People's United Financial, Inc.
Q2 2017 Earnings Call Transcript

Published: 21 Jul 2017

[Operator:]

Good day, ladies and gentlemen, and welcome to the People’s United Financial Inc., Second Quarter 2017 Earnings Conference Call. My name is Amanda and I will be your coordinator for today. At this time, all participants are in a listen-only mode. Following the prepared remarks, there will be a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would like now 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:]

Good afternoon and thank you for joining us today. Here with me to review our second 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 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, thank you everyone for joining us today. Let’s get started by turning to the overview on slide 2. The company’s strong second quarter results reflect our ongoing commitment to deliver exceptional service to clients and profitable growth to shareholders. Net income was $69.3 million or $0.19 per common share. These results include merger related expenses of $24.8 million or $0.05 per common share. On an operating basis earnings were $82.6 million an increase of 21% from both the first quarter and the prior year quarter and generated an operating return on average tangible equity of 10.9%. Operating earnings per share were $0.24 up $0.02 linked-quarter and a penny from a year ago. The quarter benefited from the Suffolk acquisition and continued net interest margin expansion resulting from higher yield on new business and re-pricing of floating rate loans. Additionally we achieved further improvement in operating leverage, organic loan growth and sustained exceptional asset quality across our diverse portfolio of businesses. We continue to enhance our operating leverage as evidenced by the ongoing improvement in the efficiency ratio through revenue growth and thoughtful expense management. Revenues grew 10% and 13% respectfully from the first quarter and prior year quarter driven by both higher net interest income and fee revenues aided by the addition of Suffolk. Net interest income benefited from the net interest margin expanding 14 basis points from the most recent quarter. Period end loan and deposit balances increased 26% and 17% respectively on an annualized basis from the end of the first quarter largely due to the Suffolk acquisition. Loan growth also benefited from a rebound and mortgage warehouse lending balances and solid organic growth in the commercial real estate portfolio. On an average balance basis both loans and deposits increased 28% annualized for the quarter. In wealth management discretionary assets grew 12% annualized during the quarter primarily due to market performance and net client inflows. Looking ahead we remain optimistic about the opportunities in the second half of the year. At June 30, loan pipelines in both our commercial and retail lending segments were solid and improved from the previous quarter end. While the industry landscape remains competitive we continue to benefit from deep long term client relationships. Similar to comments I made last quarter our view is that our commercial clients are cautiously optimistic about the underlying economic environment. There is an overwhelming desire to see Washington effect deregulation and tax reform which we believe will create greater economic activity. Turning to slide 3, we are excited to announce the all cash acquisition of LEAF Commercial Capital, one of the largest independent commercial equipment finance companies in the United States. The addition of LEAF will diversify our equipment finance portfolio into the small ticket leasing segment and enable us to leverage LEAF’s highly scalable tech-enabled origination platform. The company is a leading industry innovator in business automation as evidenced by winning the equipment leasing and finance associations operations and technology award in 2012 and 2016. LEAF provides financing and leasing solutions to both vendors and end users of essential use equipment. A firm offers a dual vendor and direct origination strategy with multiple industry verticals that provide diversified and consistent growth. Since 2002, the company has financed over $5.8 billion for more than 243,000 clients nationwide, leveraging its expertise underwriting processes, technology platform and servicing capabilities. LEAF has increased originations at a compound annual growth rate of 28% since 2011 and has done so with excellent credit performance. The transaction is financially compelling as it will be immediately accretive to earnings. We expect the transaction to be a penny accretive to earnings in 2017 and $0.03 accretive to 2018. While LEAF underwriting is consistent with People's United conservative philosophy their yields are more than two times greater than our total loan portfolio. We are very pleased LEAF season management team will join, remain in the business. With the chairman and CEO and [indiscernible], president and COO have extensive experience in the industry and under their leadership we look forward to LEAF’s continued strong growth. At closing which is expected in the third quarter and does not require bank regulatory approvals, our equipment finance units will have approximately $4 billion of assets and rank as the 16th largest bank owned equipment finance entity in the country. We look forward to welcoming the employees of LEAF Commercial Capital to the People's United family and are confident the combination will create value for both clients and shareholders. With that I will pass it to David to discuss the second quarter results in more detail.

[David Rosato:]

Thank you, Jack. Turning to slide 4, net interest income of $274.9 million increased 11% on a linked-quarter basis. The loan portfolio contributed $28.2 million to the increase in net interest income due to higher yields on new business, re-pricing of floating rate loans, and higher average balances. The quarter also benefited $1.9 million from an additional calendar day and $1 million from higher yields in the securities portfolio. The largest offset was a $3.4 million reduction in net interest income resulting from higher deposit costs and volumes. Net interest margin improved for the second consecutive quarter. As displayed on slide 5, the net interest margin of 296 increased 14 basis points from the first quarter. This expansion was driven by the loan portfolio which favorably impacted the margins by 15 basis points as new business yields were higher than the total portfolio yield. The addition of Suffolk contributed approximately 4 basis points to the margin expansion for the quarter. Looking at the loan portfolio on slide 6, period end balances were $31.6 billion an increase of $1.9 billion or 26% annualized from the end of the first quarter largely due to Suffolk. Commercial loans accounted for approximately $1.7 billion of the increase, but retail balances were up over $200 million. Notably with the addition of Suffolk our New York loan portfolio is now $7.3 billion only $593 million less than Connecticut which is currently our largest market. On an organic basis loans grew 5% annualized driven by a rebound in mortgage warehouse lending as quarter end balances were $1.2 billion up $366 million from March 31. The portfolio also benefited from favorable results in the commercial real estate portfolio as well as modest growth in retail driven by residential mortgage. Before moving to the next slide I wanted to briefly provide some color on our commercial exposure to the retail industry. Our top 10 exposures to retail tenants are mostly supermarkets with Stop & Shop being our largest exposure as well as national drug stores and large home improvement centers. Importantly we do not have any exposure to indoor malls. Period end deposit balances up $31.8 billion increased $1.3 billion or 17% annualized during the quarter driven by Suffolk. On slide 7, the favorable impact on the deposit mix from Suffolk’s outstanding base and it’s high concentration of non-interest bearing deposits is clearly same. As such the largest driver of the linked-quarter increase is the addition of nearly $900 million of non-interest bearing deposits to the portfolio. On a business segment basis deposit balances in both commercial and retail increased during the quarter by $814 million and $495 million respectively. Excluding Suffolk deposit balances declined 7% annualized in what is typically a slower quarter for deposits. Following historical trends, we expect deposit balances to be higher in the third quarter. Additionally deposits in the coming quarter should further benefit from the Commonwealth and Massachusetts which we are currently on boarding for its core banking services. Moving along to slide 8, non-interest income for the quarter of $91.6 million increased $6.9 million or 8% from the preceding quarter. Commercial banking lending fees account for $3.3 million of the increase primarily due to higher commercial real estate prepayment income. Non-interest income also benefited $1.5 million from higher bank service charges and $1.1 million from [indiscernible] income. The largest offset to these improvement was a $1.6 million decrease in insurance revenues reflecting the seasonality of commercial insurance renewals which are higher in the first and third quarters of the year. On slide 9, we display the components driving the increase in non-interest expenses on a linked quarter basis. Included in this quarter's results were merger related expenses of $24.8 million compared to $1.2 million in the first quarter. For the second quarter $10.8 million of these costs resided in professional and outside services, $3.4 million in compensation and benefits and $10.6 million in other. Excluding merger related costs non-interest expenses were $232.5 million, an increase of $7.6 million or 3% from the first quarter. The largest component of this increase was $2.5 million in hire cost related to professional and outside services due to the timing of certain projects. Occupancy and equipment costs and compensation benefits were up $1.7 million and $1 million respectively primarily due to the addition of Suffolk. Executing on revenue producing initiatives is a key focus for the company. As Jack mentioned earlier revenues grew 10% linked quarter and 13% from a year ago. This growth along with our constant over-side expenses drove a second quarter efficiency ratio of 58.4% as displayed on slide 10. This result marks an improvement of 100 basis points and 200 basis points respectively from the first quarter and prior year quarter. Going forward, even with the significant improvement we have made in our efficiency ratio we will continue to emphasize improving our operating leverage. Maintaining excellent asset quality is an important lever endowing sustainable long term value and once again we are pleased with our continued exceptional results as demonstrated on Slide 11. Originated nonperforming assets as a percentage of originated loans and REO at 67 basis points remains well below our peer group and top 50 banks. Second quarter net charge offs of 9 basis points were up slightly from recent quarters but remain at a very low level and continue to reflect the minimal loss content in our nonperforming assets. Return on average assets and return on tangible common equity matrix were unfavorably impacted by the merger related expenses in the second quarter. Therefore, looking at these matrix on an operating basis is more indicative of the company's performance this quarter. As displayed on Slide 12, both operating return on average assets of 77 basis points and operating return on average tangible common equity of 10.9% improved from recent quarters. Continuing now on to Slide 13, capital levels at both the holding company and the bank continued to be strong, especially in light of our diversified business mix, a long history of exceptional risk management. On Slide 14, we display our interest rate risk profile for both parallel rate changes and the yield curve twist. As you can see, we remain asset sensitive built slightly less so than last quarter. However, we remain well positioned for additional increases and interest rates. At quarter end, approximately 43% of our loan portfolio was either one month LIBOR or prime based, which was consistent with the year ago. Before passing the call back to Jack to wrap up, I want to draw your attention to Slide 15 as we have provided an update to our full-year 2017 goals. As you will recall, the goals we outlined in January did not include Suffolk, given the close of the acquisition was still present. This update takes into consideration the addition of Suffolk as well as people standalone results for the first half of the year. However, it is important to note these goals do not include lead commercial capital and the acquisition has yet to close. Our updated goals are as follows. We expect loan growth to finish the year in the range of 11% to 13%, deposit growth is expected in the range of 12% to 14%. The net interest income growth range is updated to 12% to 14%. Embedded in this goal is the expectation for net interest margin to be in the range of 2.90% to 3%. Total expenses excluding merger related cost are now in the range of $930 million to $940 million. We have lowered our provision range to $25 million to $35 million from the previously announced range of $40 million to $50 million. It is important to know the full-year goals for noninterest income growth and capital remain unchanged. In addition, the net effect of these changes does not impact our original full-year earnings expectations with respect to People's United on a standalone basis.

[Jack Barnes:]

Thank you, David. Before opening up for questions, I wanted to briefly speak about the acquisition of Suffolk which closed in early April. The integration has progressed extremely well. The outstanding efforts of our experienced teams provided seamless transition for clients. We successfully completed the core conversion in early May and are on track to realize projected year one cost saves. The economics of the transaction remain positive and have improved over the course of the integration process. Upon announcement, we expect the transaction to be penny accretive to full-year earnings. At this time, we now project $0.02 of earnings accretion in 2018. Similar to our original modeling, this result does not include any revenue synergies. We remain optimistic in our ability to take advantage of these synergies to further enhance earnings. Now, we'll be happy to answer any questions that you may have. Operator, we're ready for questions.

[Operator:]

Thank you. [Operator Instructions] Our first question is from the line of Jared Shaw of Wells Fargo Securities. Your line is open.

[Jared Shaw:]

Hi, thanks a lot and good afternoon.

[Jack Barnes:]

Hi, Jared.

[Jared Shaw:]

Just on the LEAF acquisition, a couple of questions on that. First, is that going to be fully integrated into people's existing equipment finance business or will it be run in parallel with that? And then if you could talk a little bit of your expectations for growth should we think to that CAGR is sustainable or do you think that given the bigger balance sheet and probably a better funding profile you could actually see improved growth profile from where they have?

[Jack Barnes:]

Sure. So, the plan is to continue to operate LEAF under its existing brand if you will and as a standalone operation. As we go forward, there may be some synergies with systems then like, but we're not planting anything there for the short term. We're very focused on continuing their momentum and having them continue to make progress. We think that they are historical to growth rates are achievable as we move forward. There is a we know from our discussions and due diligence for them that there were some deals that met their credit standards but they didn’t have the funding to do. There were some larger deals and relationships where again that funding held them back. So, we see a lot of good potential for synergies like being a part of People's United.

[Jared Shaw:]

Thanks. And then looking shifting over to the deposit side, excluding the impact from Suffolk. Was there more pressure on the deposit base and I guess you're expecting through deposit data and were you seeing a transition or a customer presence of shifting from DDA into interest growing deposits or was the relative weakness in the deposit trends this quarter more driven by the opportunity of bringing in the Suffolk deposits.

[David Rosato:]

Hey Jared, it's David. So, deposits excluding Suffolk, we're down about $0.5 billion in the quarter, which is a larger outflow than we experienced last year versus the second quarter. Second quarter is normally a down quarter for us. What I would say is what's changed is our government banking business is bigger now than it has historically been, where banking a lot of North Eastern states now. On our prepared remarks we're just talking about the onboarding that's going on of the commonwealth of math. So, when I think about that $0.5 billion ex-Suffolk decline, about $300 million of that was seasonal associated with the municipal business. About $50 million was just a reduction that we undertook in our broker deposit base. So, the core retail and commercial outflow and acquired, so we're about a $150 million. And well, definitely we expect both the municipal deposits as well as the commercial and retail to come back in the third quarter. From a deposit pricing pressure or data, we're really not seeing any impact yet. The deposit cost which you saw up 3 basis points on a late quarter basis was really driven by the broker deposits that we have on the balance sheet, not within the resale, the core retail or core commercial deposit rate.

[Jared Shaw:]

Okay, great, thanks. And then just finally from me, you touched on the customer sentiment given the sort of the national economy but the Connecticut economy is been in the news lately and obviously there is some challenges the state is facing and certainly that the city far for is facing. What's the customer sentiment around sort of the health of the Connecticut economy and do you think that that's going to be a bigger drag than maybe you're expecting earlier on the core Connecticut business?

[Jack Barnes:]

Jared, its Jack. Let's say the sentiment in the customer base is a strong desire to have those elected govern and worked together to get the states fit for house in order. So, there is definitely in conversations with customers, there is a lot of strong feeling that they need to take some pretty deliberate action to get the economic environment, much stronger to retain wealthy individuals and keep them from looking elsewhere. So, there is a lot of that sentiment and I'm hopeful that governor in the legislature will work together to balance this year's budget and try to sort of set things on a stronger course here. Hartford is from everything that we see is in pretty challenging financial condition and it really ends up with the same kind of discussion about and needing to address it.

[David Rosato:]

The only thing I would add, Jack, is LEAF is a national business. So, with them joining us, we have four national businesses now and Connecticut is only one of six states in New England that we operate in. and our New York franchise as we said in the prepared remarks is almost on par with our Connecticut franchise which helps, which is nice diversification for us.

[Jared Shaw:]

Great, thanks a lot. I appreciate the color.

[David Rosato:]

Thank you.

[Operator:]

Thank you. And our next question comes from the line of Steven Alexopolous of JPMorgan. Your line is open.

[Steven Alexopolous:]

Hello, everybody.

[Jack Barnes:]

Hello, there.

[Steven Alexopolous:]

I could start just few follow-ups on the LEAF field. I appreciate the earnings accretion that you guys provided. But could you share, you're talking about $0.03 of accretion 2018. What's the revenue and expense assumptions that are being made to get to the $0.03?

[David Rosato:]

Yes. We're not ready to go there Steve. At this point we really given a size of the transaction in the relative contribution where we are not planning to give additional detail beyond our expected EPS in accretion side. And we would tell you that on an internal rate of return basis, that it's a strong high teen internal rate of return. And we're very pleased with that. We think this is a great transaction and has a lot more potential.

[Steven Alexopolous:]

And Jack, what's your funding strategy for this growth you're going to be putting on for LEAF?

[Jack Barnes:]

Let David address that as we kind of lay out our plans.

[David Rosato:]

Sure, thanks Jack. So, that's really one of the drivers of this transaction is that as Jack mentioned earlier, they were in many respects funding constraint and it was impeding their ability to grow and to grow profitably. So, our upon close we expect to pay off all of their liabilities other than the $250 million securitization that we referenced in the slide. The reason for that is just that was a recent transaction in the last few months that has a one year lock out called lock out that once where can call that without cause, we will do so. In the near term, we're going to reduce our securities portfolio and replace those assets with these assets. That's a funding strategy but that's also makes this transaction even more capital efficient. Going forward, once the initial 735 was on to the books, you'll just see core deposit funding add of us for future growth.

[Steven Alexopolous:]

Got you, okay. But you won't really change the size of the balance sheet then if you use its securities, correct?

[David Rosato:]

That's correct, that's the plan.

[Steven Alexopolous:]

Okay. And then on the Suffolk deal what were the cost saves realized in the second quarter and what’s still left at this point?

[Jack Barnes:]

What we advertised which was 50% cost saves, 75% in the first year. So we took on about $9 million of costs from them in the quarter, $8 million to $9 million.

[Steven Alexopolous:]

Okay and were any cost saves realized at this point?

[David Rosato:]

Yes, considerable amount and we closed the number of branches. We have gone through the conversion, all of the operational support, finance, marketing etcetera, those folks are – we have gone through the transition with personnel if you will. So we have moved through a great deal of that activity.

[Steven Alexopolous:]

Okay, got you. And purchase accounting how much of purchase accounting accretion was there this quarter from that deal?

[Jack Barnes:]

It was really, the impact of Suffolk in the quarter remember we said there was ad deal signing $0.01, cost saves are fully realized and now we are seeing $0.02 so you think, we are still in the 75% cost save part of this for the most part. So it's about a quarter of a penny, additional income.

[Steven Alexopolous:]

Okay. My question was about purchase accounting accretion that would have been in net interest income in the quarter.

[David Rosato:]

There is not much accretion above the coupon on the loans because the discount was not that great.

[Steven Alexopolous:]

Okay, got it. Okay, thanks for taking my questions.

[Operator:]

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

[Casey Haire:]

Thanks guys. Just a question on the liquidity profile creeps up to 99 here with pro forma with LEAF will go 102, it sounds like you had some deposits outflow this quarter but what’s the limit there in terms of how high or you are willing to let that go and what’s the strategy to drive that down?

[Jack Barnes:]

I would bring you back Casey to my comments about the temporary outflow deposits in the second quarter and the rebound that we expect going forward. So we would expect the loan deposit ratio which has been running 99 or 100 that’s where we expect to be in the third and fourth quarter of this year and really going forward the limit if you will is where we were maybe three years ago but we have no intention of going back there. Now I would just add we have tremendous amount of work going on in our marketing area and the retail bank to grow our deposits through some new approaches that we’re taking to core deposit generation. Those are in motion and we also have what we call we’ve increased the emphasis on deposit growth in our commercial bank including oriented incentives in that direction. We’ve made tremendous progress in our commercial bank in the last couple of years, double digit improvement. So we continue to stay focused on that. Our broader goal is to be totally core funded and leveraged relatively in the scheme of things, new position we have in New York and Boston if you will. But as we continue to grow the franchise in those big markets we expect to be in very good shape on the funding side.

[Casey Haire:]

Okay, great and just one more on LEAF, sorry if I missed this. But the impact on tangible book and capital ratios from LEAF, have you guys disclosed that?

[Jack Barnes:]

We have not, the capital impact to the leverage is going to be 30 basis points or so.

[Casey Haire:]

Okay, great, thank you.

[Operator:]

Thank you. Our next question comes from the line of Collyn Gilbert of KBW. Your line is open.

[Collyn Gilbert:]

Thanks, good evening gentlemen. Just I guess, holding in on your slide with your outlook and your goals for the year, obviously a ramp up in expected growth even considering Suffolk. It gets across the board it looks like a more optimistic view of kind of your outlook there. So can you just kind of give a little bit more color as to what’s driving that I guess specifically on the growth side because I think if we back out Suffolk, if we back out the mortgage warehouse I think loans would have been flat or maybe even slightly down. I know you gave great color there David on the deposit side but just trying to reconcile a lot of the trends that we’re hearing from other banks in terms slowing growth, but yet it seems like you’re accelerating your outlook. So maybe talk a little bit about what’s driving that?

[David Rosato:]

Yes. Well, we did have a bit of a mixed quarter outside of talking organic care obviously and excluding Suffolk we had a mixed performance across the portfolios. We had I would say pretty steady growth in areas like the middle market portfolio. A lot of that was driven by improvement and increased line utilization. The ABL business was up, the whole fed group was up little more modestly. So we had businesses that were doing fine but we also had seasonal declines in portfolios like the municipal business and historically we have had pay downs in municipal books in Connecticut and Vermont. We experienced that. We also really decided that we were not going to chase spreads lower in certain of our PCLC business so that book actually had some declines, this quarter we had activity but we had some declines there. We had some large [indiscernible] on some large commercial payoffs that were driven more by insurance companies and similar folks coming into the market and being pretty aggressive. So we lost some of our balances there and we backed off a little bit on our shorter term residential on the jumbo side. Again, we changed our pricing to be a little more favorable to the bank and so the growth origination slowed. So we have made some moves in terms of not chasing lower yields and titer spreads up and we’ve had some seasonality in things like the municipal business. So we are optimistic as I said in the comments, the pipelines are in good shape. We feel good about the second half. Historically, our second half is much stronger than the first so that’s where it comes from.

[Collyn Gilbert:]

Okay, that’s helpful and then just on the onboarding of Massachusetts, can you quantify that, what you expect that deposit relationship to be?

[David Rosato:]

Sure, once that deposit relationship is completely onboard it’ll be approximately $300 million to $350 million.

[Collyn Gilbert:]

Okay, okay that’s helpful and then just finally, just looking on LEAF was that just a origin of that deal, was that a negotiated transaction or a bid transaction, is this folks that you guys have known for a while or just curious a little bit about the background?

[David Rosato:]

We have known them for a while, actually met them at a conference over a year ago I think and they know us as well. They were very familiar with our equipment finance businesses and I would say yes, it was a process and we got involved and worked our way down to just a couple parties and we’re the one selected. And probably the most intense part of that was over the last three or four months I think that’s –

[Collyn Gilbert:]

Okay, okay that’s helpful. I will leave it there, thank you.

[David Rosato:]

Thanks.

[Operator:]

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

[Matthew Breese:]

Thanks for taking my questions guys. How are you doing? I just wanted to get your thoughts relative to M&A now that the Suffolk deal is completed and your incremental close to $50 billion. At what point do you shy away from the smaller deals and move more towards the bigger deals or is there a point, just wanted to talk on those issues?

[Jack Barnes:]

Sure. So I guess I would put it this way. We kind of view the $50 billion issue the same today as we did before the LEAF field announced to continue to do the preparation, we’ve been describing to you. We’ve actually had more conversations with our regulators and have made them more familiar with the efforts that we’re making around our 50-B project and in addition to that just having more conversation about all the aspects of that including our dividend. And I would say our view toward M&A today is similar. It’s very, very small deals or something I think we would shy away from but I’d say if you look at our history if we see good opportunities and we see something that makes sense and is valuable to our shareholder we’re willing to talk about it. And $50 billion will not be the reason that we’re not going to do something.

[Matthew Breese:]

Okay. And can you update us as far as how far long in the CCAR process in terms of infrastructure built out systems how far long are you?

[Jack Barnes:]

I think we have described that previously probably more than people want to know but we are very well along. We have talent in the company that has experience in [indiscernible] filing. We have strengthened our models. We have built our debt covenants and strengthened our infrastructure if you will around for that process and we are feeling very good about that. David has led the charge on that I don't know if there is anything you would add, but –

[David Rosato:]

No, I would say, we have been talking about this since Jack referenced for a long time but we have been plugging away at it for quite a few years and incrementally up in our capability, resources. And so, I just back Jack's comments we are not going to let the $50 billion line impede something that's good for customers and good for shareholders. We are rooting for representative [indiscernible] this morning and we like the introduction of that bill.

[Matthew Breese:]

On off being equal is what's needed on the infrastructure side is that something you can still tuck into organic expense growth or do you think there will be any sort of acceleration over the coming years as you get incrementally closer?

[Jack Barnes:]

I would just think of it as tucked into organic expense growth. You followed us for a long period of time as have the others on the phone and we spent a lot of time on the expense side of this company for many years now and we have gotten our efficiency ratio which we like to talk about this quarter for example down in the upper 50s. We continue to focus to control costs and to build out our capabilities at a proper speed or the environment that we are operating in. we don't want to go overboard today for instance because a lot of this might fall away and we shouldn't be spending money on it. But long term infrastructure things like data governance we are working hard on it and it's in our run rate.

[Matthew Breese:]

Understood. Last one, I noticed the tax rate ticked up just a hair from last quarter what should we be using there?

[Jack Barnes:]

Yes, it ticked up a little bit what I would say is it was just artificially a little low in the first quarter. It's normalized to the guidance that we had originally given which was 32 on a quarter.

[Matthew Breese:]

Okay, understood that's all I had. Thank you.

[Operator:]

Thank you and our next question comes from the line of Eric Zwick of Stephens. Your line is open.

[Eric Zwick:]

Good evening guys.

[Jack Barnes:]

Good evening, hi Eric.

[Eric Zwick:]

Maybe just the first question on credit and I appreciate the color you gave on your commercial real estate kind of retail exposure and then prepared comments. Just looking at the tables quick commercial real estate non-performers were up about $20 million or so this quarter. Just any color into what you are seeing in that portfolio, what drove the increase?

[Jack Barnes:]

Yes. So, I will start with reminding you that our non-performers and net charge off in that book of business are extremely low and have been historically. That said, that number is up and basically it's driven by just the couple of credits that had events that lease expirations and like and we have them on performing for all the right cautious reasons. We are working them through workout and we think we are properly reserved and actually work through them in a pretty timely way.

[Eric Zwick:]

Maybe just one question on LEAF and I know you are not ready to provide quantitative expectations for revenue yet. But any colors to the split of revenue between interest income and then fee income in that business?

[Jack Barnes:]

It's primarily interest income. So they do generate nice fees.

[Eric Zwick:]

And then something they potentially have done some securitization in the past would you choose to pretty much hold originations going forward?

[Jack Barnes:]

Yes. As I said earlier we are going to terminate their wholesale borrowing arrangement and clear securitization other than $250 million or so which they just recently did that is not callable for the first year.

[Eric Zwick:]

Great, thanks for taking my questions.

[Jack Barnes:]

Thank you.

[Operator:]

And ladies and gentlemen since there are no further questions in the queue I would now like to turn the call over to Mr. Barnes for closing remarks.

[Jack Barnes:]

Thank you. In closing we are pleased with the company's performance in the quarter which was highlighted by the successful closing and integration of the Suffolk transaction, operating earnings growth of 21%, net interest margin expansion for the second consecutive quarter. Further improvement in operating leverage driven by higher revenues, organic loan growth and sustain exceptional asset quality across our diversified portfolio of businesses. Looking ahead we remain optimistic about the opportunities in the second half including completing the acquisition of LEAF Commercial Capital. 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. Have a good day.