People's United Financial, Inc.
Q4 2016 Earnings Call Transcript

Published: 20 Jan 2017

[Operator:]

Good day ladies and gentlemen and welcome to the People’s United Financial, Incorporated Fourth Quarter 2016 Earnings Conference Call. My name is Latif 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'd now like to turn the presentation over to Mr. Andrew Hersom, Senior Vice President of Investor Relations for People’s United Financial, Incorporated. Please proceed, sir.

[Andrew Hersom:]

Good afternoon and thank you for joining us today. Here with me to review our fourth quarter and full year 2016 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 one of this presentation which is posted on our Web site, peoples.com under Investor Relations. With that, I’ll turn the call over to Jack.

[Jack Barnes:]

Thank you, Andrew. Good afternoon. We appreciate everyone joining us today. Let's get started by turning to the overview for the full year on Slide 2. We are pleased with the company's financial and operating performance this year. Our results reflect further improvements in profitability and continued growth in earning assets. Full year net income of $281 million is the highest in the company's history and return on average tangible common equity was 10.2%. Our straight-forward solutions oriented approach to banking enabled us to further expand client relationships and forge new ones as demonstrated by another year of growth in loans, deposits and wealth management assets. We continue to enhance our operating leverage during the year as evidenced by the ongoing improvement in the efficiency ratio through revenue growth as well as proactive expense management and we expect further improvement in the efficiency ratio in 2017. We strengthened fee income generating capabilities over the course of the year through infrastructure investments and acquisitions most notably the addition of Gerstein Fisher, which was closed in early November. We also continued to strategically add talent across the organization to further drive revenue growth. Earlier in the year, we announced the acquisition of Suffolk Bancorp which upon closing will deepen our presence in the New York Metro area. Loan balances finish the year at $29.7 billion, an increase of $1.3 billion or 5% from the year ended 2015, while average balances increased 6%. We continued to benefit from the portfolios broadly diversified business mix as displayed on Slide 3. Strong results in residential mortgage, middle market C&I and mortgage warehouse lending more than offset slowing commercial real estate growth resulting from the decision to reduce the transactional portion of our New York multifamily portfolio to focus our resources on full service relationships. Looking longer term, our balance sheet as experienced compound annual growth -- loan growth of 8% over the past five years as a result of our successful geographic expansion focused on organic growth, investment and talent and new business initiatives. Importantly, this loan growth outweighed significant net interest margin compression. As a result on Slide 4, net interest income excluding accretion as increased at an annual rate of 7% during this time period. For 2016, net interest income of $972 million increased 4% year-over-year driven primarily by ongoing loan growth. On Slide 5, we can see deposit balances ended the year at $29.9 billion, an increase of 5% from 12 months ago reflecting growth in both our commercial and retail business segments. Each product line grew year-over-year with the exception of higher cost time balances, which we have successfully reduced. It's also important to note, the overall cost of deposits declined 1 basis point for the year. Given deposits, our large component of profitability and an integral part of client relationships, we have emphasized deposit gathering across the organization. We have been very pleased with the success of these efforts as evidenced by an annual growth of 8% since year ended 2011. Turning to Slide 6, non-interest income of $343 million was consistent with the prior year when adjusting for the 2015 gain on sale of our payroll services business as higher non-interest income during the year from investment management fees and insurance was offset by lower bank service charges and prepayment fees. Despite significant industry headwinds related to bank service charges, we have been able to grow fee income at a compound annual rate of 2% over the past five years. As we continue to diversify our revenue stream. We have looked to strengthen fee income generation capabilities both organically and via acquisition. We have invested in infrastructure such as our new foreign exchange and loan syndication platforms, as well as a leading edge customer relationship management system in order to broaden our product and service offerings, strengthen relationships and drive revenue. The recent acquisitions of Gerstein Fisher, Eagle Insurance Group and Kesten-Brown have bolstered our wealth management and insurance businesses. As such we continued to look for additional opportunities to further enhance these businesses. We continue to be pleased with our ability to control cost. Full year expenses excluding merger-related cost were $864 million, an increase of only $3 million from the prior year primarily driven by higher regulatory assessments. Managing expenses proactively is deeply engrained in the culture of the company. As you can see on Slide 7, this mindset has limited the increase and expenses at an annual -- average annual rate of less than 1% over the last five years. We are especially proud of these results considering that we have continued to make strategic investments and revenue producing initiatives as well as cover heightened regulatory compliance cost. Slide 8 displays our earnings per common share since 2011. As a result of our ability to increase earning asset, strengthen fee income and proactively control cost, full year earnings per common share as increased from $0.55 to $0.92 over the period, a compound annual growth rate of 11%. We will continue these efforts to further enhance profitability moving forward. On Slide 9, we include a snapshot of our 2016 goals, which were updated midyear compared to actual results. As you can see, we were inline with all of our goals with the exception of net interest income, which was slightly below the expected range due to marginally lower than anticipated average loan volume and yields. Moving to Slide 10, we list our goals for 2017. We continually strive to balance and utilize six levers to create shareholder value. These levers are enhancing client focused capabilities, growing the balance sheet, maintaining excellent asset quality, diversifying revenues, controlling costs and deploying capital efficiently. As such we enter the year well-positioned across our diversified portfolio of businesses and attractive northeast footprint to further deliver exceptional service to clients and profitable growth to shareholders. With that background in mind, let me outline our goals for full year 2017. It is important to note the following goals incorporate a full year of Gerstein Fisher non-interest income and expenses, but does not include the pending acquisition of Suffolk. Once Suffolk transaction is closed, we will update these goals accordingly. The first goal is to grow our loan portfolio in the range of 5% to 7%. Secondly, our continued focus on gathering deposits is expected to drive deposit growth in a 4% to 6% range. The next goal is for net interest income to grow in the range of 5% to 7%. Embedded in this goal is the expectation or net interest margin to be in the range of 2.8% to 2.9%. This net interest margin range is derived from many different factors, one of which is an assumption of 125 basis point rate increase in Fed funds in mid-2017. In addition, we expect the current slope of the yield curve to remain essentially the same throughout the year. We expect non-interest income to grow in the range of 5% to 7%. Non-interest expenses excluding merger-related cost for the year are anticipated to be in the range of $895 million to $915 million as compared to $864 million in 2016. The range includes expenses related to six plans in the store branch openings, five of which are in New York as well as a full year of Gerstein Fisher expenses. We also continue to build our readiness across a $50 billion asset threshold through our B50B project, which we have been discussing in detail in previous quarters. Our goal is to complete this process internally over the next few years and avoid unusual one-time cost. We expect to maintain excellent credit quality, with the provision in the range of $40 million to $50 million. We also plan to maintain strong capital levels with an expectation that at the year end holding company Tier-1 leverage ratio will be in the range of 8% to 8.5% and common equity Tier-1 capital ratio will be in the range of 9.5% to 9.7%. Finally, we anticipate the effective tax rate for the year to be approximately 32%. With that, I will pass it to David to discuss the fourth quarter in more detail.

[David Rosato:]

Thank you, Jack. Our fourth quarter performance provided a strong finish to the year as evidenced by record quarterly net income of $75.9 million, an increase of 7% from a year ago. The quarter benefited from higher net interest income and continued expense control. As a result, the efficiency ratio was 59.3% an improvement of 170 basis points compared to the prior year quarter. On a per common share basis, earnings were $0.24 consistent with the third quarter and up a $0.01 from the prior year quarter. We are pleased with these results considering that the preferred dividend paid as a result of our recent $250 million preferred stock issuance cost us $0.01 in the quarter. Additionally, the weighted average diluted common share count was higher by 3 million and 5 million shares respectively compared to the third quarter and prior year quarter. Turning to Slide 12, net interest income increased $1.5 million or 1% on a linked quarter basis primarily driven by the securities portfolio as well as ongoing loan growth. Net interest income in the securities portfolio benefited from higher yields and a modestly lower level of premium amortization in the mortgage backed securities portfolio. The primary offsets for these increases were $1.2 million decline in accretion from run-off in the acquired portfolio and $400,000 of higher borrowing cost. Moving to Slide 13, net interest margin of $2.78% decreased 2 basis points from the third quarter. New loan volumes unfavorably impacted the margin by 3 basis points as the new business yield remained lower than the total portfolio yield. In addition, higher borrowing cost reduced the margin by one basis point. These decreases were partially offset by an improvement of 2 basis points in the securities portfolio. On Slide 14, you can see loan balances increase $377 million or 5% annualized from September 30 with growth in both our retail and commercial portfolios. These results mark the 25th consecutive quarter of loan growth. Originated loan growth for the quarter totaled $412 million. Originated loans from the commercial portfolio increased $238 million driven by growth in commercial real estate and equipment financing of $260 million and $46 million respectively. These increases were partially offset by lower C&I originated balances of $68 million. The C&I portfolio was primarily impacted by lower mortgage warehouse balances which ended the quarter at $1.1 billion, a $107 million decrease from September 30. Retail contributed a $174 million of originated loan growth which was driven by continued strong residential mortgage growth of $196 million partially offset by lower balances in the consumer portfolio. Residential mortgage portfolio continues to benefit from the strategic additions of seasoned residential loan officers in our newer market. As we have grown our residential mortgage portfolio in recent years, originations continue 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 loans added to the portfolio during the quarter, the average LTV is 67% and the average FICO is 763. We experienced declined loan runoff of $35 million this quarter compared to $46 million in the third quarter; remaining balance of the acquired portfolio at quarter end was $610 million. Slide 15, shows the change in deposits since September 30. Deposits grew $205 million or 3% on an annualized basis during the quarter. While the cost of deposits was consistent with the third quarter and one basis point lower than the prior year quarter. The growth of the deposit base was primarily due to higher interest bearing checking and money market balances as well as non-interest bearing balances partially offset by a decline in higher cost time balances. On a business segment basis, deposits in both retail and commercial increased during the quarter by $154 million and $51 million respectively. On Slide 16, we look at non-interest income which decreased $6.6 million or 7% compared to the third quarter. During the quarter, we sold $400 million of lowering yielding short duration securities, a portion of the sale proceeds will be reinvested at higher rates and generate a greater level of income than the securities sold. The $6 million loss as a result of these sales was more than offset by $6.3 million gain from the sale of an ownership interest in a legacy privately held investment. Insurance revenues decreased by $3 million reflecting the seasonal nature of commercial insurance renewals, which were higher in the first and third quarters of the year. In addition, lower operating leasing income and bank service charges unfavorably impacted non-interest income by $1.7 million and $1.1 million respectively. These decreases were partially offset by a $2.6 million increase in investment management fees mostly attributable to the Gerstein Fisher acquisition in early November. Finally, the other decline in non-interest income as displayed on the Slide was $3.7 million totaled $3.7 million. As you will recall in the third quarter, other non-interest income benefited from higher income related to a distribution from an acquired equity investment partnership. On Slide 17, we illustrate the components of changes in non-interest expenses on a linked quarter basis. Fourth quarter expenses of $217.2 million declined $4.2 million or 2% from the third quarter. Included in this quarter's results were margin related costs of $1.6 million, which are reported in compensation and benefits as well as professional and outside services compared to $3.1 million in the third quarter, which were all reported in professional and outside services. Compensation and benefit excluding merger related cost of $700,000 decreased $2.8 million primarily reflecting lower payroll and benefit related costs. Professional and outside services, excluding merger-related cost was $900,000, increased $800,000 as a result of the timing of certain project related to the income generating capabilities Jack referenced earlier. Regulatory assessments increased $500,000 primarily due to the FDIC surcharge related to recapitalizing the deposit insurance fund. As a reminder, payroll taxes 401k matches and 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. On Slide 18, you can see our efficiency ratio in the fourth quarter was 59.3% an improvement of 60 basis points and 170 basis points respectively from the third quarter and prior year quarter. As Jack referenced earlier, the improvement in this metric demonstrates our continued focus on enhancing operating leverage through ongoing revenue growth and proactive expense management. Slide 19 is a reminder of our exceptional credit quality across each of our portfolios. Originated non-performing assets as a percentage of originated loans and REO at 57 basis points remains below our peer group and top 50 banks and as continued to improve from recent quarters. Fourth quarter net charge-offs was 6 basis points remained at a very low level and continued to reflect the minimal loss content in our non-performing assets. As shown on Slide 20, return on average assets of 75 basis points improved for the third consecutive quarter. This metrics increased 3 basis points on a linked quarter basis and was consistent with the year ago. Return on average tangible common equity of 10.7% exceeded 10% for the third consecutive quarter and was consistent with both the third quarter and prior year quarter. Notwithstanding these results, our returns continued to be impacted by the low interest rate environment. Turning to Slide 21. Capital levels at both the holding company and bank continue to be strong especially in light of our diversified business mix and history of exceptional risk management. We assured 250 million of preferred stock at five and five days during the quarter to enhance our already strong capital position. The issuance bolstered holding company capital ratios in the range of 80 to 100 basis points and will support continued growth. On Slide 22, we display our interest rate risk profile to both parallel rate changes and yield curve twist. As you can see, we remained asset sensitive, so slightly less so than last quarter. We remained well-positioned for an increase in interest rate as our loan mix continues to trend towards floating rate loans. At quarter end, over 44% of the loan portfolio was either one-month LIBOR or prime-based consistent with September 30, went up from 42% a year ago. The sensitivity of our assets is mostly driven by one-month LIBOR and the shape of the yield curve. As such the continuation of LIBOR rates drifting upward and the yield curve maintaining this current slope should bode well for further growth in interest income as the year unfolds. Conversely sustained, lower long-term rates remain a headwind for our risk positioning as evidenced by our long and down scenario on this slide. Before passing the call back to Jack and opening up for the questions. I wanted to point out the full year effective tax rate of 31.4%, a decrease from 33.4% in 2015 due to our continued investment in tax advantage license as well as other tax planning strategies. As Jack mentioned earlier, we anticipate our effective tax rate to be 32% for 2017.

[Jack Barnes:]

Thank you, David. We are pleased with the company's financial and operating performance in 2016 and look forward to continued progress in 2017 as we expect further growth earning assets, improved operating leverage and enhanced profitability. We are very pleased to have closed Gerstein Fisher during the quarter and have their employees join the People's United team. We look forward to building upon their successes to further grow the business. The Suffolk integration process is progressing well. We continue to move towards closing the transaction. We are excited about the expected benefits of these transactions each of which further growth and strengthen our franchise in the New York Metro area. In Massachusetts, we are extremely proud to be selected to manage the Commonwealth Core Banking services which are the primary bank account for concentrating and managing balances and dispersing funds to taxpayers, beneficiaries, employees, retirees and others. In addition, during the quarter we opened a branch in Copley Square, a terrific location to service clients and strengthen our franchise in Boston. Both of these achievements reflect our significant commitment to serving the people of Massachusetts and the momentum that we have generated in this vibrant economy. We remain committed to consistently returning capital to shareholders, as today the Board declared a dividend for the 94th consecutive quarter as such the Board management understand the importance of the dividend and the significant impact it as on the valuation of the company's shares. Therefore, it is important to once again remain both current and perspective shareholders, we will not move the company past the $50 billion threshold without knowing we have regulatory support for our dividend. This concludes our presentation. Now, we will be happy to answer questions you may have. Operator, we are ready for questions.

[Operator:]

Ladies and gentlemen, we are ready to open up the line for your questions. [Operator Instructions] Your first question comes from Jared Shaw of Wells Fargo. Your line is open.

[Jared Shaw:]

Hi. Good afternoon.

[Jack Barnes:]

Good afternoon, Jared.

[Jared Shaw:]

Could we just start maybe talking a little bit about the trends you are seeing in the loan portfolio with the good growth on CRE this quarter that's a little bit of a change from where we have seen in the last few quarters. Where is that in terms of geography any thoughts -- in the past you also have been pulling back from the New York City multifamily market with some of the competitors also pulling back, does that become more attractive now? If you could just give an update how you are looking at CRE right now.

[Jack Barnes:]

Sure. Jared, its Jack. I'm not sure I heard totally but I will respond and tell me if I have got it complete but we did have a good quarter with CRE and important to note as well that we continued to have some runoffs although at the lower end of the range we had given on the New York multifamily. So we made a lot of progress actually in New York in our relationship based CRE business. And we are feeling very good about that market both in terms of the quarters performance and also as we head into 2017. It's a very strong pipeline there. The other market I would note more significant balance will be Massachusetts. We had a solid quarter there. And again, have a good pipeline going into the first quarter here. I would say generally we have made good incremental progress building that portfolio across our markets. But those two markets would be the largest and have the most impactful.

[Jared Shaw:]

Okay, great. Thanks. And then on the C&I side, obviously impacted by the pullback or the slowdown on the mortgage warehouse side, but apart from the mortgage warehouse business, can you give an update on the strength of the pipeline and some of the trends you are seeing on C&I?

[Jack Barnes:]

Yes. So, you are exactly right. The pullback on the mortgage warehouse did have a big impact on our pace growing C&I. Although, we did -- I say a notable, it's not as big in the numbers. But business banking momentum is picking up across the markets and we are pleased with that. And the sentiment actually is kind of encouraging me in this time of change and the economic environment. There is a lot more dialog and activity with the -- in the small business area. So, other than that, I would say we have had a very solid year but not robust, generally in our middle market segments. We had a very good strong year in ABL, double-digit growth. And we had kind of middle-digit 5-ish percent growth in our equipment finance businesses. So, good progress and I would say steady and I would say we are cautiously optimistic about our -- but the Massachusetts group really did well on the C&I side in the second half of the year and stronger in the fourth quarter than the third. And so, as we look forward I expect more progress in Massachusetts, more cross-progress across New York. The mortgage warehouse, we are not building in our guidance any increase there as you see the history the balance is up from the $500 million or $600 million range a few years ago to a $1 billion plus. But, they are doing -- they continue to do an excellent job as well as the environment is changing and the refis will slow, they continue to build relationships and they continue to be -- the group -- the bank of choice in that business and they continue to add relationships. So, we will see how that plays out. But, again, we are not planning -- we are looking actually to see that growth in relationships will kind of balance out the change in the refi market. And I think I have covered the landscape there. I feel really good about the sentiments from the commercial groups, it's pretty good.

[Jared Shaw:]

Great. Thanks for that color. And then just finally maybe for David on the securities portfolio, when was the timing of that restructuring? And then what does that do to the duration of the portfolio going forward? And should we expect to see any more yield pickup from maybe the timing of that reinvestment?

[David Rosato:]

Sure. It was done very late in the quarter. So, if you look at in the release, the ending balances versus the averages, there was a larger decline on funding. So that portfolio as I said was very short duration, so is also low yielding. We haven't reinvested yet but I think we will be executing in the early part of this quarter -- the early side of this quarter and there is a yield pick up over 100 basis points, which will allow us to most likely shrink the amount of securities we put back on the balance sheet but fully replace any income loss.

[Jared Shaw:]

Is that yield pick up on the total balance, or is that on the incremental purchases we're looking at, picking up a 100 basis points?

[David Rosato:]

The yield pick up would be on what we buy. So, we won't probably reinvest a smaller notional amount than we sold.

[Jared Shaw:]

Okay. Thank you.

[Jack Barnes:]

Sure.

[Operator:]

Thank you. Our next question comes from Casey Haire of Jefferies. Your question please.

[Casey Haire:]

Thanks, guys. Yeah, so, Just one more follow-up on the loan growth outlook. Jack, it sounds like you feel pretty good on the commercial front. Is that – does that mean that we might get a little less of a contribution from the resi mortgage side, which if I look at the loan growth in 2016, it contributed almost 60% of the loan growth given a positive outlook on the commercial side, should we expect a more balanced mix between commercial and resi mortgage of loan growth?

[Jack Barnes:]

I’d say a more balanced mix in a sense resi did really, really well this year and we expect and hope that the present folks can attain that kind of pace, but – so there is couple of things that’s going on. Go back, I know I’ve said this before, but just – so it is important that while we do see some pullback and expect – not only do we expect, we see our pipeline starting to come down as the refis slow. We are seeing improvement in purchase numbers and we are benefiting from the -- now across – particularly Massachusetts and the New York, new mortgage origination officers that are in the markets and now have been in the markets and getting themselves established. They are veterans in the market that we’ve recruited over the last few years and we expect to get volume out of those folks that we haven’t had really before. Now, so we’ve got some change going on there. Obviously, the refis are slowing down, but still at pretty good pace and with some economic improvement, hopefully improvement in the housing market.

[Casey Haire:]

Okay, great. And if I look at the deposit growth guide and take the midpoint of that as well as the loan growth guide, I kind of – I have your loan-to-deposit ratio crossing over a 100, is that – are you guys okay with that? Can you just give us some updated thoughts on how you are thinking about your liquidity profile and potentially a rising rate environment?

[David Rosato:]

Sure, Casey, it’s David. So if you do the midpoint both loan and deposit growth, which roughly had almost the same starting balance. You would find a mismatch of a few $100 million. Our view would be, in the grand scheme of things, with all the unknowns as the year developed, that’s not anything that’s concerning to us.

[Casey Haire:]

Okay, great.

[David Rosato:]

You could see loan-to-deposit creep up 1% or 2%.

[Casey Haire:]

Understood. Okay. And just on the fee guide, if I take the midpoint of that 5% to 7% or whatever it was, I’m getting – you are basically implying fees of $360 million or averaging $90 million a quarter in 2017. So what is the – what’s driving this growth from this sort of $84 million starting point here in the fourth quarter?

[David Rosato:]

Sure. The number one driver would be addition Gerstein Fisher for the full year. Away from that…

[Casey Haire:]

Right. But is it Gerstein Fisher in for the majority of the fourth quarter?

[David Rosato:]

Yeah, for two months, two of the three months and fourth quarter, full year, obviously next year. So – and then away from Gerstein Fisher, mid-to-high single digits across cash management, our other remaining investment management businesses, our customer swap business, FX business offset by really two headwinds, one is the ongoing decline in bank service charges and secondly, commercial loan prepayment fees were lighter as 2016 unfolded as the pace of refi has slowed down and I think that trend will continue into 2017.

[Casey Haire:]

Okay, great. Just last one from me. Just trying to get a sense on share count for the year. I have in the merger math about 26.5 million extra shares. Apologizes if I miss this, but when is the – did you talk about when do you expect the deal to close and what kind of share count you expect for the year?

[David Rosato:]

Two separate questions. I will take the first and give the second part of Jack. So share count exclusive of Suffolk, you will notice in the press release was up, ending share count is about 310 million shares. For 2017, that’s the expectation.

[Casey Haire:]

Okay, great. Thank you.

[Operator:]

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

[Collyn Gilbert:]

Great. Thanks. Good evening, gentlemen. Maybe I will just pickup right there on Casey’s question about the timing of Suffolk, if you guys had any thoughts on the close there and why – interesting to me, I guess, that you choose not to include them in your outlook numbers and maybe we will just start with a little bit of color on that. And then I’ve got some others.

[Jack Barnes:]

Sure. As we – we just have a very strong tradition of not budgeting any of our deals or acquisitions until we are closed. So part of that I guess and thinking about our guidance, we are not closed yet, we don’t know what the timing is and et cetera, et cetera, so it would be little difficult to do that. That’s why we choose to just get it closed and we will come back to you with the impact. So having said that, we continue to move through the application process with our regulators, and I would say it’s progressed well. We had a number of request of information, which is normal in the process and we’ve been very timely in our response for those questions and most of that has revolved around common letters we received and we’ve been very attentive to it and expect to be able to close – very hopeful we will be able to close here in the first quarter pending approval of our application. The regulators, as you know, do not share anything about expectations around the date or the decision until it’s over. So we have to be attentive to the process, keeping working through it, but – and then wait for their decision.

[Collyn Gilbert:]

Okay, that’s helpful.

[Jack Barnes:]

I’d say – maybe for a little bit more color, if you look over the last few years, deals similar to ours have taken seven to nine months and we are right in that range now.

[Collyn Gilbert:]

Okay, okay, that’s helpful. And then just also tying to the outlook, what you guys have laid out for 2017, just a little bit of an uptick better kind of across the board than what you guys put up in 2016, is that a function of just what you are doing internally, is that a function of the microenvironment, I mean, maybe just talk a little bit what’s kind of going into that little bit better of optimism in 2017 versus what – 2016?

[Jack Barnes:]

Sure, sorry. So, it really is internal in the sense – we’ve kind of build out plans not building in if you will changes and things like economic activity and increases in GDP or what might happen in the environment, really kind of good or bad, it’s really – our plans are more built around status quo, if you will, than the environment staying stable from where we are. And so, that’s the framework, but we continued progress and growth because of the initiatives that we’ve taken to get into new geographies as we’ve talked about, bring on new talent, build the businesses, which we’ve been doing steadily over time and we are optimistic as I answered earlier in our New York and Massachusetts markets and the progress and momentum that we have there and I think our partnership - even though it’s not in the guidance, our partnership with Suffolk and the integration there, putting those teams together is going to be a big plus. And we have businesses like ABL this year, their growth was in the mid-teens, it’s been steady for a number of years, but not that strong. They got some nice momentum. The equipment finance businesses have actually been fairly modest over the last few years, more like 5% plus or minus, but they are feeling more activity in the market in the last 60 days to 90 days. So, yeah, I would say our plans come from expectations and the conversations, and the planning that we are doing with the business lines.

[Collyn Gilbert:]

Okay.

[David Rosato:]

Stuff that we think we can control.

[Jack Barnes:]

Yeah.

[Collyn Gilbert:]

Okay, that’s great. Okay. And then David just a couple of sort of housekeeping questions for you. And you’ve alluded this before, the end of period share count, what drove that, that increase in the linked quarter?

[David Rosato:]

That was mostly driven by auction exercises. If you remember, we’re a little over nine years from the second step where there were a lot of employee and director options that are getting within a year exercise or maturity, so the run-up in the stock reported a number of individuals the opportunity to exercise.

[Collyn Gilbert:]

Okay.

[David Rosato:]

And then – as well as the run-up in stock price putting more shares on a fully diluted basis in the money thereby increasing share count.

[Collyn Gilbert:]

Okay. Okay, that’s helpful. And then the investment sales gain, was that -- $6.3 million, was that in the wealth line?

[Jack Barnes:]

No, other non-interest income.

[Collyn Gilbert:]

It was other, okay. And then just in terms of Gerstein, do you have a little bit more color as to what they added this quarter on the revenue side as well as the expense side?

[Jack Barnes:]

The revenue was $2.6 million and they closed it – not a full month of November, but most of the month, it was very early in the month, essentially two months.

[Collyn Gilbert:]

Okay. And then expense associated with it, I guess, maybe thinking mostly salaries?

[Jack Barnes:]

A little bit lower than that. Yeah, and that’s mostly salary.

[Collyn Gilbert:]

Okay. And then the outlook for the provision expense -- I know you guys – I think you guys were guiding to like a provision in the fourth quarter of $10 million to $12 million, so it obviously came in a lot lower than that. I mean is your expectation that credit just stays good and you can kind of keep the provision down at these levels, or just kind of curious how you are thinking about credit in general?

[Jack Barnes:]

We are feeling very good about credit. And if you look at our – this past quarter, we’ve had again reductions in non-performing assets, our delinquencies are down, our charge-offs continuing to be very low. Our outlook going forward is very good.

[Collyn Gilbert:]

Okay. Okay, I will leave it there. Thank you.

[Jack Barnes:]

Thank you.

[David Rosato:]

Thanks, Collyn.

[Operator:]

Thank you. Our next question comes from Steven Alexopoulos of J.P. Morgan. Your question please.

[Steven Alexopoulos:]

Hello, everybody.

[Jack Barnes:]

Hi, Steve.

[David Rosato:]

Hi, Steve.

[Steven Alexopoulos:]

Couple of questions on expenses, if we look at the 2017 expense guidance, I’m assuming by your answer Collyn that Gerstein is around $12 million in terms of the increase. So we are looking for expenses of somewhere between $30 million and $50 million, it seems to be a pretty big step-up in expense growth outside of Gerstein, what’s driving that?

[David Rosato:]

The number one is compensation and benefits, just that line item, which then also would include merits, new hires healthcare cost, that totals probably about $20 million, we have the FDIC surcharge that kicked in two quarters ago, ballpark, that’s about $3 million, an equal pickup in occupancy and equipment, as Jack mentioned, we have six branch openings, in the guidance as well as some of the higher level of depreciation for some of the projects, the revenue initiatives that we talked about in the past several calls.

[Steven Alexopoulos:]

Okay, that’s [indiscernible].

[Jack Barnes:]

Steve, obviously, we know that that is higher pace than we’ve had historically and as we pointed out in the slides that our average rate of 1%, but taking on Gerstein and then growing the businesses has those higher comp levels, those were big drivers.

[Steven Alexopoulos:]

Right.

[Jack Barnes:]

When we play out our guidance and look at our plan, we – as we said in the comments, we expect our efficiency ratio in 2017 to improve. So we are creating operating leverage despite that plan having higher expenses.

[Steven Alexopoulos:]

Okay. Jack, maybe following up on that. Do you think you could hold the efficiency ratio below 60% near-term given some of the seasonal headwinds that David ran through?

[Jack Barnes:]

Well, if you mean near-term first quarter…

[Steven Alexopoulos:]

Yeah.

[Jack Barnes:]

Well, in the first quarter, we will have the higher expenses that David referenced. So, will it be below – it’s going to be closed, whether it’s one side or the other, is my sense of that. But as I said, we expect through the year that we will have the slow incremental improvement that we’ve talked about and of course unless good things happen to rates and GDP, in which case that rate hopefully improve.

[Steven Alexopoulos:]

Right. And maybe just – go ahead David.

[David Rosato:]

I was just going to say if you look at our results over a five–year, you’ve seen a steady focus by us to bringing that ratio down and you’ve seen the success as well.

[Steven Alexopoulos:]

Yeah, okay. And maybe just final one. Jack I wanted to follow-up on your comments around your dividend. Are you saying that you would not announce a deal that would take you over $50 billion unless you are given assurance you could keep the current dividend, is that what you said?

[Jack Barnes:]

Yes.

[Steven Alexopoulos:]

Okay. I just want to make sure I heard you correctly. Thanks a lot guys. That’s all I had.

[Jack Barnes:]

Thank you.

[Operator:]

Thank you. Our next question comes from Ken Zerbe of Morgan Stanley. Your question please.

[Ken Zerbe:]

Great. Thanks. Just wanted to make sure I got the numbers right on the security repositioning, I think I saw, if I’m looking at the right number, that securities on an end of period balance were down almost $200 million, is that right? I’m just trying to get the right number to apply the 100 basis point yield improvement number.

[David Rosato:]

The 100 basis points was – to give up on $400 million of securities that were sold, they were sold very late in the fourth quarter.

[Ken Zerbe:]

Got it.

[David Rosato:]

Remember, over the course of the quarter, there were other security purchases as well.

[Ken Zerbe:]

So when you say they give up yields, so you lost $100 basis points by selling the securities and you are going to add – so I guess they go on – what – 200 basis points?

[David Rosato:]

Yeah, around that, yeah.

[Ken Zerbe:]

[indiscernible]

[David Rosato:]

And what I would say in the there was the yield on the securities was one-ten, don’t forget there is a funding cost against that as well. But incremental pick up, spread is slightly over 100 basis points by the time we buyback some – those securities that I’m referencing specific to that transaction.

[Ken Zerbe:]

Sorry. And to be super clear, is that $400 million that we should be investing 100 basis points higher?

[David Rosato:]

No.

[Ken Zerbe:]

I’m just trying to get the right number to apply to the 100 basis points.

[David Rosato:]

I would look at it as no loss in income between what we sell and what we purchase, but we will have the ability to have fewer securities on the books when you put the two sides together.

[Ken Zerbe:]

Got it. Okay, so should the yield is unchanged, so really it has no impact on our income statement?

[David Rosato:]

Income would be unchanged; we would carry smaller security balance.

[Ken Zerbe:]

Got it.

[David Rosato:]

So if you think about, it would be additive to the margin, it would be additive to capital levels.

[Ken Zerbe:]

Understood, not the income. Okay. Okay, great. Thank you.

[Jack Barnes:]

Thanks, Ken.

[Operator:]

Thank you. Our next question comes from Bob Ramsey of FBR. Your question please.

[Bob Ramsey:]

Hi, good evening. I know you said are not looking to move pass $50 billion without support of the dividend, if for whatever reason you are not able to get that simply because a lot times regulators don’t give clear indications of such things. What is the alternative plan then? Do you sort of stop below $50 billion? What do you do if you are not able to get that approval or that assurance I should say rather than approval?

[Jack Barnes:]

Let me – I would answer that this way. We’re at $43 billion, we are growing organically to $50 billion, it’s going to take a number of years. And what we are expecting that we will continue to improve our profitability, bring our payout ratio down and we see in the environment that the regulators are allowing 50 banks to carry cash dividend levels that are now up to $40 billion, we are now $60 billion something equivalent in the quarter, so we are going to continue to navigate toward $50 billion maintaining our dividend with the intent that we would not pass $50 billion without that support. Meantime, we fully expect to have a much lower dividend payout ratio than we do as we’ve continued to improve that as we go along.

[Bob Ramsey:]

Okay. And then I guess in terms of additional M&A once Suffolk is done, is it safe to assume that sort of until you get that $50 billion mark sort of squared away that you wouldn’t want to do a deal that would take you over that threshold?

[Jack Barnes:]

If we don’t get support from the regulators to maintain our dividend.

[Bob Ramsey:]

Okay. And I guess, maybe this is a little bit more nuance, but as I’m sure you are aware in New York community was not able to get a timely approval with a thought, although they did have support from regulators for their reduced dividend, they still couldn’t kind of get over the finish line over the timeline they had anticipated. How do you ever sort of get comfortable with a deal being able to sort of get to the whole regulatory process when a lot of that is really outside of your control?

[Jack Barnes:]

Well, our relationship with our regulators and our communication about our plans are in our control and we maintain very frequent and good relationships and communication with our regulators. So I understand that we would be looking for strong assurance and that would be our expectation. So I have no idea exactly what happens with the New York community in Astoria deal and I don’t think anybody else does expect the folks that are there. So I’m not going to draw any conclusions about that. I’m going to work on People’s United Bank and our regulatory relationships and our issues.

[Bob Ramsey:]

Sure. Okay. Thank you very much.

[Jack Barnes:]

Thank you.

[Operator:]

[Operator Instructions] Our next question comes from Matthew Breese of PJ. Your line is open.

[Matthew Breese:]

Good evening, everybody.

[Jack Barnes:]

Good evening.

[David Rosato:]

Hi, Matt.

[Matthew Breese:]

All right, so just a quick question on the Suffolk deal, in terms of your initial assumptions, in terms of cost saves, accretion in EPS, dilution to book value, has any of that changed?

[Jack Barnes:]

No, I would say the thing that has evolved is we had not built revenue synergies into the deal. And as we move through and continue to work with each other, I’m very optimistic that we will benefit greatly by the integration of having the teams come together. They are already working together as a team if you will on a number of relationships and things are going very, very well. My original expectation and Howard’s original expectation around the positives would be around our combination are only strengthened. We are both feeling very good about that.

[Matthew Breese:]

Right.

[Jack Barnes:]

And, Matt, I would only add to that, we haven’t done any updates to the streets since we announced that deal, the original cost saves that we set out, we are still committed to and there will be some pluses and minuses from interest rate marks because the – interest rates have moved, but nothing that substantially changes positive economics of that transaction for us.

[Matthew Breese:]

And what areas on the revenue front now have you more excited than when you first announced, is it fee income or loan growth capabilities, could you expand upon that?

[Jack Barnes:]

The significant piece I would say is loan growth possibilities.

[Matthew Breese:]

Understood. Okay. And then considering your margin guidance…

[Jack Barnes:]

Not to dismiss expectations around fee income.

[Matthew Breese:]

Understood. Okay. And then just considering your margin expectations for the year, there is an upward bias, could you give us some color around their trajectory throughout the quarter, is this going to be a greater shift upwards in the first quarter versus later in the year or how do you expect it to go just on a more granular basis?

[David Rosato:]

Sure, Matt, it’s David. I would just point out in the first quarter because of day count, you will normally see margin contraction, but aside from that, as you noted, we are feeling a little better about the margin based on the guidance we gave out. I would think our expectation is for a gradual increase in the margin over the course of the year especially if the yield curve keeps its current steepness and we continue to get positive comments about the economy and fed intentions.

[Matthew Breese:]

And does that margin range still hold that there is more than one fed hike this year?

[David Rosato:]

Yes, unless those fed tightenings wound up being substantially earlier and the curve wound up being steeper, but right now we are planning one increase at midyear as we said. If there were another one in the middle of the fourth quarter, for example, it’s really not going to have a big impact on the year.

[Matthew Breese:]

Okay. And then in terms of new commercial real estate loan yields, can you give us an idea of what traditional kind of 5-year 51 paper is going on your books at now versus at September 30 and how was the increase in the yield curve translated into new loan yields?

[Jack Barnes:]

We’ve seen some modest improvement in the quarter as rates moved some, but I would say the spreads pretty – have not changed dramatically in the market and no significant to-date anyway.

[Matthew Breese:]

Right, okay. And is that just as a function of competition?

[Jack Barnes:]

Yeah, I mean it’s just a function of market clearing price for commercial real estate these days.

[Matthew Breese:]

Okay. And then the same question for the deposit side, have you seen any pickup in deposit competition, new promotional rates, anything like that that will change deposit side?

[Jack Barnes:]

No. I mean it’s been a very muted to know response from the banking community. The only place where deposit costs have really changed at all is in a certain component of our municipal banking deposits from the larger customers. Again, that’s not a large piece of the book of business for us. That’s why you saw deposit costs unchanged third quarter to fourth quarter.

[Matthew Breese:]

Got it. Okay. And then my last one is really around the B50B, if I said that right, readiness program. It sounds like you want to complete that over the next couple of years. Is that to say that we shouldn’t see any sort of sizable transactions over the next couple of years that pushes that envelope on $50 billion or gets you over it?

[Jack Barnes:]

No, that is not to say that we continue to work on our readiness and obviously if there is – being opportunistic, if there is a compelling reason at that timeline gets accelerated for the right reason. We feel very confident that we can react to that and mange our way through that. Some of the cases is self-imposed in the sense of we are not spending money that we don’t need to ahead of the curve. So for instance living will in the construction and building out of a living will before we get there doesn’t make sense to us. We understand what it is, we’ve studied it, but there is no reason to invest further and actually build it until the time and we would have time to do that, adequate amount of time once we pass.

[Matthew Breese:]

Right. And then just the last one, how is the M&A landscape changed today versus pre-Trump and the run-up in a lot of bank stock valuations.

[Jack Barnes:]

I don’t think it’s changed much at all. I think the segment moved together, so everybody's currency is stronger generally, but I don’t think certainly in the last 60-days there’s been a major shift.

[Matthew Breese:]

Thank you. That’s all I had.

[Jack Barnes:]

Thank you.

[Operator:]

Ladies and gentlemen, this will conclude the time we have for questions. I’d like to turn the call over to Mr. Barnes for closing remarks.

[Jack Barnes:]

In closing, our fourth quarter performance provided a strong finish to the year, including record quarterly and full year net income, continued improvement in the efficiency ratio, further loan growth highlighting our diverse business mix, sustained exceptional asset quality and continued strong expense management. Our straightforward solutions oriented approach to banking and combination with our expensive suite of products and services continues to differentiate People's United across the Northeast corridor. As such, we enter 2017 well-positioned across our diverse portfolio as a business to further deliver exceptional service to clients and profitable growth 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.