People's United Financial, Inc.
Q2 2015 Earnings Call Transcript

Published: 16 Jul 2015

[Operator:]

Good day, ladies and gentlemen and welcome to the People’s United Financial Inc. Second Quarter 2015 Earnings Conference Call. My name is Whitney and I will be your operator for today. At this time all participants are in 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 now like to turn the presentation over to Mr. Andrew Hersom, Senior Vice President of Investor Relations for People’s United Financial Inc. Please proceed sir.

[Andrew Hersom:]

Thank you. Good afternoon and thank you for joining us today. Here with me to review our second quarter of 2015 results are Jack Barnes, President and Chief Executive Officer; David Rosato, Chief Financial Officer; Kirk Walters, Senior Executive Vice President and Jeff Hoyt, our Controller. Please remember to refer to our forward-looking statements on Slide 1 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. As I often do I spend time during the quarter calling on customers. These visits always provide me with a great sense of how well we are meeting their needs. The feedback I continually receive from customers is how our approach to relationship banking differentiates us in the market. In fact we recently were recognized with an Excellence Award by Greenwich Associates for delivering exceptional service quality to small and middle market businesses. While our expensive suite of product is comparable to large banks we also have a long history of focusing on relationship management at the local level. This combination uniquely positions us in our large and attractive markets and resonates deeply with customers. This enables us to broaden existing relationships and foster new ones helping to generate momentum across the franchise. We look to sustain this momentum by not only continuing to invest in talent, product and services but also by showcasing our strengths to a wider audience through our new marketing campaign. The knowhow starts with Knowing You campaign started at the end of June and focuses on our ability to understand the needs of customers and the breadth of products and services offered by our commercial wealth management and consumer businesses. If you reside in one of our markets I’m sure you’ve already seen one of our new television spots, billboards or print ads. Now turning to the overview of the quarter on Slide 2, our performance in the second quarter reflects this continued momentum. We grew loans 9% on an annualized basis marking the 19th consecutive quarter of growth, while at the same time maintaining excellent asset quality. In addition, we are pleased with the continued progress in gathering organic deposits as evidenced by the 5% annualized growth during the quarter. As we maintain emphasis on our franchise-wide cross-sell and deposit gathering efforts the deposit base will continue to see growth. Our continued focus on improving profitability drove a 6% increase in operating earnings from the prior year quarter. These results bring operating earnings through the first half of the year to $127 million, a 9% increase from the same period in 2014. Revenues decreased slightly from the first quarter as a result of modestly lower non-interest income partially offset by higher net interest income. As discussed in the conference call in April, we expected non-interest income to moderate in subsequent quarters from the very strong first quarter results. In comparison to the prior year quarter, the revenues on an operating basis increased 2% driven by improvements in both net interest income and non-interest income. As expected, operating expenses improved from the first quarter primarily resulting from lower compensation and benefit cost. On a year-over-year basis, operating expenses were slightly higher. However, we remain confident in our ability to control cost despite the ongoing impact of strategic investments and increasing regulatory compliance cost. With that, I’ll pass it to David to discuss the quarter in more detail.

[David Rosato:]

Thank you, Jack. On Slide 3, we provide detail behind the linked-quarter increase in net interest income from the first quarter. Strong originated loan growth and higher average balances and yields in the securities portfolio increased net interest income by 1.7 million and 1.5 million respectively. Net interest income also benefited by 1.7 million from an additional calendar day in the second quarter. The largest offset to these improvements was a 1.4 million reduction in net interest income from higher deposit costs and volumes. Additionally, a decline in accretion from write-off and the acquired loan portfolio lowered net interest income by $1 million. On Slide 4, net interest margin for the second quarter was 288, a decline of 3 basis points from the first quarter. New loan volume negatively impacted the margin by 4 basis points as new business yields remained lower than the total loan portfolio yield. In addition, the margin was lowered by 2 basis points from higher deposit volumes and costs. Contributing to the slightly higher cost of funds in the quarter were successful CD campaigns in the retail bank that targeted new customers and drove increased foot traffic into the branches. The margin benefited by 2 basis points from an additional calendar day in the second quarter and 1 basis point from higher average balances and yields in the securities portfolio. Turning to Slide 5. The loan portfolio grew 633 million or 9% annualized from the first quarter. Originated loan growth through the quarter totaled 691 million. As in prior quarters, growth was well balanced from a product and geographic perspective. C&I contributed 375 million of the total originated loan growth, while commercial real estate contributed 149 million. Within C&I we experienced strength across several categories, including traditional C&I, asset-based lending and most notable in our mortgage warehouse lending business. The portfolio remains broadly diversified with respect to loan type, geography and industry. Residential mortgages had another strong quarter with 151 million of originated loan growth. Similar with recent quarters, most of the newly originated residential mortgages retained in our portfolio were hybrid adjustable rate mortgages. The recent addition of a veteran sales manager and seasoned residential loan officers in our newer markets helped drive growth. This is another example of a targeted strategic investment in talent. We experienced acquired loan run-off of 58 million this quarter, compared to 93 million in the first quarter. The remaining balance of the acquired portfolio at quarter-end was $900 million. Slide 6 shows the growth in deposits by segment from the first quarter. Deposits increased 285 million or 4% on an annualized basis. Commercial deposits grew 310 million and retail deposits in line with historical second quarter patterns declined slightly as expected. Broker deposits ended the quarter at 2.6 billion down 13 million from the end of the first quarter. As such, the deposit growth in the second quarter was once again organically driven. Overall, we are very pleased with the progress we are making gathering deposits. We firmly believe that deposits are an integral part of customer relationships and we continue to focus on organic deposit growth. On Slide 7, we take a closer look at non-interest income. Non-interest income decreased 7% from the first quarter. As discussed on our conference call in April, we expect that non-interest income would moderate in subsequent quarters. As such commercial banking lending fees and customer interest rate swap income were down from very strong first quarter levels. Insurance revenues were also lower due to the seasonal nature of insurance renewals. In addition, as you will recall the first quarter benefited from the sale of one acquired loan. These decreases in non-interest income were partially offset by higher gains on sales of residential mortgages, as well as higher bank service charges. On Slide 8 we illustrate the key components of changes in non-interest expense during the quarter. Non-operating expenses decreased $3 million from the first quarter, which is mainly attributable to lower branch closure costs. Although branch closure costs were lower compared to last quarter, we did close 10 branches bringing the year-to-date total to 18 as we continue to optimize our branch delivery channel. Since the beginning of 2011, we have closed 54 branches which were mostly traditional branches. During the same period we opened 24 branches most of which are more cost efficient in-store branches. In addition to optimizing the branch footprint, we have begun to install new technology in our branches to improve efficiencies and further reduce costs moving forward. From an operating perspective expenses decreased 2.8 million from the first quarter. As expected compensation and benefits decreased 5.1 million resorting from lower payroll related and benefit cost which are traditionally higher in the first quarter. In addition, the quarter benefitted from nearly $2 million in lower occupancy and equipment cost. The largest offset to these improvements was a 1.5 million increase in professional and outside services. The increase is primarily related to costs associated with a number of initiatives focused on enhancing our product offerings and processes. As we have mentioned before, we continue to tightly control expenses while investing in revenue producing initiatives and covering the higher cost of regulatory compliance. The next slide details our efficiency ratio over the last five quarters. The ratio improved from both the most recent quarter and the second quarter of 2014. An important area of focus for the organization is to continue to improve operating leverage through revenue growth and effective expense management. Slides 10 and 11 are a reminder of our excellent credit quality, originated non-performing assets as a percentage of originated loans and OREO at 83 basis points remains below the peer group and top-50 banks and has improved from 96 basis points in the second quarter of 2014. Looking at Slide 11 net charge-offs for the quarter were five basis points, an improvement from recent quarters and the lowest level in over eight years. These levels reflect the minimal loss content in our non-performing assets and our view that conservative underwriting is viable for sustainable value creation. As shown on Slide 12 operating return on average assets decreased one basis point and two basis points respectively from last quarter and the second quarter of 2014. Our return on average assets continues to be impacted by the persistently low interest rate environment. Progress will be driven by continued loan and deposit growth, fee income growth and an ongoing disciplined approach to expenses. Slide 13 illustrates our return on average tangible equity. While this metric is down slightly from recent quarters, as profitability improves we expect to see continued progress overtime as we have seen in previous quarters. Turning to slide 14, we remain comfortable with our capital structure and balance sheet strength. Capital levels at the holding company and the bank continue to be strong especially in light of our diversified business mix and history of exceptional credit risk management. Slide 15 displays our interest risk profile for both parallel rate changes and yield curve twist. As you can see we are a bit more asset sensitive as compared to last quarter primarily due to a loan mix trending towards floating rate loans. At June 30th, 41% of the loan portfolio was either one month LIBOR or prime-based with 70% of these loans being one month LIBOR-based. Now I'd like to pass it back to Jack to wrap-up.

[Jack Barnes:]

Thanks David. Looking forward to the second half of the year we are optimistic we can sustain momentum by continuing to build and deepen relationships across our large and attractive markets. We remain committed to building the business for the long-term and are well positioned to deliver value to both customers and shareholders. This concludes our presentation and I would be happy to answer any questions that you may have. Operator we are ready for questions.

[Operator:]

Ladies and gentlemen, we are ready to open the lines for your questions. [Operator Instructions] Your first question comes from the line of Bob Ramsey, FBR Capital Markets. Please proceed.

[Bob Ramsey:]

I just wondered if you could talk about a little bit about the mix of retail versus in-store branches, I know you guys have continued as you mentioned to sort of shift that mix, what do you see as the optimal mix of retail versus our full service versus in-store?

[Jack Barnes:]

Well I think the way to two ways to think about that, if you think about our Connecticut and New York franchises that's where we have the in-store footprint with Stop & Shop. North of that in Massachusetts in the northern pieces we only have one actually to mine was recollection. So when you think about where we do have in-stores, we think of it and when a watch traffic patterns many-many of our customers used both, so they will use an in-store and a traditional and so we like the idea of sometimes we call it a hub and spoke kind of thing, but if you think about it and somebody is taking advantage of the convenience of seven days and extended hours but at the same time maybe lives near the traditional branch and uses the drive up and that kind of thing. It's really how they play together and I don't know that we really think of it say as a percentage in terms of optimization as much as how both types of branches working within a particular market naturally the kind of geographic and access particulars are different and unique in each place. What we do find very successful is the combined convenience of both.

[David Rosato:]

Bob it's also important to remind everyone that our in-store branches are full service, they offer every product and service that the traditional branches do as well.

[Bob Ramsey:]

And then I know you mentioned the in-store is really a focus in the Connecticut, New York franchises, is it not in other markets because that model doesn't work as well in those markets or is it really just you haven't found the right partnership locations to offer that?

[Jack Barnes:]

Yes if we had not found the right opportunity, the Stop & Shop group has a relation in the Massachusetts market with another bank and we'd be very interesting in it if we were to be an opportunity. So we like it and actually we get some information I think the Massachusetts arrangement and relationship is very successful there as well so.

[Bob Ramsey:]

And then your last question there on it but is there much more opportunity to consolidate the standalone branches or as you see the footprint today or you more or less where you want to be?

[Jack Barnes:]

I think that we will continue to keep working on it. I think David's remarks we laid out the number that we've done over the last few years and as we continue to move ahead with that, we learned more and more about how to effectively retain customers which we feel very good about our execution on that and we also are kind of in that process learning how again looking at traffic patterns and how the customers interact with us, learning how just how far we can go geographically with executing on that. And the other thing is the technology and interaction right engagement with the customer keeps changing and involving and I am sure that our take on how far we should go and what would be the say the next branch that would seem to be make sense will be impacted by that as well.

[Bob Ramsey:]

You mentioned in selling new technology in the branches in the prepared remarks, if you just elaborate a little bit on some of the technology you guys have been rolling out?

[Jack Barnes:]

Yes, one of the key things that we're using is machine called the cash recycler so people can make deposits in cash and withdraw cash out of the same unit and it doesn't require tellers' involvement. And we're also using image enabled ATMs that allow them to again kind of walk up to the ATM place the check on the screen, and make the deposit well without needing assistance, so the technology is allowing us to reevaluate staffing needs and the time of staffing needs and that's the gist of it.

[Operator:]

Your next question comes from the line of Casey Haire with Jefferies. Please proceed.

[Casey Haire:]

So just wanted to touch on the loan growth outlook obviously a nice quarter here you guys are tracking nicely towards your guide on the year, just curious how is it looking in the second half of the year is any chance for acceleration based on pipeline strength at June 30th and where are you seeing the most, where are the pipelines strong as by product?

[Jack Barnes:]

So yes we are feeling good about the second half and the pipelines are actually up in the second quarter compared to the first and that maybe the first indicator. Second is that our third and fourth quarters historically are stronger in terms of originations. And I would say we continue to be most encouraged across the core C&I middle market activity and that’s across the footprint. We are a little slower but okay in the equipment finance business and ABL is making nice. Mortgage warehouses have got some all time line utilization highs. So that’s very active. We don’t see that moderating right away although we certainly consider it something that could be mull so depending on mortgage rates. And CREE is probably the area where it’s slowest and pipelines are really encouraging but that market has been slower than we anticipated the last few years, mostly a competitive situation I think.

[Casey Haire:]

And then just switching gears to expenses. Nice leverage this quarter. I was a little surprised to see the other non-interest expense line to actually rise. I know there is some, the banking restructuring charges are in there but 6 million, last quarter 3 million, this quarter, and then still for that line to rise, what was driving that growth quarter-to-quarter?

[Jack Barnes:]

Casey, are you asking about other non-interest expense?

[Casey Haire:]

Yes, the other non-interest expense. So the write down was 6 million last quarter, it’s only 3 million this quarter and yet the other line is up. So I am just curious what was driving that and what is kind of a good run rate for that other line going forward?

[David Rosato:]

Yes, the advertising was up in the quarter in conjunction with the campaign that Jack talked about at the beginning of his comments. And also in the first quarter we had a little better experience on OREO sales but the advertising is just a timing issue, so real uptick in that line item is expected.

[Casey Haire:]

And just lastly, on the assets activity front, the broken deposits 2.6 billion, if memory serves, I think that had an average term around nine months, which is obviously gives you a nice lag on the funding side when rates rise. But I am just curious what would be your expectation for the simulation at that nine month point, meaning once those, that market funding has to re-price, does the NII simulation face like a headwind where you become liability sensitive?

[Jack Barnes:]

Well what I would say is that those broker deposits are a combination of money markets as well as CDs and it’s the CDs that have the term in them. But when we model that and produce our interest rate risk resorts we assume 100% sensitivity 100% re-pricing of the money markets immediately upon a change in the Fed target rate and the CDs are also 100% though it doesn’t happen until, it only happens as the book rolls. But both of those are all 2.6 billion of broker deposits is 100% sensitivity assumed.

[Casey Haire:]

I guess what I am getting at is like I know you guys are showing asset sensitive for the first 12 months, my point is at once you reach that nine month mark, does the balance sheet become liability sensitive?

[Jack Barnes:]

No, if we roll forward our models, we remain asset sensitive.

[Operator:]

Your next question comes from the line of Steve Moss with Evercore ISI. Please proceed.

[Steve Moss:]

I was wondering just give more color with regard investment securities growth, I think grown about 25% year-over-year and if you expect that to continue?

[Jack Barnes:]

Yes. There will probably be modest increases in our securities portfolio in the third quarter and maybe into the fourth quarter. We are only about 15.5% or so of total assets. So when we think about that portfolio relative to our peer group, we do and have always had a smaller securities portfolio. And the other thing about that portfolio is there -- it is a relatively short or moderately short duration portfolio especially when you back out the long-term units that we have at our HCM account.

[Steve Moss:]

Then in terms of the on the mortgage warehouse you guys mentioned this big source of growth, just wondering what are the balance of that at the end of the period here versus last quarter?

[Jack Barnes:]

Sure. The mortgage warehouse at 3/31 was 911 million and at 6/30 it was 1.151 billion.

[Steve Moss:]

And also one more thing with regard to or one more thing in terms of loan spreads, have they stabilized or you continue to see a downward trend?

[Jack Barnes:]

No, we actually are hopeful that loan spreads have stabilized. We saw that occur in the second quarter and we have our figures crossed that it continues and at some point starts to widen. The downward pressure we’ve been fighting seems to be abating.

[Operator:]

Your next question comes from the line of Steven Alexopoulos with JPMorgan. Please proceed.

[Steven Alexopoulos:]

I wanted to start with a few questions on the deposit cost, on Webster’s call this morning they indicated other banks in their markets were pushing up the market rates being paid for deposits. When we look at your deposit cost they were up particularly time deposits. Are you guys responding also to what other banks are doing, you are offering a better rate or are you one of the banks that is actually pushing u market rates given you need to fund loan growth?

[Jack Barnes:]

It would definitely be the former and then I wouldn’t even necessarily say we’re responding to what other banks are doing. We have done a couple of things you saw our overall deposit costs go up 2 basis points. We did and we referenced it in my comments we have run a few CD port or CD campaigns over the course of the second quarter and we did a little in the first quarter as well. What we’re trying to do is a; lock in a little term money but also to drive activity into the branches. One of things that is we hope is unique about us is that to open up a CD with us you require to open up a DDA relationship as well and what we find is that we actually grow our DDA balances at a faster pace when we run those CD campaigns and we are driving the most growth in our newer markets of mass in New York as well.

[Steven Alexopoulos:]

Is there a target David in terms of how much you’re expected to raise with the campaigns?

[Jack Barnes:]

No, there is not a number that we have out there.

[Steven Alexopoulos:]

To shift gears looking at the efficiency ratio which you have on Slide 9 it is down modestly over the past year I would call it essentially flat ex any benefit from rates should we basically just continue to assume that stays pretty flat in this range?

[Jack Barnes:]

I think that’s probably fair Steve, but I also if you think about continued growth and growing net interest income with certainly time to grow the piece and so I think we can -- we are working to continue to make progress I think ex a movement in rates it is going to be hard to make any dramatic steps forward for sure but I’d like to think that we can incrementally continue to make small steps forward.

[Steven Alexopoulos:]

Just one technical question with the banking house asset right down which you reported again this quarter, can you just remind us what exactly you’re writing down with those?

[Jack Barnes:]

So those are closing the branches so it’s either termination of leases or successive write-offs.

[Steven Alexopoulos:]

Okay, got it so it’s all branch related. Okay. Thanks for the color.

[Operator:]

Your next question comes from the line of David Hochstim with Buckingham Research. Please proceed.

[David Hochstim:]

Could you just repeat again what you were saying about loan pricing in commercial C&I and commercial real estate using theme stabilizing spreads?

[Jack Barnes:]

Sure. Well the comment was in general across all of those portfolios in the second quarter we saw loan spreads stabilize and that’s relative to our stance over the last couple of years us in the industry of tighter and tighter spreads and then that is that statement really holds true for most of our portfolios as well at least the major portfolios when you think about C&I, commercial real estate our mortgage warehouse business as well as on the retail side as well our residential mortgage portfolio.

[David Hochstim:]

And the mortgage warehouse loans are those in commercial or in…?

[Jack Barnes:]

Yes, they’re in our commercial business.

[David Hochstim:]

And then could you just give us an update on your merchant acquiring joint venture, is that generating any income for you yet?

[Jack Barnes:]

Yes, it is. It kind of slow steady progress but right now I think the way to characterize it on an annual basis is it’s about where we were before we went into the joint venture. But we’re very encouraged by the progress we’re making on the sales side, so we do expect some slow steady momentum to build there but certainly had not seen any dramatic change in a historical kind of contribution from that business.

[David Rosato:]

It’s right where it should be today and there is a lot of positive momentum.

[Jack Barnes:]

Yes it’s on plan but I think the biggest thing and I know we’ve mentioned it before we're having some success with larger merchants larger customers of ours that appreciate advantage capabilities and we weren’t -- we were not able to offer those to them before so we’re booking business and it will start to show gradually overtime.

[David Hochstim:]

And then could you just talk about new branch openings given that technology you’re talking about deploying that makes branch operations more efficient. Would it make sense to open more smaller branches or do you think for example in New York where you’re still kind of under-branched?

[Jack Barnes:]

We definitely are thinking that way. We happen to call the use of the technology and the way we’re modifying the in-store branches advantage centers. We’re just at the beginning of this deployment and that will certainly those branches are third less costly if you will than the average branch and this will make them even more cost effective because of the staffing impact. And as we look to new markets and to expand into New York and Boston in particular we are thinking about smaller traditional branches rather than kind of old school.

[David Hochstim:]

That went to less costly that’s the operating cost not the facilities cost I guess, that’s a personnel cost.

[Jack Barnes:]

I am sorry I am having trouble hearing you.

[David Hochstim:]

You referenced that they’re about one third less expensive that’s in terms of staffing and personnel or is that operating cost?

[Jack Barnes:]

It’s all, it’s all of the above so there is staffing, personnel and there is the least cost of the facility et cetera.

[David Hochstim:]

And then I am sorry if I missed it, did you give net interest margin guidance for the second half?

[Jack Barnes:]

We gave annual guidance in January for what we expected over the course of the year, and we’ll continue at halfway through the year here to be comfortable with the ranges we delivered.

[Operator:]

Your next question comes from the line of David Darst with Guggenheim Securities. Please proceed.

[David Darst:]

With your commentary on fee income, are you expecting continued pressure or should we see a recovery in the second half of the year for the swap income and commercial fees?

[Jack Barnes:]

Well, I think what happened is we had a really strong first quarter and we’d like to see that in the third and fourth quarter going forward we as you know I mean those businesses depend on the customer’s appetite. I think we’re not planning in terms of kind of perspective we’re not planning on it. But we have people with expertise in the markets and we’re in front of folks in a more active way as we’ve described before with looking to build that business. On the insurance side, we’re looking for seasonal increases in insurance revenue in the third quarter again that’s historically been very consistent.

[David Darst:]

And then could you give us an update kind of on the timing or probability if you’re issuing some type of preferred?

[Jack Barnes:]

Sure David and it’s what we said last quarter was we thought it would probably be at this point a mid 2016 event and that was continued on the size of the balance sheet and we would say again that that’s the most likely scenario at this point. Our guidance [Multiple Speakers] pretty much where we thought it would be at this point.

[David Darst:]

And then Dave just quickly could you restate your comment around the number of percentage of loans tied to one month LIBOR and prime?

[David Rosato:]

Sure, so what I said in the prepared remarks was that 41% of the loan portfolio at 6/30 was tied to either one month LIBOR or prime and that 70% of those are one month LIBOR-based.

[Operator:]

Your next question from the line of Collyn Gilbert with KBW, please proceed.

[Collyn Gilbert:]

Just to quickly follow-up on the last question. So that's, you've indicated obviously what is tied to one month LIBOR but what's the duration of your residential mortgage portfolio?

[Jack Barnes:]

Well I don’t have an exact number but I will let me take a -- put a broad range around what I think it is. So that portfolio it is almost exclusively hybrid arms so the most popular products for us or the only products we offer are 5-1, 7-1 and 10-1s. And we’ve had those products for years now so it's a very seasoned portfolio. The top of my head I would think that the average duration of that portfolio is between 3 and 3.5 years. We also have about between 600 million and 700 million hybrid arms that once they became floaters they haven't repaid off which is contrary to what used to happen. It's just a function of how low rates are. So we have a large part of that portfolio that is also tied to either one year treasuries or one year LIBOR as well that was.

[Collyn Gilbert:]

And is that really what's driving sort of the justification of the thought to not have any, if I'm looking at it right, not having any long-term borrowings on the balance sheet?

[Jack Barnes:]

Yes well there's a couple of things. I mean we have a little bit of long-term borrowings, and some of that's in the form of capital market transactions for instance. We have a $500 million about 2.5 year old 10 year note that's outstanding at the holding company. But most of the liabilities in our treasury unit, meaning excluding our retail CD deposit base are fairly short. It is a function of short duration assets pretty much across the board whether you look in our securities portfolio, our residential loan portfolio and the growing amount of floating rate assets that we’ve been generating. Meaning growth in C&I, our mortgage warehouse business entirely and floats of one month LIBOR, our ABL is a one month LIBOR portfolio. Equipment finance is very short our home equity portfolio is all prime-based. So we have a nice mismatch at the short-end of the curve where we have quite a bit more assets than liabilities and that's the big driver in our asset sensitivity and we don't feel we need to increase the asset sensitivity by doing long-term borrowings at this point. And it's been the right decision for years now.

[Collyn Gilbert:]

Okay I'll leave that discussion point there. Just to also to confirm so you'd mentioned that the origination spreads, or you've mentioned spreads I should say were stabilizing on the commercial side. I'm assuming in your comments you mean origination spreads are stabilizing because and I guess then part two of my question how are you seeing sort of the differential still between the portfolio yield and the origination yield. Is that gap narrowed now?

[David Rosato:]

Jack and I are looking at each other I just would pass the note Collyn that, the duration of our residential mortgage portfolio is 3.2 years.

[Collyn Gilbert:]

Okay.

[David Rosato:]

Okay, yes that gap has come down, it's come down because the originated portfolio as you see it has been coming down, if you look over a long period of time there's definitely been a trend towards conversions, we're not there yet and it's hard to predict exactly when that might occur, so the only thought or color I can really give you is we are seeing a convergence.

[Collyn Gilbert:]

Okay, and then just as your discussion on the CD promotion that you did. What was the rate on that?

[David Rosato:]

Well there were actually different terms there. We had a couple of different offers out there. Generally speaking where those CD offers are maybe 20 basis points, 25 basis points above treasury yield curve.

[Collyn Gilbert:]

Okay and what part of the treasury what I mean…?

[David Rosato:]

Well it depends, I [Multiple Speakers] I know we've done an 11 month CD, we did an 18 month CD and we actually did a 5 year CD as well.

[Collyn Gilbert:]

Okay, and then just on your comments to about the uptick in professional fees this quarter and talked about kind of looking at different product offering, can you just talk a little bit more detail on exactly what's going on there, it just seems like a pretty big number of an increase just trying to understand that and maybe what the trend we should expect going forward?

[Jack Barnes:]

Collyn, this is Jack. We just happen to have a timing issue and some unique efforts that had caused that number to go up and we don't it will continue, but so we've had an effort and we used some outside consulting help to look at our salesforce effectiveness and what tools we might use throughout the Company to improve our ability to drive sales, and drive revenue as we went forward and we paid some fees for that service and that is a one-time event. And then we also paid some outside fees in our payments states and the same folks that helped us with the joint venture in the merchant service helped us evaluate several other aspects of our payments environment and some of the offerings we have there. So that trends and the uptick that you see should not continue as we go forward, we will -- we've got other things going on in terms of other outside professional service venders that we continue to negotiate contracts with and we continue to increase utilization. So that it should be relatively in the range it has been historically.

[Collyn Gilbert:]

And just one quick last question, I know you guys Dave talked about you have spent some time on the retail deposit side but if we could just go back to the commercial deposit initiative I know that's been a big focus for you guys for this year, David, I think you said you had, was it 300 million in commercial deposits come in, if you could just sort of update us again on what the numbers were for the commercial deposits and kind of what your goals are for the year on that front and then I'll leave it there?

[David Rosato:]

Sure let me talk a little bit about what we are doing, because I really think that is what's most important and that's been -- our efforts have been in place for a couple two years now or so where we have really impressed upon our relationship managers the need to raise commercial deposits because we've been undersized in commercial deposits as an institution for a long period of time. And so we did a couple of thing there, we increased incentives for deposits but more importantly we put in profitability models that lenders need to submit with every loan request, so it's just looking at the totality of the relationships both the loan all the fee income businesses as well as the deposits. And the deposits are a large component of the profitability, so we stayed focused on that across the organization and that's what we're seeing flow through. The commercial growth in the quarter was $310 million to give you the number.

[Collyn Gilbert:]

And do you have enough what that was in the first quarter?

[David Rosato:]

I do not have it off hand we can get it for you. It was a larger number in the first quarter I just I am blanking on the number.

[Collyn Gilbert:]

But it's in the target for the year is something in the range of 300 and some odd million a quarter is that how we should think about it?

[David Rosato:]

In that ballpark there is what I would say is there is some seasonality across some of those businesses, so we actually had negative seasonality this quarter in our municipal business that will recover in the third quarter. But the success here is we don't have a firm number around what we were trying to do each quarter, what we were trying to do is change behavior across the whole salesforce. But we've been very pleased with that we've been able to do in the first two quarters of the year and would expect the behavior changes to last not only this year but into the future.

[Operator:]

Your next question comes from the line of Matthew Breese with Piper Jaffray. Please proceed.

[Matthew Breese:]

Just going back to a prior question on preferred equity into 2016, I was just trying to get a sense for the size or what you would estimate to be the size of that offering or what capital ratio you would be looking to maintain if and when that would have come about?

[Jack Barnes:]

Matt, we haven’t really sized it. It’s going to be a function of the size of the balance sheet as well as our sense of what growth from that point forward will be. I mean the only color I can give you there is I think it would be hard to believe that we would issue up to what is allowable under Basel III which is 1.5% of risk weighted assets. Today our thought process would probably be about half of that or so. The -- so at this point that’s about the best color I can give you.

[Matthew Breese:]

No I am sorry, that’s helpful.

[Jack Barnes:]

I am sorry, go ahead.

[Matthew Breese:]

No I interrupted you, I am sorry.

[Jack Barnes:]

I was just going to follow, go back to Collyn’s question about the commercial deposit growth in the first quarter, it was $600 million.

[Matthew Breese:]

And then I just wanted to follow-up on charge off level this quarter were obviously very low and I wanted to get a sense for whether or not you thought this kind of level was sustainable and how that also factors into your provisioning expense?

[Jack Barnes:]

Yes, so this is Jack. I think that we had a very low quarter and we would very much like to see it continue to repeat. We have seen a reduction in problem assets as we think about working through the last several years an indemnification of criticized loans and alike, they are at modest levels and we don’t see a lot of new names. So we are encouraged by that. And there’s two components of our provisioning all right and the build. So one is to cover net charge off activity and the other is to build the allowance as we grow the portfolio. So you think about covering net charge offs, we did have some very good recoveries this quarter, not too far out of normal range but better than average. So that impacted the net charge offs some as well. And whether that...

[Matthew Breese:]

[Multiple Speakers] do you expect somewhat of an increase in the provision for the remainder of the year?

[Jack Barnes:]

I think the provision has been in a fairly narrow range for quite some time and if you are planning on it. We don’t expect dramatic shift. So that’s probably the appropriate way to look at our history and we don’t see anything moving.

[David Rosato:]

And the only thing I was going to add is when you are at these low levels, one credit or two credits can really bounce that number around. And a large part of the provision for this quarter and it was in the press release a little over $4 million was just provision for growth going forward.

[Matthew Breese:]

My last question is really around, I want to get a sense for where you as a management team stand on in terms of M&A and a desire to go out and transact and be a buyer?

[Jack Barnes:]

No we, I think the way, to describe the way we think about it is we are very focused on organic growth. We think we have got great opportunities to continue to grow organically at a very good pace, I think gets back to what we’ve been doing in terms of the acquisitions that we did in ’10, ’11 and ’12 that got us into Boston and New York and so that’s a primary focus. We continue to build relationships and convey an interest with folks and at least dialoging if it works mutually across the Northeast corridor. And as I said in the past those things I think people understand that we are a successful acquirer, we are a successful company and we are very interested in being constructive about those things. And whether it happens or not I find this very much on each individual partner’s situation.

[Matthew Breese:]

I just had one last quick one. What was the average loan yield on the acquired portfolio?

[Jack Barnes:]

Yes. It’s not a number we have traditionally given. It’s a little over, it’s around 6%.

[Operator:]

Your next question comes from the line of Sameer Gokhale with Janney Montgomery Scott. Please proceed.

[Sameer Gokhale:]

I had a couple of questions. Just going back to the discussion about the relationship managers and how they are being charged with originating deposit as well as you’ve kind of you mentioned I think that you had put the initiative in place maybe a couple of years ago and I think you alluded to the fact that maybe we’ve been pleased with the progress you have seen since the beginning of this year but would you say at this point I mean it sounds to me like you feel that those relationship managers still have some room to go in terms of adopting this philosophy of originating deposit or shouldn’t they kind of have matured at this point in time in terms of what their capabilities are from that standpoint even how should we think about how much more room they have to move the needle in terms of raising deposits?

[Jack Barnes:]

No I think it’s very fair I feel very strongly that it has matured and naturally whatever we’ve got newer relationships coming on hiring people getting them oriented to our organization but for the most -- in terms of the program and our relationship managers we have specific goals for relationship managers built into their individual plans. We’ve got incentives around those that have been established at least for two years probably longer. So what David I think was trying to describe is that we continue to see these relationship’s new activity and we look at those returns that are coming from the profitability sheets and we continue to encourage more progress all the time. So I think the maturity of the program is there I think the issue is there is always opportunity and we continue to look for more progress. And the division if you will, the business line has goals, the individuals within the business line have goals and everybody is now working towards them.

[Sameer Gokhale:]

And then just going back again to the issue of the efficiency ratio and thinking about that, I mean it seems to me that maybe you’ve already made significant investments in sort of improving like upfront investments to try to improve operating efficiency and you should be reaping the benefits of that. You’ve done a fair amount of it but then people are talking about a lot of emphasis being put on mobile banking and investing more in that technology you’ve talked about some of your branches and enabling the deposit taking capability at tellers. So how should we think about your investments in the near-term that could maybe help drive more operating efficiency overtime but will represent more initial investments upfront? Do you think that we see a meaningful lift in those investments, are you pretty much done at this point with a lot of those investments and we just see sort of a fairly even investing going forward?

[Jack Barnes:]

Well, I think the way to think about that is we have made a lot of progress on putting automation into our back room in many functions and departments but we again kind of continues improvement, we continue to look for more opportunities. I would say in the normal capital spend pace we always have several projects, we have several projects oriented to improve the environment and improve the operating efficiency. So I would think about it as more of continues improvement and not any dramatic or some, to answer your question, should you expect some significant unusual level of investment that is going to cause some kind of change I do not anticipate that.

[Sameer Gokhale:]

So then it’s fair to say that some of these professional and other third-party expenses that you’ve kind of incurred, those move down and then those kind of fall to the bottom-line it seems unlikely they’re going to reinvest those into some other type investments or initiatives and things of that nature. So I just want to kind of flex that out a little bit.

[Jack Barnes:]

Sure I mean I’ll go back to continuous improvement I think that that line item we were talking about and the spend that we saw here in the second quarter will moderate but I think we will continue to look for opportunities to do things better and we certainly may engage folks in the future.

[Operator:]

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

[Andrew Hersom:]

Thank you again for joining us today. We appreciate your interest in People’s United. If you should have any additional questions, please feel free to contact me at 203-338-4581. Have a great night.

[Operator:]

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