asset company has spent recent quarters running off broker-originated loans in its New York multifamily portfolio while looking to increase its dealings in specialty loans and equipment finance.

The goal has been to create a loan book with higher-yielding credits. Equipment financing, for instance, produced an average loan yield of 5.58% in the fourth quarter, or 129 basis points more than the company's overall portfolio.

Those efforts gained momentum in the second half of 2019, with People's shedding $144 million in multifamily loans over the last two quarters. In the fourth quarter alone, the company added $314 million in organic loans, including $175 million from equipment finance.

People's plans to let another $300 million to $400 million in multifamily loans run off this year, Jack Barnes, the company's chairman and CEO, said during a conference call Friday to discuss quarterly results.

The company also plans to run off a similar range of loans this year tied to United Financial in Bridgeport, which it bought in November for $759 million. When it announced the deal, People's said it would eventually let $1.8 billion of United’s loans run off, while selling $556 million in investment securities.

The decision to scale back in multifamily coincided with new rent-control restrictions in New York that have caused values on rent-regulated buildings in the city to plummet. Lower interest rates and more competition from alternative lenders have increased refinance activity and pressured pricing.

Barnes credited several factors, including traction from a pair of acquisitions, for his company's gains in other lending categories.

VAR Technology Finance, which People's bought in January, switched to an originate-and-hold model after it was incorporated into the company's LEAF Capital unit. People's also gained a team of commercial real estate lenders from Belmont Savings Bank, which it bought for $327 million.

"Belmont's commercial real estate team ... continues to generate strong production," Barnes said.

Net income rose by 3% in the fourth quarter from a year earlier, to $137.5 million, though the results were skewed by the company's three acquisitions.

Net interest income increased by 15% to $382.7 million. The net interest margin held its own, contracting by only 3 basis points, to 3.14%.

Barnes said the company expects net interest income to increase by 9% to 11% this year, with a goal of maintaining a margin between 3% and 3.10%.

"Commercial real estate organic growth was driven primarily by strong performance in northern New England, particularly in Massachusetts," Barnes said. C&I lending "continues to benefit from our specialized industry verticals, with especially good results in fund banking, health care and franchise lending."

Barnes also touted several technological upgrades, including a new digital platform to originate small-business loans of $250,000 or less.

Residential mortgage lending should remain flat in 2020, Barnes said. While People's is committed to the business, it is trying to gradually remix its book in a way that will gradually reduce mortgages as a percentage of total loans.

People's recently opened branches in Boston's Seaport area and Penn Station in New York. The south shore of Boston is an area where the company could add locations.

While People's remains committed to pursuing more bank acquisitions, Barnes noted during the call that there are "not many larger deals across our footprint."

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