U.S. Markets open in 3 hrs 3 mins

Edited Transcript of PBCT earnings conference call or presentation 18-Apr-19 9:00pm GMT

Q1 2019 People's United Financial Inc Earnings Call

BRIDGEPORT Apr 22, 2019 (Thomson StreetEvents) -- Edited Transcript of People's United Financial Inc earnings conference call or presentation Thursday, April 18, 2019 at 9:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Andrew S. Hersom

People's United Financial, Inc. - SVP, IR

* Jeffrey J. Tengel

People's United Financial, Inc. - President

* John P. Barnes

People's United Financial, Inc. - Chairman of the Board & CEO

* R. David Rosato

People's United Financial, Inc. - Senior EVP & CFO

================================================================================

Conference Call Participants

================================================================================

* Austin Lincoln Nicholas

Stephens Inc., Research Division - VP and Research Analyst

* Brocker Clinton Vandervliet

UBS Investment Bank, Research Division - Executive Director & Senior Banks Analyst of Mid Cap

* Collyn Bement Gilbert

Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst

* David Patrick Rochester

Deutsche Bank AG, Research Division - Equity Research Analyst

* Jared David Wesley Shaw

Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst

* Kenneth Allen Zerbe

Morgan Stanley, Research Division - Executive Director

* Mark Thomas Fitzgibbon

Sandler O'Neill + Partners, L.P., Research Division - Principal & Director of Research

* Matthew M. Breese

Piper Jaffray Companies, Research Division - MD & Senior Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day, ladies and gentlemen, and welcome to the People's United Financial, Inc. First Quarter 2019 Earnings Conference Call. My name is Sherry, and I will be your coordinator for today. (Operator Instructions)

I would now like to turn the conference over to Mr. Andrew Hersom, Senior Vice President of Investor Relations for People's United Financial, Inc. Please proceed, sir.

--------------------------------------------------------------------------------

Andrew S. Hersom, People's United Financial, Inc. - SVP, IR [2]

--------------------------------------------------------------------------------

Good afternoon, and thank you for joining us today. Here with me to review our first quarter 2019 results are Jack Barnes, Chairman and Chief Executive Officer; David Rosato, Chief Financial Officer; Kirk Walters, Corporate Development and Strategic Planning; Jeff Tengel, President; and Jeff Hoyt, Chief Accounting Officer. Please remember to refer to our forward-looking statements on Slide 1 of this presentation, which is posted on our website, peoples.com, under Investor Relations.

With that, I'll turn the call over to Jack.

--------------------------------------------------------------------------------

John P. Barnes, People's United Financial, Inc. - Chairman of the Board & CEO [3]

--------------------------------------------------------------------------------

Thank you, Andrew. Good afternoon. We appreciate everyone joining us today.

Let's begin by turning to the first quarter overview on Slide 2. We are pleased with our first quarter performance and continued success in enhancing profitability. Operating earnings of $123 million increased 18% from a year ago, and operating return on average tangible common equity of 14.4% improved 60 basis points. On a per common share basis, operating earnings were $0.33, up $0.03 from the prior year quarter.

We continue to execute on revenue-producing initiatives and synergies created by recent acquisitions. Total revenues of $427 million increased 11% from the prior year quarter and 1% linked-quarter. These results were driven by higher net interest income, reflecting net interest margin expansion as well as growth in noninterest income. The margin improved 15 basis points year-over-year and 3 basis points linked-quarter primarily due to higher yields on new business.

While the first quarter is seasonally higher for expenses, total noninterest expenses excluding merger-related costs increased 3% from the fourth quarter. Our thoughtful approach to expense management has enabled us to control costs while continuing to make important investments in our digital capabilities. As a result of these investments and several new fintech partnerships, we continue to build out digital solutions for customers.

Earlier this year, we launched an online and mobile residential mortgage and home equity lending portal to simplify and transform the way customers apply for a mortgage and home equity loan. Later this month, we will introduce a more advanced website that will offer a fully optimized user experience for mobile devices. The new peoples.com will also provide, among other advancements, a customer-centric design focused on providing tailored solutions and an enhanced storefront feature to highlight key product areas.

In the second quarter, we will be significantly enhancing our online mobile deposit account opening solution that will improve customer experience with its ease of use and speed. And also in the second quarter, we expect to launch our new direct to client investment advisory solution, which will deliver an online portfolio management solution to customers. All of these enhancements allow us to provide a fast and efficient digital onboarding experience for our customers.

Moving on to loans. In what is a seasonally slower quarter for growth, total period end loans increased 1% from year-end, our strongest first quarter growth rate since 2015. Solid results across C&I businesses and equipment finance more than offset lower commercial real estate balances, reflecting the importance of our portfolio's diversification. The quarter also benefited from a lower level of paydowns compared to recent quarters. We are also very encouraged with the momentum being generated across our specialized industry verticals. In addition, loan pipelines at quarter end were solid, causing us to remain cautiously optimistic despite a highly competitive environment.

We continue to be pleased with our ability to gather deposits as evidenced by period end balances increasing $742 million or 2% from year-end. While we have achieved deposit growth across many of our markets, we are particularly pleased with the results in our New York franchise. Period end balances in the state increased over $350 million from year-end to $5.7 billion. Given this success, we are excited to open a new branch at Manhattan Penn Station later this quarter. More than 0.5 million passengers pass through this station every day, many of whom are commuters from Long Island where we have significant presence.

Our strong results this quarter are a testament to the hard work of our employees who successfully integrated the acquisition of VAR Technology, completed the core system conversion for Farmington Bank and advanced the integration of Belmont while continuing to deliver organic growth, the same asset quality and enhanced profitability. This performance is further evidence that the integration of acquisitions is a significant core competency of People's United. I'm extremely proud of the efforts of our employees and their dedication to the company.

With the acquisition of Belmont complete, we are excited to leverage our expanded customer and employee base to build upon our strong organic growth in Massachusetts particularly in the Greater Boston area. Integration has gone very well. Core system conversion will take place in the third quarter, and we remain confident in achieving the transaction's attractive returns. During the quarter, Jeff Tengel and I visited with Belmont employees and spent time with their customers. We came away from these meetings even more impressed with the talent that we will -- that will be joining our team as well as with the strength and the quality of the customers they do business with.

The momentum our franchise is generating in the Greater Boston area is significant. With the addition of Belmont, the recent establishment of 3 new specialized business lines to our Boston-based commercial team and the opening of a branch in the vibrant Seaport District in the city this summer, we are optimistic about our growth opportunities in the region.

In addition, our prudent capital management has enabled us to grow the business organically and invest strategically in the franchise while also providing a consistent cash return of capital to our shareholders. As such, we are proud to announce the company's 26th consecutive annual common dividend increase. We remain committed to our strategy of annually increasing the common dividend while also continuing to reduce our common dividend payout ratio through earnings growth.

Before passing the call over to David to discuss the first quarter in more detail, I wanted to note we were honored to be recognized by Barron's as one of the Top 100 Most Sustainable U.S. Companies for 2019. People's United was ranked #5 among financial institutions and #41 overall based on assessments of more than 200 performance indicators in 5 categories, which includes shareholders, employees, customers, planet and community. We are pleased to receive this noteworthy recognition, and it is a reflection of our unwavering commitment to the company's guiding principles.

With that, here is David.

--------------------------------------------------------------------------------

R. David Rosato, People's United Financial, Inc. - Senior EVP & CFO [4]

--------------------------------------------------------------------------------

Thank you, Jack. Turning to Slide 3. Net interest income of $332.8 million was up modestly from the fourth quarter. The loan portfolio contributed $15.4 million of the increase to net interest income and benefited from higher yields on new business. Net interest income also benefited $1.8 million from a lower level of borrowings. The primary offsets to these increases were higher deposit costs and 2 fewer calendar days in the first quarter, which reduced net interest income by $12.2 million and $4 million, respectively.

Net interest margin of 3.20% expanded 3 basis points from the fourth quarter. As displayed on Slide 4, this expansion was primarily driven by the loan portfolio, which favorably impacted the margin by 15 basis points as new business yields continued to increase and remained higher than the total portfolio yield. The margin also benefited 2 basis points from lower borrowings and 1 basis point from higher yields in the securities portfolio. Conversely, higher deposit costs lowered the margin by 11 basis points, while 2 fewer calendar days reduced the margin another 4 basis points.

Looking at loans on Slide 5. Average balances of $35 billion increased by $30 million or less than 1% from the fourth quarter. On a period end basis, loans ended the quarter at $35.5 billion, up $274 million or 1% from December 31. Solid results across middle market C&I, asset-based lending, mortgage warehouse lending, health care and equipment finance more than offset lower commercial real estate balances. Growth in equipment finance was primarily driven by LEAF, which grew period end balances by 11% linked-quarter.

Balances in the transactional portion of the New York multifamily portfolio, which is in runoff mode, ended the quarter at $940 million, down $27 million from year-end. While the decline during the quarter was less than anticipated, we continue to expect runoff in this portfolio to be $400 million to $500 million for the full year.

Moving on to deposits on Slide 6. We are encouraged by our continued success gathering deposits as average balances of $36.5 billion increased $491 million or 1% linked-quarter. Period end balances of $36.9 billion grew $742 million or 2% from year-end, lowering the loan-to-deposit ratio to 96%. The seasonality of our municipal business had a favorable impact on period end deposits of nearly $600 million. As a reminder, the first and fourth quarters are typically our strongest quarters for deposit growth.

While our deposit costs were up 10 basis points for the quarter, we continue to focus on controlling pricing. While we have observed some very modest easing in deposit pricing, mostly related to shorter-term CD specials and corresponding rates, we still view the market as highly competitive. Our interest-bearing deposit beta is 32% since the beginning of the current cycle of increasing interest rates, up 5 percentage points from 27% at the end of the fourth quarter. In comparison, our loan yield beta is 42% during the same period, which also increased 5 percentage points linked-quarter from 37%. Over the past 12 months, our interest-bearing deposit and loan yield betas are 66% and 74%, respectively.

Turning to noninterest income on Slide 7. Noninterest income of $94.6 million increased $5.9 million or 7% on a linked-quarter basis. As you will recall, noninterest income in the fourth quarter included $10 million of security losses incurred at the tax planning strategy in response to tax reform-related benefits recognized in the period. Excluding security losses, noninterest income decreased $4.1 million or 4% from the fourth quarter. This decline was primarily driven by a $4 million reduction in customer interest rate swap income, which had a very strong fourth quarter; $1.8 million in lower commercial banking lending fees, reflecting less prepayment income; and a $1.7 million decrease in bank service charges primarily resulting from 2 fewer calendar days in the first quarter. Positively, insurance revenue was up $3.8 million in the quarter.

On Slide 8, noninterest expense of $277.2 million increased $14.5 million linked-quarter. Included in the first quarter were $15 million of merger-related costs, with $11.9 million in other noninterest expense primarily reflecting costs of 15 branch closures associated with the Farmington acquisition; $1.5 million in compensation and benefits; $1.2 million in professional and outside services; and the remainder in occupancy and equipment. In comparison, the fourth quarter incurred $8 million of merger-related costs, which were largely in professional and outside services as well as compensation and benefits.

It is important to note with the completion of the core systems conversion for Farmington in January, we have achieved all of the cost savings projected at the announcement of the transaction. Excluding merger-related costs, noninterest expenses of $262.2 million increased $7.5 million or 3% linked-quarter. The largest driver of the increase was $5.9 million in higher compensation and benefit costs primarily reflecting seasonally higher payroll and benefit-related costs. In addition, professional and outside services increased $1.1 million.

Turning to Slide 9. The efficiency ratio of 57.3% increased 220 basis points from the fourth quarter but improved 210 basis points from a year ago. The seasonally higher payroll and benefit costs in the first quarter were the primary reason the efficiency ratio increased on a linked-quarter basis. We remain very pleased with the significant progress we have made, and we will continue to seek ways to improve operating leverage.

Asset quality was once again exceptional across each of our portfolios as demonstrated on Slide 10. Originated nonperforming assets as a percentage of originated loans and REO at 54 basis points remains below our peer group and top 50 banks and has continued to decline. Net charge-offs of 6 basis points improved from an already low level and continue to reflect the minimal loss content in our nonperforming assets. As we have said previously, sustaining excellent asset quality is an important lever in building long-term value. As such, even though the credit environment continues to be benign and has been for an extended period, we remain committed to our conservative and well-defined underwriting process that has served us well for many years.

Moving to returns on Slide 11. Return on average assets of 96 basis points and return on average tangible common equity at 13 basis points -- 13%, which -- were each below the prior year quarter and the fourth quarter. However, both metrics were meaningfully impacted by the merger-related expenses in the first quarter. On an operating basis, return on average assets was 103 basis points while return on average tangible common equity was 14.4%, both improved from a year ago. As we continue to build the earnings power of the company, we expect further improvement in these metrics.

Continuing on to Slide 12. Capital ratios remain strong given our diversified business mix and long history of exceptional risk management. It's important to note that the adoption of the new lease accounting standard on January 1 of this year increased risk-weighted assets, resulting in a 5 to 10 basis point decrease in risk-based capital ratios with both the holding company and the bank.

Before opening up the call for questions, I want to draw your attention to Slide 13 as we have provided an update for our full year 2019 goals. As you will recall, the goals we outlined in January did not include Belmont given the close of the acquisition was still pending. This update simply reflects the addition of Belmont as People's United's stand-alone goals are unchanged. For reference, Belmont's period end loans closed the first quarter at $2.71 billion and deposits ended at $2.11 billion, respectively.

Our updated full year 2019 goals with the inclusion of Belmont are as follows. We expect loan growth to finish the year in a range of 10% to 12%. As a reminder, this goal excludes the transactional portion of our New York multifamily portfolio, which is in runoff mode. Deposit growth is expected in the range of 10% to 12%.

The net interest income growth range is expected to grow 13% to 15%. Embedded in this goal is the expectation for net interest margin to be in the range of 3.10% to 3.20%. Belmont's full year 2018 net interest margin was 2.23% compared to 3.12% for People's United. While we will be remixing Belmont's balance sheet and have already started the process, it will take some time to complete. As such, Belmont will have an unfavorable impact of 6 basis points on our full year 2019 margin. As an additional reminder, we did not assume any increases in the Fed funds target rate in our margin outlook provided in January.

Operating noninterest expenses, which include merger-related costs -- which exclude merger-related costs, are now in the range of $1.06 billion to $1.08 billion. Belmont's annual noninterest expense base is approximately $33 million. We expect to achieve 50% cost savings with half of the savings in year 1 and a 100% base thereafter. Given the transaction closed on April 1 and the core systems conversion will occur in the third quarter, we expect to realize approximately $5 million of cost savings in 2019.

It is important to note that the full year goals for noninterest income provision, the effective tax rate and capital remain unchanged. In addition, the updated goals do not include the impact of purchase accounting adjustments which we do not expect to materially affect full year 2019 results.

Now we'll be happy to answer any questions you may have. Operator, we're ready for questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from Ken Zerbe with Morgan Stanley.

--------------------------------------------------------------------------------

Kenneth Allen Zerbe, Morgan Stanley, Research Division - Executive Director [2]

--------------------------------------------------------------------------------

Just to start off with a clarification question. Just on the full year goals slide, the loan growth of 10% to 12%, I just want to make sure I'm thinking about this right. You said the growth is 10% to 12% for the full year, but it doesn't include the transactional piece. So should we build in the 10% to 12% then subtract $400 million to $500 million and then get to some presumably lower loan growth number? Is that -- on a net basis, that's the right way to think about it, right?

--------------------------------------------------------------------------------

R. David Rosato, People's United Financial, Inc. - Senior EVP & CFO [3]

--------------------------------------------------------------------------------

Yes. So go to our 12/31 balance sheet, remove the New York multifamily. I'll give you that number in a sec, what that number was. And then expect growth of 10% to 12%. At 12/31, the New York multifamily portfolio stood at $968 million.

--------------------------------------------------------------------------------

Kenneth Allen Zerbe, Morgan Stanley, Research Division - Executive Director [4]

--------------------------------------------------------------------------------

Got it. Understood. Okay. So on a net-net basis, it's going to be something lower than the 10% to 12%, right? That does make sense. I guess more broadly just in terms of loan growth, can you just remind us like -- I know you're saying that this is a stronger first quarter than you've had in a little bit of time. But looking back historically, that wasn't always the case. First quarter used to post fairly decent loan growth. Is there any reason why that's changing or that we should expect the first quarter stays lower? And also if you can just broadly kind of take the question of what are you seeing in terms of loan growth on an organic basis ex BSB?

--------------------------------------------------------------------------------

R. David Rosato, People's United Financial, Inc. - Senior EVP & CFO [5]

--------------------------------------------------------------------------------

Sure, Ken. Just to talk to the numbers for a sec. So in 2017 and 2018, the first quarter loan growth was minus 1% in '17. It was actually minus 6% in 2018. That, in many respects, was driven by elevated levels of payoffs. 2016, where our commercial real estate payoffs were more subdued, we grew 1%. So you have to go back prior to 2016 when we were putting up 4% to 5% Q1 growth. And the market has changed quite a bit over the years from that respect.

--------------------------------------------------------------------------------

Kenneth Allen Zerbe, Morgan Stanley, Research Division - Executive Director [6]

--------------------------------------------------------------------------------

Fair enough. I guess...

--------------------------------------------------------------------------------

Jeffrey J. Tengel, People's United Financial, Inc. - President [7]

--------------------------------------------------------------------------------

It's Jeff. I would just add that some of that growth in years past in the first quarter was from that multifamily portfolio that we built up. The growth we're seeing in the first quarter of this year -- we've had headwinds in the commercial real estate business over last couple of years, and it's really been the acceleration of our middle market franchise in Connecticut and Massachusetts, along with some of the specialty businesses, that have enabled us to kind outpace some of the sluggishness in the commercial real estate markets.

--------------------------------------------------------------------------------

Operator [8]

--------------------------------------------------------------------------------

Our next question comes from Dave Rochester with Deutsche Bank.

--------------------------------------------------------------------------------

David Patrick Rochester, Deutsche Bank AG, Research Division - Equity Research Analyst [9]

--------------------------------------------------------------------------------

On the NIM guidance range, it seems like you guys were effectively thinking the NIM trend should be fairly flat from here following the inclusion of Belmont. What are you guys baking in for the interest rate curve for the rest of the year? And then how long deposit costs will continue to increase from here?

--------------------------------------------------------------------------------

R. David Rosato, People's United Financial, Inc. - Senior EVP & CFO [10]

--------------------------------------------------------------------------------

That's a hard question, Dave. Now the -- what we're saying is really consistent with what we have been saying for the last couple of quarters. We will -- we expect a modest quarterly uptick in the NIM. The -- we also expect deposit cost to continue to move up. However, where -- we have seen a little bit lower levels of competition on the deposit front primarily in CDs. What's happening -- so that's abating a little bit, but it's not enough yet to change our overall expectations that you're still going to see a little bit of upward bias in deposit costs.

The other thing that I would point out is -- and we talked about this as well in the past, is we have older loan business that is now rolling off and being replaced at higher benchmark interest rates and actually a little better credit spreads as well. So there's a -- the differential between the new business on the loans side and the existing portfolio is over 50 basis points at this point, and we expect that to continue as the year develops. So you put the 2 together, and we see a modest, still a modest increase in the margin even without a movement in the Fed funds target rate.

--------------------------------------------------------------------------------

David Patrick Rochester, Deutsche Bank AG, Research Division - Equity Research Analyst [11]

--------------------------------------------------------------------------------

Got you. And then just projecting the current interest rate curve through the end of this year effectively?

--------------------------------------------------------------------------------

R. David Rosato, People's United Financial, Inc. - Senior EVP & CFO [12]

--------------------------------------------------------------------------------

Yes, yes. I would say the curve's a little flatter than when we gave guidance at the beginning of the year, but it's on the edges and not enough to change our overall thinking at this point.

--------------------------------------------------------------------------------

David Patrick Rochester, Deutsche Bank AG, Research Division - Equity Research Analyst [13]

--------------------------------------------------------------------------------

Okay. And just on the loan side, you highlighted multifamily book runoff is a little bit lighter than expected. I was just wondering why you think that pace is going to pick up as much as your guidance would imply, the $400 million to $500 million. Are you seeing that kind of volume hitting reset period this year? Is it due to that? Or are you expecting refi or purchase activity to pick up later this year? I was just wondering why that'd pick up.

--------------------------------------------------------------------------------

R. David Rosato, People's United Financial, Inc. - Senior EVP & CFO [14]

--------------------------------------------------------------------------------

Yes. Well, what -- I think what we would say is it was -- we had more prepays than refis last year than we were thinking. And we were pleasantly surprised in the first quarter, but we expect that to again resume.

--------------------------------------------------------------------------------

John P. Barnes, People's United Financial, Inc. - Chairman of the Board & CEO [15]

--------------------------------------------------------------------------------

Yes. You got to think about it more like the first quarter surprised us in terms of the pace slowing. And if we look at the average runoff over the last couple of years, we're just -- we're sticking with that expectation right now and see what happens.

--------------------------------------------------------------------------------

R. David Rosato, People's United Financial, Inc. - Senior EVP & CFO [16]

--------------------------------------------------------------------------------

That book of business, because it's in runoff mode, continues to mature. And you are correct that those loans have annual step-down prepayment functions. And the borrowers and the brokers are very good at monitoring and picking those spots. So that's highly dependent on the shape of the yield curve.

--------------------------------------------------------------------------------

David Patrick Rochester, Deutsche Bank AG, Research Division - Equity Research Analyst [17]

--------------------------------------------------------------------------------

And you mentioned earlier just the roll-off of lower-yielding loans. I mean that -- I would imagine that bucket probably has a number of 3 handles in that in terms of rate.

--------------------------------------------------------------------------------

R. David Rosato, People's United Financial, Inc. - Senior EVP & CFO [18]

--------------------------------------------------------------------------------

It does. It's...

--------------------------------------------------------------------------------

David Patrick Rochester, Deutsche Bank AG, Research Division - Equity Research Analyst [19]

--------------------------------------------------------------------------------

Okay. And then just one last one, just on the deal front. Can you just give an update on what you guys are looking for that -- looking at this point from a size and geography perspective and the level of conversation activity you're seeing on M&A in the market?

--------------------------------------------------------------------------------

John P. Barnes, People's United Financial, Inc. - Chairman of the Board & CEO [20]

--------------------------------------------------------------------------------

Yes. So I would say that basically our view in terms of geographic, wanting to be in the footprint or adjacent, remains the same. And the level of conversation is about the same. So continue to do the relationship building and having conversations with folks, but it's not changed dramatically from our perspective.

--------------------------------------------------------------------------------

Operator [21]

--------------------------------------------------------------------------------

Our next question comes from Jared Shaw with Wells Fargo Securities.

--------------------------------------------------------------------------------

Jared David Wesley Shaw, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [22]

--------------------------------------------------------------------------------

Maybe just sticking with the margin theme here for a second. What was the spot pricing on deposits and loans at the end of the quarter for new loans?

--------------------------------------------------------------------------------

R. David Rosato, People's United Financial, Inc. - Senior EVP & CFO [23]

--------------------------------------------------------------------------------

I mean we tend not to just look at spot pricing, at where are we in the quarter. We tend to think about the business in aggregate that hit the folks over the course of the quarter and compare that to the portfolio yield. So we have a portfolio yield, so you can see on the margin page in the press release, of 4.48%. We have new business that was going on over the course of the quarter, a little over 5%. So just natural, a little more than 50 basis points.

--------------------------------------------------------------------------------

Jared David Wesley Shaw, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [24]

--------------------------------------------------------------------------------

Okay. Got it. Thanks. And then with the integration of Belmont and the opportunity with the mark-to-market there, any thoughts on moderating the asset sensitivity, given the -- where the Fed is? Or should we expect that you're generally keeping a steady state on the overall asset sensitivity of the balance sheet?

--------------------------------------------------------------------------------

R. David Rosato, People's United Financial, Inc. - Senior EVP & CFO [25]

--------------------------------------------------------------------------------

Yes, Jared. The addition of Belmont really won't have much of an impact on the aggregate company sensitivity. As far as our thoughts around our interest rate risk positioning, as you know, we tend to be organically an asset-sensitive company, meaning what hits the books every month increases asset sensitivity. We held it in dollar terms pretty flat over the last couple of years but reduced it on a percentage basis as the company has grown. I wouldn't expect any major deviations from that. We're not preparing for a major Fed easing at this point, for example.

--------------------------------------------------------------------------------

Jared David Wesley Shaw, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [26]

--------------------------------------------------------------------------------

Okay. And then I guess finally for me, Stop & Shop is in its second week of a strike here in the Northeast. Is that impacting the branch-based business there at all? Or how are you dealing with the strike?

--------------------------------------------------------------------------------

John P. Barnes, People's United Financial, Inc. - Chairman of the Board & CEO [27]

--------------------------------------------------------------------------------

Yes. So we are staying open, and most doors are open. We are very pleased with our employees and their handling of the situation and also appreciate that when the Stop & Shop workers know that it's a bank customer, they also are handling the situation very well and making sure people easily get through. I would say, naturally, we're disappointed in the situation. And we're seeing a little lower traffic, not dramatically but lower traffic. And we are also seeing a pickup in traffic in some of our traditional branches. And so that is actually a very positive message for us. And when we think about our historical view towards the spoke in wheel type of situation between the traditional branches and the Stop & Shops, it seems to be working out as expected.

--------------------------------------------------------------------------------

Jared David Wesley Shaw, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [28]

--------------------------------------------------------------------------------

Okay. And I guess just a final one from me. Have you seen any less pressure in the CRE market from the nonbank lenders now that the funding cost for them is higher? And do you think that you'll get to a point where through -- sort of organic CRE growth opportunities start coming back to the bank space?

--------------------------------------------------------------------------------

Jeffrey J. Tengel, People's United Financial, Inc. - President [29]

--------------------------------------------------------------------------------

This is Jeff. I don't -- we have not seen a reduction in the level of competition from the nonbank lenders across the CMBS market or the insurance or the fund. Having said that, I do think that we continue to see good opportunities. As we've said in the past, we tend to stick with our customers. And so -- a lot of them are privately held or investing their own money. So they're a little bit more judicious maybe than the recent funds are, but we still feel like we're able to provide product and service to our customers. But the overall competitive landscape has not eased at all in my opinion.

--------------------------------------------------------------------------------

Operator [30]

--------------------------------------------------------------------------------

Our next question comes from Austin Nicholas with Stephens.

--------------------------------------------------------------------------------

Austin Lincoln Nicholas, Stephens Inc., Research Division - VP and Research Analyst [31]

--------------------------------------------------------------------------------

Maybe just to dovetail on the branch discussion. I guess how...

--------------------------------------------------------------------------------

John P. Barnes, People's United Financial, Inc. - Chairman of the Board & CEO [32]

--------------------------------------------------------------------------------

Could you -- Austin, could you speak into your mic a little closer? We can't quite hear you.

--------------------------------------------------------------------------------

Austin Lincoln Nicholas, Stephens Inc., Research Division - VP and Research Analyst [33]

--------------------------------------------------------------------------------

Is this a little better?

--------------------------------------------------------------------------------

John P. Barnes, People's United Financial, Inc. - Chairman of the Board & CEO [34]

--------------------------------------------------------------------------------

Yes. Thank you.

--------------------------------------------------------------------------------

Austin Lincoln Nicholas, Stephens Inc., Research Division - VP and Research Analyst [35]

--------------------------------------------------------------------------------

Sorry about that. I guess as you think about the branch network, are there opportunities to optimize that? And then maybe as you look at that in-store branch network, how are you thinking about the strategy there at the same time as you kind of build out some of the new technology initiatives?

--------------------------------------------------------------------------------

John P. Barnes, People's United Financial, Inc. - Chairman of the Board & CEO [36]

--------------------------------------------------------------------------------

Yes. We are constantly evaluating that and also looking at kind of the changes that are going on generally in the marketplace. And we have a contract that's out to 2022. So we continue to evaluate what's going on with our traffic and our customers' kind of behavior and needs, also the traffic in grocery stores generally and other changes in the market. So very well aware of it. Stay right on top of it, and we'll always be giving that consideration.

--------------------------------------------------------------------------------

Austin Lincoln Nicholas, Stephens Inc., Research Division - VP and Research Analyst [37]

--------------------------------------------------------------------------------

Understood. And then maybe just looking at loan growth for the year, appreciate the guidance. Maybe just thinking about the expected breakdown of kind of where you would expect loan originations to come from between the specialty portfolios and some of the more traditional C&I and kind of not -- or kind of owner occupied-type buckets, that'd be helpful. Any commentary on kind of how you think that pie would be broken down in terms of originations?

--------------------------------------------------------------------------------

Jeffrey J. Tengel, People's United Financial, Inc. - President [38]

--------------------------------------------------------------------------------

Again, this is Jeff. I think you're going to continue to see the same trends we've seen in the first quarter. We're going to see good production from our equipment finance businesses, LEAF in particular. We'll continue to see good production and good momentum from the specialty businesses, and we'll continue to see good production from our core C&I businesses in Massachusetts and Connecticut. All of those segments had a good first quarter, and they all have pretty good pipelines. So we're pretty optimistic that we're going to move through the second quarter and the balance of the year with similar performance.

--------------------------------------------------------------------------------

Austin Lincoln Nicholas, Stephens Inc., Research Division - VP and Research Analyst [39]

--------------------------------------------------------------------------------

Got it. And then maybe just one last one, in line with that thinking. I guess just thinking about the provisioning for incremental loan growth. I guess how should we be thinking about that with some of the specialty finance areas and then kind of the equipment finance businesses making up a little bit more of the growth? Any comment there would be helpful.

--------------------------------------------------------------------------------

John P. Barnes, People's United Financial, Inc. - Chairman of the Board & CEO [40]

--------------------------------------------------------------------------------

Yes. So we -- naturally, we're doing detailed work on each portfolio and the behavior of those portfolios over time and basically applying the general history and whatever factors we're applying to the different businesses based on the pace of growth within those businesses. So for instance, if you see more growth in equipment finance, then we're going to take our historical results from that, and that will have a big impact on the way we are provisioning based on the pace of growth in the portfolio.

--------------------------------------------------------------------------------

R. David Rosato, People's United Financial, Inc. - Senior EVP & CFO [41]

--------------------------------------------------------------------------------

And the only thing I would add to that, Austin, is if you go back in time and look at us, you'll see our provision expense each quarter tends to grow throughout the year.

--------------------------------------------------------------------------------

Operator [42]

--------------------------------------------------------------------------------

Our next question comes from Mark Fitzgibbon with Sandler O'Neill.

--------------------------------------------------------------------------------

Mark Thomas Fitzgibbon, Sandler O'Neill + Partners, L.P., Research Division - Principal & Director of Research [43]

--------------------------------------------------------------------------------

David, first, just to follow up on one of the comments you made earlier. It looked like in your slide deck, the balance sheet became a touch more asset-sensitive during the course of the quarter. Did I hear correctly that the plan is not to reduce asset sensitivity?

--------------------------------------------------------------------------------

R. David Rosato, People's United Financial, Inc. - Senior EVP & CFO [44]

--------------------------------------------------------------------------------

I would call the change in the quarter, from my perspective, relatively modest. The -- but yes, what I was referring to is there's nothing that we're thinking about, about a significant change in asset sensitivity in Q2.

--------------------------------------------------------------------------------

Mark Thomas Fitzgibbon, Sandler O'Neill + Partners, L.P., Research Division - Principal & Director of Research [45]

--------------------------------------------------------------------------------

Okay. And then secondly, on Page 16 of your slide deck where you have the breakdown of the loan portfolio by geography, it looks like that the growth in states other than sort of your core footprint are growing at accelerated rates. I'm just curious, what states is it occurring in? And what types of lending are you doing in those markets?

--------------------------------------------------------------------------------

R. David Rosato, People's United Financial, Inc. - Senior EVP & CFO [46]

--------------------------------------------------------------------------------

You're referring to the blue, other at $6.8 billion, I assume. Yes. So the 3 equipment finance platforms are national, and they are the major driver of that.

--------------------------------------------------------------------------------

Mark Thomas Fitzgibbon, Sandler O'Neill + Partners, L.P., Research Division - Principal & Director of Research [47]

--------------------------------------------------------------------------------

Okay. And then lastly, given that you just closed BSB, when do you think might be in a position to contemplate additional acquisitions?

--------------------------------------------------------------------------------

John P. Barnes, People's United Financial, Inc. - Chairman of the Board & CEO [48]

--------------------------------------------------------------------------------

So we -- as we said a while ago, we continue to work on our relationships and look at the landscape. So nothing more than -- more specific than that to offer you, I guess. But obviously based on our history, we would expect to have opportunities and be willing to look at them. As long as it makes sense for us from a metrics standpoint, we're still willing to continue to recognize that acquisitions are a very nice way for us to move the company forward in our markets.

--------------------------------------------------------------------------------

Operator [49]

--------------------------------------------------------------------------------

Our next question comes from Matthew Breese with Piper Jaffray.

--------------------------------------------------------------------------------

Matthew M. Breese, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [50]

--------------------------------------------------------------------------------

Just wanted to follow up on the provision question. It just seems like if you're going to get to the low end of the guidance range, we need to see a pretty significant ramp from now until year-end. So maybe my question is was there anything in there this quarter that drove it artificially lower, and then next quarter and the ones thereafter, we should see an accelerated provision rate.

--------------------------------------------------------------------------------

John P. Barnes, People's United Financial, Inc. - Chairman of the Board & CEO [51]

--------------------------------------------------------------------------------

No, it wasn't artificial. It was low net charge-offs.

--------------------------------------------------------------------------------

R. David Rosato, People's United Financial, Inc. - Senior EVP & CFO [52]

--------------------------------------------------------------------------------

And to follow up with that, there is nothing that we're aware of that has us concerned about higher provisioning going forward other than hopefully solid loan growth.

--------------------------------------------------------------------------------

Matthew M. Breese, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [53]

--------------------------------------------------------------------------------

Understood. Okay. And you're not seeing anything from a credit perspective on the horizon. Nothing's changed there.

--------------------------------------------------------------------------------

R. David Rosato, People's United Financial, Inc. - Senior EVP & CFO [54]

--------------------------------------------------------------------------------

Correct.

--------------------------------------------------------------------------------

Matthew M. Breese, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [55]

--------------------------------------------------------------------------------

Okay. And then just on the M&A comments. I know you mentioned no change in targets geographically. But given the bank's size now with Belmont, is there an asset threshold that you wouldn't look under? Is there a size of bank that would simply be too small for you at this point?

--------------------------------------------------------------------------------

John P. Barnes, People's United Financial, Inc. - Chairman of the Board & CEO [56]

--------------------------------------------------------------------------------

Yes. So we continue to think about that. I think that banks in that $2-something-billion range are getting more difficult for us as we think about undertaking the effort to execute the way we want it and the costs. So we don't think of it as a floor. But if you want to think about would we be likely to do something that's $1.5 billion, not very likely at all. And $2.5 billion, depending on the situation, might be around where we would be hitting the low end.

--------------------------------------------------------------------------------

Matthew M. Breese, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [57]

--------------------------------------------------------------------------------

Understood. Okay. And at this point, do you have any comments or guidance with regards to CECL and how that first day true-up reserve might shake out?

--------------------------------------------------------------------------------

R. David Rosato, People's United Financial, Inc. - Senior EVP & CFO [58]

--------------------------------------------------------------------------------

Not that we're prepared to make, Matt. We continue to do all the work that you would expect a bank our size to be doing around CECL. And our expectation is in the back half of the year will be when we start disclosing a little bit of guidance around what we think the eventual impact will be. Right now, we're spending our time developing, refining, validating our loss methodologies across the portfolios and doing the necessary work to start parallel runs later in the year.

--------------------------------------------------------------------------------

Matthew M. Breese, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [59]

--------------------------------------------------------------------------------

Maybe to follow up, thinking about the current allowance or reserve methodology in terms of qualitative factors versus quantitative ones. What is the current breakdown of how you arrived at the current allowance from that perspective? And do you expect it to be more quantitative-driven under the CECL methodology?

--------------------------------------------------------------------------------

R. David Rosato, People's United Financial, Inc. - Senior EVP & CFO [60]

--------------------------------------------------------------------------------

Sure, Matt. I mean ballpark quantitative, qualitative is about 50-50, right? And then obviously, under CECL, it's a much more quantitative approach.

--------------------------------------------------------------------------------

Operator [61]

--------------------------------------------------------------------------------

Our next question comes from Brock Vandervliet with UBS.

--------------------------------------------------------------------------------

Brocker Clinton Vandervliet, UBS Investment Bank, Research Division - Executive Director & Senior Banks Analyst of Mid Cap [62]

--------------------------------------------------------------------------------

On the New York multifamily, I know what your guidance is in terms of runoff for the year. There is very little in Q1. It seems like activity in that whole space has declined somewhat just due to the Fed stepping off the gas. Is -- are a lot of these loans just coming right up against their refi date? Is that why you're so confident you'll see so much runoff this year?

--------------------------------------------------------------------------------

R. David Rosato, People's United Financial, Inc. - Senior EVP & CFO [63]

--------------------------------------------------------------------------------

I wouldn't use the term so confident from the perspective that we were a little surprised last year at the level it was. It is interesting that we saw high level of refis last year, but we also did see some loans that went almost to the maturity date before they disappeared. So this year, this is -- it's an asset class that's a little hard to predict. It is clearly very interest rate-dependent. It's also very competitive. And as you know, it's broker-driven, which also adds a whole other nuance to it. So we're giving you our best thoughts today. And we're recognizing that we experienced a lower level of payoffs in the first quarter than we expected. So we expect our initial thoughts to normalize.

--------------------------------------------------------------------------------

Brocker Clinton Vandervliet, UBS Investment Bank, Research Division - Executive Director & Senior Banks Analyst of Mid Cap [64]

--------------------------------------------------------------------------------

And have you ever -- do you disclose the yield in that portfolio or not?

--------------------------------------------------------------------------------

R. David Rosato, People's United Financial, Inc. - Senior EVP & CFO [65]

--------------------------------------------------------------------------------

No, not specifically. So Dave earlier on the call threw out about a 3.50 or so yield. It's a little higher than that, but it's between 3.5 and, call it, about 3.75.

--------------------------------------------------------------------------------

Brocker Clinton Vandervliet, UBS Investment Bank, Research Division - Executive Director & Senior Banks Analyst of Mid Cap [66]

--------------------------------------------------------------------------------

Got it. Okay. So as I think bigger picture, the Belmont transaction closes, your NIM rebases 6, 7 bps lower and then climbs from there. And the climb is based on Belmont remix, resi ARM repricing, New York multifamily runoff. Am I...

--------------------------------------------------------------------------------

R. David Rosato, People's United Financial, Inc. - Senior EVP & CFO [67]

--------------------------------------------------------------------------------

Yes. I would add just new business going on at better than roll-off. That's a little over 50 basis points that we gave as a response to Jared's question. And the -- a little bit of mix change over the course of the year. If you -- as LEAF continues to grow faster than our other businesses, that's positive. And we're also -- you noticed residential mortgage was flat linked-quarter, and we don't have large growth aspirations for that business once we take on Belmont's loans. So that's part of the remix. There's a little less residential mortgage, which happens to be the lowest-yielding portfolio in our books at quarter end.

--------------------------------------------------------------------------------

Operator [68]

--------------------------------------------------------------------------------

And our next question comes from Collyn Gilbert with KBW.

--------------------------------------------------------------------------------

Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [69]

--------------------------------------------------------------------------------

Just very quickly, I just wanted to clarify. Dave, you said -- what was Belmont's margin at the end of the first quarter?

--------------------------------------------------------------------------------

R. David Rosato, People's United Financial, Inc. - Senior EVP & CFO [70]

--------------------------------------------------------------------------------

Well, we actually gave it for the full year. For 2018, it was 2.23 for the full year. It was -- I don't know the exact number for Q1, but I think it was a touch lower. So just -- go ahead.

--------------------------------------------------------------------------------

Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [71]

--------------------------------------------------------------------------------

Okay. And then just on the linked-quarter, so 6 basis points lower coming into the second quarter with Belmont. But then I'm just thinking about the day count. So you had that 4 basis point decline because of day count, which I presume would reverse in the second quarter I guess. I would have thought that NIM would start -- would be trending higher than what you guys are guiding to. Is there something that changed? Or are you just taking a more cautious approach on one of the components with the low NIM guide?

--------------------------------------------------------------------------------

R. David Rosato, People's United Financial, Inc. - Senior EVP & CFO [72]

--------------------------------------------------------------------------------

I can't say that anything has changed specifically. Whether we're being cautious or not, I think we'll find out over time. I think the cautiousness, if we have one, is more on the deposits side and what the level of competition will be. We called out in the script a slight easing of some CD terms, but it's -- and we're hopeful that the pressure starts to recede a little bit, but we're not betting on it at this point.

--------------------------------------------------------------------------------

John P. Barnes, People's United Financial, Inc. - Chairman of the Board & CEO [73]

--------------------------------------------------------------------------------

Yes. Our expectation for the margin excluding Belmont did not shift.

--------------------------------------------------------------------------------

R. David Rosato, People's United Financial, Inc. - Senior EVP & CFO [74]

--------------------------------------------------------------------------------

Right. We said the same thing in January as we said this afternoon, a slight increase in the margin on a quarterly basis as the year unfolds.

--------------------------------------------------------------------------------

Operator [75]

--------------------------------------------------------------------------------

Ladies and gentlemen, since there are no further questions in the queue, I'd now like to turn the call back over to management for any closing remarks.

--------------------------------------------------------------------------------

John P. Barnes, People's United Financial, Inc. - Chairman of the Board & CEO [76]

--------------------------------------------------------------------------------

Thank you. In closing, our first quarter performance provided a strong start to the year and was highlighted by the closing of the acquisition of Belmont on April 1, an 18% increase in operating earnings from a year ago, 210 basis point improvement year-over-year in the efficiency ratio, reflecting higher revenues and well-controlled expenses, further net interest margin expansion, strong deposit growth, lowering the loan-to-deposit ratio to 96% and sustained exceptional asset quality. Finally, given the importance of dividend to our shareholders, we are proud to announce the company's 26th consecutive annual common dividend increase.

Thank you very much for your interest in People's United. Have a good night.

--------------------------------------------------------------------------------

Operator [77]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect, and have a wonderful day.