People's United Financial, Inc.
Q1 2017 Earnings Call Transcript

Published: 20 Apr 2017

[Operator:]

Good day, ladies and gentlemen, and welcome to the People’s United Financial, Incorporated First Quarter 2017 Earnings Conference Call. My name is Andrew Kristiansen, 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. [Operator Instructions] As a reminder, this conference call 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 Incorporated. Please go ahead, sir.

[Andrew Hersom:]

Thank you. Good morning and thank you for joining us today. Here with me to review our first quarter 2017 results are Jack Barnes, President and Chief Executive Officer; David Rosato, Chief Financial Officer; Kirk Walters, Corporate Development and Strategic Planning; and Jeff Hoyt, Chief Accounting Officer. Please remember to refer to our forward-looking statements on the 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.

[Jack Barnes:]

Thank you, Andrew. Good afternoon, everyone. We appreciate everyone joining us today. Let’s get started by turning to the overview on Slide 2. We are pleased to report first quarter net income of $70.8 million, which increased 13% from a year ago. The quarter benefited from a 4 basis point improvement in the net interest margin from the fourth quarter, which was primarily attributable to loan yields our new business exceeding the total portfolio yield during the quarter. Revenues grew on both a linked-quarter and year-over-year basis as a result of both higher net interest income and non-interest income. Revenue growth drove an efficiency ratio of 59.4%, which is comparable to the fourth quarter and an improvement from a year ago, despite modestly higher expenses. We remain focused on enhancing operating leverage through revenue growth and proactive expense management. Therefore, over time, we continue to expect further improvements in the efficiency ratio. Loan balances declined 1% on an annualized basis, primarily as a result of paydowns in the mortgage warehouse lending due to the rate driven nature of the business. Excluding mortgage warehouse lending, the loan portfolio experienced an annualized growth of 3%, driven by favorable results in residential mortgage, as well as middle market commercial and industrial lending, highlighting the importance of our diversified business mix. In addition, we remain successful gathering deposits across the franchise as evidenced by 9% annualized growth since year-end. As a reminder, the first and fourth quarters are typically our strongest quarters for deposit growth. Looking forward, at quarter-end loan pipelines were solid causing us to remain optimistic about our Commercial Lending segments, while expecting a somewhat lower level of growth in retail. Our view is that, our commercial customers are managing their businesses very thoughtfully in light of the current environment. While uncertainly exist due to unknowns around potential fiscal regulatory and tax law policy changes, we find clients remain hopeful and are looking to take advantage of growth opportunities as they arise. With the acquisition of Suffolk Bancorp completed, we are excited to further strengthen and expand People’s United in the New York metro area. Experienced teams on both - from both companies have worked closely together throughout the integration process to ensure a seamless transition for clients. As planned, the core system conversion will take place in early May. Howard Bluver, former President and CEO of Suffolk is now our New York market President. Howard’s deep roots in the region, understanding of the local economy, and proven track record growth will greatly benefit the franchise. In addition, Suffolk Board of Directors has agreed to function as an Advisory Board to support integration, provide market insights, and help meet our growth expectations. All of the expectations that we had at the announcement of the transaction have only been strengthened. They’re optimistic about the revenue synergies of the combined company, particularly given the success achieved, while the two teams working together on client relationships in the months leading up to closing. We also remain committed to the cost saves we originally set forth. Our team has identified and scheduled to close 13 branches, which include both Suffolk and People’s locations. Overall, the positive economics of the transaction remain unchanged, and as such, we are very confident this combination of similar customer-focused cultures will create significant value for shareholders. Suffolk is a terrific compliment to our already strong position in Metro New York area. Since the end of 2012, our New York franchise has experienced organic compound annual loan growth of 18%, making it our fastest growing market within the company’s footprint over the period. At quarter end we had $5.7 billion of loans in New York, which represent 19% of our total loan book and trails only Connecticut’s $7.8 billion portfolio. The addition of Suffolk will bring New York’s loan portfolio almost on par with Connecticut. And we expect in time it will become the largest market. In New York, the experienced commercial real-estate team we brought in last year continues to generate increasing momentum. As such the headwind related to the decision to reduce the transactional portion of our multi-family portfolio has abated as new business originated from the full service relationships is offsetting approximately $20 million in monthly run up. It’s also important to note the strength of our Massachusetts franchise. Since the end of 2012 we have experienced again a compound annual loan growth of 8% in the Commonwealth, making in our second fastest growing market. At quarter end we had $5.5 billion of loans in Massachusetts. I spent time during the quarter visiting customers and employees in Massachusetts and came away impressed with the continued progress we were making and the momentum that we’re generating, particularly in the Greater Boston area. As we noted on our call in January, we opened a branch in Copley Square at the end of the last year, it’s an excellent location to serve clients and has been very well received. In addition, during the quarter we began the on-boarding process for the Commonwealth and Massachusetts as we were selected to manage its core banking services, which is a significant win for People’s United and should drive further opportunities for the Bank. Finally, we are extremely pleased that Greenwich Associates recently recognized People’s United for its commitment to service with 7, 2016 Excellence Awards in middle market banking, both nationally and in the Northeast. It’s an honor to be recognized once again by Greenwich Associates and more importantly by our clients. This way, I want to take a moment to thank our employees for their unwavering commitment to providing excellent exceptional service that delivers thoughtful, straightforward solutions that address the financial needs of our clients. This commitment in combination with the breadth of products and services we offer truly differentiate People’s United in the market. With that, I’ll pass it to David to discuss the first quarter’s results in more detail.

[David Rosato:]

Thank you, Jack. Turning to Slide 3, net interest income increased $1.8 million or 1% on a linked-quarter basis. The loan portfolio contributed $7.8 million to net interest income due to higher yields on new business, re-pricing a floating rate loans, as well as slightly higher average balances. The largest offset to this increase was a $3.4 million reduction in net interest income resulting from two fewer calendar days in the first quarter. In addition, higher deposit cost and volumes lowered net interest income by $2.6 million. Moving to Slide 4. Net interest margin of 282 basis points increased 4 basis points from the fourth quarter. New loan volume favorably impacted the margin by 9 basis points as new business yields were higher than the total portfolio yield. The margin also benefited by 3 basis points from a higher yielding securities portfolio EBIT in part by a reduced level of premium amortization of mortgage-backed securities. Two fewer calendar days in the first quarter unfavorably impacted the margin by 4 basis points, while higher deposit and borrowing costs collectively reduced the margin by another 4 basis points. Deposit costs were 36 basis points in the quarter, up 2 basis points from the fourth quarter. On Slide 5 you can see period end loan balances dropped slightly from December 31st. The decrease of $58 million or 1% annualized was due to a $307 million reduction in the commercial portfolio, largely offset by strong retail growth of $249 million. On an average basis, the total loan portfolio was up slightly in the fourth quarter. Retail was driven by residential mortgage growth of $271 million, partially offset by lower balances in the consumer portfolio. As we have grown our residential mortgage portfolio in the recent years, originations continued to be of outstanding quality. The portfolio’s LTV and FICO metrics have remained consistent and the overwhelming majority of business retained continues to be hybrid, adjustable rate mortgages. For originated mortgages added to the portfolio during the quarter, the average LTV is 66% and the average FICO score is 750. The decline in the commercial portfolio was primarily attributable to a lower C&I balance of $207 million. Within C&I, mortgage warehouse balances ended the quarter at $822 million, a $263 million decrease from year-end. As Jack mentioned earlier, this decline was attributable to paydowns due to the rate driven nature of this business. Excluding mortgage warehouse, the C&I portfolio grew 3% on an annualized basis. Slide 6 shows the change in deposits since December 31. Deposits increased $645 million or 9% on an annualized basis during the quarter. While deposit growth occurred across all categories, the increase was primarily driven by higher interest bearing checking and money market balances. One a business segment basis, deposits in both retail and commercial increased during the quarter by $504 million and $141 million respectively. Once again, please note that first and fourth quarters are typically our strongest quarters for deposit growth. On Slide 7 we look at non-interest income which increased $500,000 or 1% compared to the fourth quarter. During the quarter we sold approximately $500 million of lowering yielding short maturity securities, which resulted in net security losses of $15.7 million. These investment sales increased our asset sensitivity, which should be beneficial as the Fed further tightened monitory policy. We have partially repurchased securities to offset the loss carry income and expect all securities to be repurchased before quarter end. As such, the overall transaction is income neutral and enables us to hold smaller securities portfolio. As you will recall, in the fourth quarter we reported net security losses of $6 million. Included in non-interest income was a $16.1 million gain from the exchange of an ownership interest in a legacy privately held investment. As a reminder, in the fourth quarter we reported a $6.3 million gain from the sale of a similar type investment. Insurance revenues increased non-interest income by $2.3 million, reflecting the seasonal nature of commercial insurance renewals, which are higher in the first and third quarters of the year. In addition, the quarter benefitted from higher investment management fee of $1.8 million, primarily attributable to a full quarter result of Gerstein Fisher. As you will recall, the acquisition of Gerstein Fisher closed in November of last year. The primary offset to these improvements was a $1.7 million lower net gain on the sale of residential mortgage loans. On Slide 8 we illustrate the components of changes on non-interest expenses on a linked-quarter basis. First quarter expenses of $226.1 million increased $8.9 million or 4% from Q4. Included in the quarter’s results were merger related and acquisition integration cost of $1.2 million compared to $1.6 million in the fourth quarter. For the first quarter, $700,000 of these costs are reported in professional and outside services, $400,000 in occupancy and equipment and the remainder in other. Compensation and benefits excluding fourth quarter merger related and acquisition intervention costs of $700,000 increased $12.3 million. This result was primarily due to seasonally-higher payroll and benefit-related cost, as well as an increase in healthcare and incentive expenses. The line was also impacted by a higher salary expense, reflecting a full quarter of Gerstein Fisher, annual merit increases and new hires to support continued growth of the Bank. The primary offsets for this increase were lower regulatory assessments of $800,000, as well as lower professional and outside service expenses, excluding merger related and acquisition integration costs in both quarters of $600,000 due to the timing of certain projects. Before moving to the next slide, I wanted to mention the income tax expense for the quarter reflect a $1 million benefit associated with the adoption of new stock-based compensation accounting rules, which require the income tax effect of [Indiscernible] be recognized in income tax expense. For the period, this benefit had the effect of lowering the effective tax rate by 1%. Turning to Slide 9, our efficiency ratio in the fourth quarter was 59.4%, consistent with the fourth quarter and improved from the prior year quarter. As Jack referenced earlier, we continue to focus on enhancing operating leverage through revenue growth and thoughtful expense management. Maintaining excellent asset quality is an important lever in building sustainable long-term value. As such, we are pleased with our continued exceptional results as demonstrated on Slide 10. Originated non-performing assets as a percentage of originated loans and REO at 63 basis points remains well below our peer group and top 50 banks. First quarter net charge offs of 3 basis points remained at a very low level and continued to reflect the minimal loss content at our non-performing assets. Moving to Slide 11, on a linked-quarter comparison, return on average assets and return on average tangible common equity declined 5 basis points and 10 basis points respectively. Primarily due to the seasonally higher first quarter payroll and benefit related cost previously discussed. As displayed on the slide, compared to the first quarter of 2016 each of these return metrics showed improvement. Continuing on to Slide 12, capital levels at both the holding company and the bank continued to be strong, especially in light of our diversified business mix and long history of exceptional risk management. Finally on Slide 13 we display our interest rate risk profile for both parallel rate changes and yield curve twist. As you can see, we are a bit more asset sensitive compared to last quarter, primarily due to a smaller security portfolio resulting from the previously discussed investment sales. We remain well positioned for additional increases in interest rates. At quarter end 44% of our loan portfolio was either one-month LIBOR or prime-based consistent with year-end and up from 42% a year ago. Before passing the call back to Jack, I wanted to briefly comment on our full year 2017 goals. As a reminder, the goals we outlined in January did not incorporate Suffolk. With the transaction closing less than three weeks ago, we are currently going through the purchase accounting process. As such, we are not going to provide an update to these goals to include Suffolk until the second quarter earnings call in order to fully complete the process. However, we wanted to share some March 31st data points for Suffolk. The loan portfolio closed the quarter at $1.656 billion, while deposits were $1.852 billion. The inherent earning strength of Suffolk remains in place and joining People’s United will only serve to enhance its potential going forward.

[Jack Barnes:]

Thank you David. Our prudent capital management has enabled us to deliver shareholder value through the consistent return of capital, while still growing organically and investing strategically in the franchise. We remain committed to this strategy as evidenced by the Board declaring a common dividend for the 95th consecutive quarter, in addition we are pleased to announce the Board also voted to raise the common dividend to an annual rate of $0.69 per share, this marks the 24th consecutive year of common dividend has been increased. This concludes our presentation. Now I’ll be happy to answer any questions that you may have. Operator, we’re ready for questions.

[Operator:]

Thank you. Ladies and gentlemen, we are ready to open the lines up for your question. [Operator Instructions]. We’ll be taking our first question for the day from the line of Jared Shaw from Wells Fargo Securities. Your line is open.

[Jared Shaw:]

Hi, good morning.

[Jack Barnes:]

Good morning Jared.

[David Rosato:]

Good morning.

[Jared Shaw:]

Just - if you could share a little bit on the loan portfolio and some of the opportunities as we look post Suffolk. Could you give us an update on where you were in terms of commercial real-estate concentration for the quarter? And then as we look to see growth going through the rest of the year, do you think that there is an opportunity to expand as some of the competitors have pulled back from the CRE market? And if you could also then talk to what the investors are looking for in terms of cap rates and if that’s dramatically changed?

[Jack Barnes:]

Sure. So we are below the 300% of capital, somewhere around 285% in terms of commercial real-estate concentration levels, so we’re not concerned about that. And as we’ve talked about in the past, we have enhanced risk management around the monitoring of that portfolio and have not been concerned when we move above 300%, so just so everybody has kind of that perspective on our sense of that. We see good potential growth in the commercial real-estate portfolio. Our strongest market pipeline right now are in New York, particularly revolving around the new team we have there and Connecticut where we have a lot of long-standing strong relationships and again, a good solid pipeline. The rest of the markets I’d say are kind of in line with the historical perspective. And I would say just generally to your question about, I think cap rates and where the market is, it feels like there is no significant change in People’s appetite for investment with good properties and we focus on good operators with a lot of experience and People will continue to invest.

[Jared Shaw:]

Thanks. And if I could just ask one additional question. As you look at your asset sensitivity and post the Suffolk deal, should we expect to see maybe opportunities for more restructuring on the securities book on either the Suffolk book or your book and then what would you expect, would you expect a big change in your pro forma asset sensitivity post the conversion or integration?

[David Rosato:]

Yes. Hi Jared, it’s David. No, the most - the components of the Suffolk portfolio that we liked, we’ve taken onboard, there are few asset classes that were similar to ours and the others we have since exited. But the - again, they are only 5% of our asset size, so it’s not going to have a noticeable impact on our overall interest rate risk profile. So you should expect us to maintain sensitivity very similar to what we have. I would note that you saw an uptick in sensitivity this quarter, that was primarily due to the sales of securities in the first quarter that approximately $500 million of short senior notes delivered.

[Jared Shaw:]

Okay, thanks. And then just finally, at 40 - you are going to be closer to the $50 billion threshold now Suffolk, what’s the appetite for additional M&A versus organic growth in terms of passing the $50 billion threshold?

[David Rosato:]

We continue to prepare to cross $50 billion, as we’ve described in the past we’re making good progress on that front. And as we’ve said again in the past, if the right opportunity were to come along in M&A, then we would be certainly looking to respond to that and dealing with the process with our regulators, having the dialogue about that potential and feel good about having a good solid dialog with the regulators about that and so we wouldn’t be shying away from a conversation just because of the $50 billion mark.

[Jared Shaw:]

Great. Thank you for taking my questions.

[David Rosato:]

Sure.

[Jack Barnes:]

Welcome.

[Operator:]

Thank you. Our next question comes from the line of Casey Haire from Jefferies. Your line is open.

[Casey Haire:]

Thanks, good morning guys. Dave, I wanted to follow-up on the securities restructure, can you just give us a sense as to when this took place in the quarter? And then also, maybe disaggregate how much of the uptick in the securities portfolio yield was from premium am and from the restructuring? Just trying to get a sense of where that securities yield could potentially go in the next quarter?

[David Rosato:]

Sure. First of all, the sales were late in the first quarter. Again, what we emphasized was short maturity low yielding, so the average yield on that portfolio was about 133 and after funding cost it only had about a 35 basis point positive spread. Our strategy will be exactly the same as what we talked about three months ago when we did this in the first or in the fourth quarter is to replace that income with higher-yielding securities, which allows us to shrink the securities portfolio, it’s additive to capital, it’s additive to the margin, but it’s income neutral. The overall effect on the yield of the securities portfolio was about 3 basis points or so.

[Casey Haire:]

Okay, great. Alright and then just switching to the loan growth front, you guys are tracking pretty nicely towards your - towards the bottom end of your loan growth guide for the year even with the mortgage warehouse downdraft, I’m just - you know is that in line with your thinking and do you see stability in the mortgage warehouse lines going forward or is there further pressure there?

[Jack Barnes:]

Casey, this is Jack. Yes, we’re basically feeling kind of exactly as you described. The utilization on the mortgage warehouse lines that dropped to somewhere in the mid-40% range and that’s a low point for sure. And we would think it’s going to be somewhere in the range, maintain the balance that it’s - where it is now. We didn’t plan on the balances that were very different from where we are now. So, in terms of expectations on our garden, I think it’s kind of in line with that. I’ve described a little bit about the three pipelines, talking with Jared, and I would reinforce that on the C&I side, I think particularly the Boston area and Connecticut have very solid opportunities in front of us, so we’re feeling fine about where we are.

[Casey Haire:]

Okay, great. Just one last one from me, Dave, on the fee guide, it looks like it’s coming in a little light this quarter, tracking below that 5% to 7% guide, are you guys still feeling good about that? I mean, it doesn’t seem like you are going to need a very steep ramp in the remaining three quarters here to hit the low-end of that guide.

[David Rosato:]

Casey, thank you, it’s David. We’re still comfortable with the guidance that we provided. The first quarter from, both a loan origination and a fee income perspective was slow season, but seasonally slow, not unlike last year. So, we would expect to see a ramp in most of the line items as the year progresses and we’ll provide an update with the Suffolk guidance next quarter; but where we stand today, we’re still comfortable with the guidance.

[Jack Barnes:]

The day count impact...

[David Rosato:]

Yes, you know in first quarter two fewer calendar days, three fewer business days did have an impact across a lot of those businesses and the lower originations actually affected, for example, our FX business, our customer interest rate swap business et cetera and we feel fine about those as the year unfolds.

[Casey Haire:]

Okay, great. I mean it does look like that that other income line net of the securities or the one-time gain was a little low. Maybe there was some, I don’t know if there was any noise in there, but that did seem like you underwent there.

[David Rosato:]

It’s struck down a little over $1.5 million quarter-over-quarter once you make the adjustment for the security - the one times.

[Casey Haire:]

Okay, great, thanks.

[David Rosato:]

You’re welcome.

[Jack Barnes:]

Thank you.

[Operator:]

Thank you. We’ll be taking our next question from the line of Steven Alexopolous from JPMorgan. Your line is open.

[Steven Alexopolous:]

Hey, good morning everyone.

[Jack Barnes:]

Good morning.

[David Rosato:]

Good morning Steve.

[Steven Alexopolous:]

I want to start on the efficiency ratio. You guys have chopped quite a bit of wood on the expense front over the past few years. I’m curious how much is left to do on the expense side and are we getting closer to the point where you really need to start seeing stronger revenue growth to start moving the efficiency ratio needle?

[Jack Barnes:]

Yes, Steve, I mean as we’ve said on the expense front, it’s working at it every day and working at our expense management process, but there are certainly no large unique efforts there that we have planned. You know you remember in - it seems like 2013, 2014, 2015 we closed a lot of branches, particularly in places where we had either dense, density locations Connecticut, but also places where we acquired banks in the same market like in Boston. So we’ve made a lot of promise on that front. We continue to work at that kind of thing, but we - it won’t be any big 10 or 15 at a time. It will be continuing to work at it over time. So, on the expense front, we just continue to work to realize saves wherever we can. More about automating processes, you know continuing to put in technology to improve efficiency where we can. It is that I think mostly a revenue opportunity for us and there are just many, many markets New York and Massachusetts and many business lines, you know ABL, equipment finance, large corporate where we’ve grown businesses, but they have plenty of potential to continue to grow and as we do that, we expect to see revenue expansion.

[Steven Alexopolous:]

Okay, that’s helpful color. And maybe for David on the deposit side, overall deposit cost were up only modestly in the quarter. Can you talk about what you’re seeing from a local markets view as you go out there and raise deposits and how are you thinking about deposit data’s for the rest of the year?

[David Rosato:]

Sure. The - we haven’t really seen any noticeable customer demand or push for higher deposit costs. The 2 basis point linked-quarter increase was really driven by our broker deposits, which are essentially Fed funds index type deposits. From a - if I look across the retail businesses and the commercial businesses, the only segment where we’ve really seen any type of pressure is very small subset of the largest Government banking client. So that would be both the state money that we have in a few states. The savviest of that client vertical and so that’s - we’ve seen a little bit there, but your bread and butter municipality across our franchise, we have not. On the retail side, we’re seeing a few more banks run CD specials across the market. Not incredibly impressive, but modestly more aggressive than we’ve seen over in the past few quarters. But again, our increase in deposits really wasn’t across our core customer base, it was across the broker deposits that we have on the balance sheet.

[Steven Alexopolous:]

Okay, does that mean you expect betas to remain very low from the rest of the year?

[David Rosato:]

Yes, so if you think about betas, we’ve had now 325 point rate increases, so 75 basis points and our deposit costs are up 2 basis points. If you go to our very low end 33, so you can say we’re up 3 basis points for a 75 basis point move. We’re - you know addition of 0.04. We won’t think that when the piece of Fed moves becomes closer together and more consistent, if we get to that, you’re going to see increasing pressure on betas and we would expect them to slowly gravitate towards more normal betas, which I would say for the industry in aggregate it’s probably around a 0.05 or so. But I don’t think we’re close to that point by any means right now.

[Steven Alexopolous:]

Okay. That’s really great color. If I could squeeze one more and sorry if I missed it. On the mortgage warehouse what was the split of purchase and refi in the quarter?

[David Rosato:]

In the mortgage warehouse business or in our business.

[Steven Alexopolous:]

Yes, no, in the mortgage warehouse business.

[David Rosato:]

I don’t - I would say, it was probably close to 50-50 off the top of my head. I don’t have that in front of me Steve.

[Jack Barnes:]

I think it was a little bit more with the refi score still little lower, I think 50%.

[David Rosato:]

Yes, maybe, yeah. What we’re seeing generally in our Bank and in the business, you know there is a much, much more talk about purchase activity and we’re seeing it in the numbers and of course the refi applications have dropped pretty considerably.

[Steven Alexopolous:]

Okay. Have you historically been about 50-50 in that business?

[David Rosato:]

I would say no, you know as that business goes, in the last few years it was much higher refi and slower purchase. So, the expectation in the business is that as the economy improves and the demand for housing stock improves or increases, I should say then the purchases will pick up and it is picking up both in our footprint, in our retail bank and in that business.

[Jack Barnes:]

Steve, just to add a little more color to that. So, not our mortgage warehouse business, but our retail business in the first quarter 65% of the volume was refinanced, 35% purchased. I would add to that though that just in this quarter we’ve seen the purchase component creep up, which is a normal seasonality.

[Steven Alexopolous:]

Yes, okay, thanks for the color guys.

[Jack Barnes:]

You’re welcome.

[Operator:]

Our next question comes from the line of Ken Zerbe from Morgan Stanley. Your line is open.

[Ken Zerbe:]

Great, thank you. Just going back to the commercial real estate, because it seems like you are somewhat bullish about the growth outlook there. Obviously just - there is still concerns about credit quality in the industry, right in underwriting terms of the industry and we’ve seen some indications that the terms have gotten better. From your experience like is that - how meaningful are those industry changes and is that having any noticeable impact on your ability to grow commercial real estate? Thanks.

[Jack Barnes:]

I would say that challenge generally is a challenge for us. We are pretty firm in our underwriting approach and you can see that in our results over time, including right now the level of non-performers and delinquency and charge off in our CRE portfolio is minimal. So, we kind of always deal with a pressure from a competitor that will do something that we’re are not willing to. I would say on the larger properties, most of our competition is the - or moderate to larger banks and the discipline around underwriting is there, you know pretty consistent with ours. So, I don’t think there is a big problem from my perspective generally in the industry. Locally, smaller banks often are more aggressive with a borrower and a property that they feel they know very well and they will work hard to either keep or win that type of business. So, that’s our biggest challenge on the competitive front.

[Ken Zerbe:]

Got you, okay and then, the other question. Just in terms of updates on the timing of potential merger costs over the next three quarters? Thanks.

[David Rosato:]

You don’t see most of those costs next quarter, but some will - in the second quarter, but some will leak over into the third quarter as well.

[Ken Zerbe:]

Got you. Provided fourth quarter it’s totally gone or done?

[David Rosato:]

Yes, it should be, except for maybe a few items there, but…

[Ken Zerbe:]

Great. Okay, thank you.

[David Rosato:]

Welcome.

[Operator:]

Thank you. Our next question comes from the line of Matthew Breese from Piper Jaffray. Your line is open.

[Matthew Breese:]

Good morning everybody. Just going back to the securities portfolio for a second, I just wanted to get a sense for how we should be thinking about modeling it from a size perspective and are the restructurings done and maybe said in another way, what percentage of assets would you like to hold that securities portfolio at?

[David Rosato:]

It is a question of whether we would expect any more restructurings, the answer - that short answer to that would be no. We are not foreseeing that. And I should add if I wasn’t clear to Jared’s first question, any restructuring having to do with the Suffolk portfolio has also been completed. What we are really trying to do is, recognize that we are in a slowly rising interest rate environment. We believe that even though some of the timing of the next Fed news in the last weeks has started to leak out of the market. The first quarter was - generally had expectation due to three more Fed tightening and we’ve seen a flatter yield curve. So we traditionally have always wanted a smaller securities portfolio than our peer group in the last couple years, when rates have been down that has crept up closer to the peer group, but still below. So what we are trying to do going forward in the environment that we foresee is just to run a smaller portfolio or a small of a portfolio as we can, while still generating the proper amount of income, as well as to manage our rate sensitivity. So, I wouldn’t look for all of these loans to go back or all of these securities to be going back on the balance sheet anytime soon. And the other important point in this is, similar to what we did last quarter, the bonds that will be repurchased will cover the income that was given up from the sales. So it’s income neutral transactions.

[Matthew Breese:]

Understood, okay. And then going to expenses, the $225 million core number, is that a good number to work off of for the rest of the year? And as a follow-up to that, how do you think that’ll trend in 2Q and 3Q, will there be any pullback from changes in seasonality?

[David Rosato:]

Well, as you know, expansions are historically elevated in the first quarter, so if you make that adjustment and then - use that as the run rate for the year, I would say, you would be underestimating the expansions that we’ll - we saw. Some of our expansions were a little subdued in the first quarter due to the timing of projects. We do expect a little bit expense build over the course of the year, plus don’t forget, we’ll be adding Suffolk into the mix and then we will be updating guidance from the beginning of July.

[Matthew Breese:]

Okay. Is it sufficed to say that, you know excluding Suffolk, expect it should head towards the upper end of your guidance for the year, the $915 million number?

[David Rosato:]

I wouldn’t say the upper end of the guidance, I would say we are still comfortable with the guidance that we provided three months ago.

[Matthew Breese:]

Okay. And then on the margin, considering the twist scenario and how the 10-year has moved over the past several weeks, how will that impact things over the course of the year, now with the 10-year back to 220?

[David Rosato:]

If the yield curve stays flat or goes flatter, it’s not good for the margin. The - we modeled one - in our original guidance, 125 basis point increase in the middle of the year and it’s come earlier obviously and it seems like we might get another one this year, so if you put that together that’s positive to the margin. Our guidance for the margin was 280 to 290 first quarter which is usually a lower quarter, because at day count we were at 282. So, if rates continue to rise, if the yield curve does not flat further, we’re comfortable with that guidance and think we may wind up gravitating towards the upper end of that all else equal. But really the key as you are pointing out in your question is the optimum shape of the yield curve and we’ve seen a flattening of the yield curve in the first quarter, quite considerably the 10-year is down about 15 basis points, 12/31 to 3/31 and the two-year is up probably five - maybe even 5 to 7 basis points and Fed funds are up 25.

[Matthew Breese:]

Great. Understood. Okay, that’s all I had. Thank you very much.

[Jack Barnes:]

You’re welcome Matt.

[Operator:]

We’ll be taking our next question from the line of Collyn Gilbert from KBW. Your line is open.

[Collyn Gilbert:]

Thanks, good morning gentlemen.

[Jack Barnes:]

Good morning.

[David Rosato:]

Good morning.

[Collyn Gilbert:]

So, just to talk quickly on the credit side, the uptick in commercial NPLs and the equipment finance and C&I portfolio, what was driving that and kind of what’s your outlook there?

[Jack Barnes:]

Really very isolated on a few credits, just unique situations and not concerned about that at all in terms of the overall outlook. So we just had a transportation related company that had operating issues.

[Collyn Gilbert:]

Okay, okay. And just tying to that, you guys had provided guidance at the end of the year for provision running in the $40 million to $50 million range for 2017. Obviously coming in much slower than that on an annualized basis, are you still holding to that same guidance then which would suggest a bump up in the provision as we go out through the year?

[Jack Barnes:]

Yes, we are right now obviously had very good performance in the quarter and we have in the last number of quarters, so we are thinking really two things, we look at net charge-offs in the quarter and then we look at loan growth and this quarter’s level of provisioning was tied to both of those. As we moved through the year, we expect continued strong credit performance and the piece of our loan growth and provisioning around the growth of the portfolio will kind of determine where we end up in that range, that’s makes sense, Collyn?

[Collyn Gilbert:]

Okay, yep, yep, that’s helpful, okay. And then just on the investments that you guys have been able to monetize and I apologize if you may have done over this last quarter, but can you just remind us of what the overall pool is of these investments and maybe what your outlook is for future themes from here?

[David Rosato:]

Sure Collyn, it’s David. There is really nothing left of substance that’s similar to what happened in the last two quarters. Last - at year around that was a legacy People’s United investment, this quarter we are actually one investment that came from two different acquired banks over time. And really nothing else that we see on the horizon.

[Collyn Gilbert:]

Okay, okay that’s helpful. And then, just bigger picture on the M&A front, Jack, I mean you indicated that obviously you approaching $50 billion is not causing you to shy away from M&A. Would your preference be, I mean given where you guys, how much you’ve built the infrastructure and the overall organization over the years, would your preference be at this point to do a larger deal if it should present itself rather than kind of some of the smaller ones or how do you think about the size of M&A now as we look out over the next few years?

[Jack Barnes:]

I’ll speak to them and I think I guess just for the record, my strong preference would be for Congress to move the $50 billion mark, $250 billion or something. I feel the weight with that, but I’m still hopeful that something will happen on that front. So, on the M&A front, I would continue to have everybody think about us being opportunistic and so whether it’s something like Suffolk that isn’t large but is meaningful in terms of improving our presence in the market and strengthening our position, bringing on some really talented folks and we really think that that deal is bigger than it looks when you think of all of the potential it has to help us move forward. And so whether it’s something that’s $2 billion or $2.5 billion or a $10 billion, it really is about what will it do for us, how good is the opportunity? How accretive is it? What does it do for the shareholder? It’s not really necessarily about size.

[Collyn Gilbert:]

Okay, that’s helpful. And then just one final question tied to that. Are you guys thinking about Long Island any differently now or your approach as you integrate Suffolk, given the fact that Sterling is going to be moving out on to the Island with Historia, which is a different competitor certainly than what NYD would have been. I mean, just curious to get your thoughts on if you’re thinking about that and is it of any differently or how - what your outlook is there for Long Island?

[Jack Barnes:]

Yes, so I would say, the way we are thinking about, we’re bring in 22 relationship managers and all of their customers into the bank, those folks are middle-market lenders, C&I lenders and business bankers and some commercial real-estate. So we are strengthening our relationship manager, a presence on the Island. We’ve got great footprint, convenience to the customers. Our brand is stronger, I think, every day. We’ve got a lot of marketing going on right now actually as we move through the integration. And so we see opportunity even with the story of Sterling and other activity, if you really think about the Island, Chase is very big out there, Capital One, TD, [Indiscernible], there is a lot of competition, very good competition and we’ve been facing that since we started establishing our presence there in 2010. And so we steadily build our presence there and as we kind of shared in the comments we made, we’ve grown nicely in New York and continue to make good progress not only there, but in Westchester County and then Manhattan. So we feel really good about what we’re doing. We like to move faster, we always want to move faster and we’re trying to do that, looking forward to the Suffolk folks joining us and trying to do exactly that.

[Collyn Gilbert:]

Okay. Okay, that’s great. I’ll leave it there. Thanks gentlemen.

[Jack Barnes:]

Thank you

[Operator:]

Thank you very much. Ladies and gentlemen, there are no further questions in the queue. I’d now like to turn the call back over to Mr. Barnes for closing remark.

[Jack Barnes:]

Thank you. In closing, our first quarter performance provided a solid start to the year, as referenced by and reflected in enhanced year-over-year profitability, improvement in the net interest margin, loan yields on new business outpacing total portfolio yield, continued revenue growth, further success gathering deposits, and sustained and exceptional asset quality. In addition, with the acquisition of Suffolk completed, we’re very optimistic about the opportunities for further strengthening and growth of our franchise in the New York Metro market. Thank you all very much for your interest in People’s United and have a good day.

[Operator:]

Ladies and gentlemen, thank you again for your participation in today’s conference call. This now concludes the program and you may now disconnect your phones at this time. Everyone have a great day.