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

Q2 2019 People's United Financial Inc Earnings Call

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

TEXT version of Transcript

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Corporate Participants

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* 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

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Conference Call Participants

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* Brocker Clinton Vandervliet

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

* Casey Haire

Jefferies LLC, Research Division - VP and Equity Analyst

* Collyn Bement Gilbert

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

* Jared David Wesley Shaw

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

* Kenneth Allen Zerbe

Morgan Stanley, Research Division - Executive Director

* Matthew M. Breese

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

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Presentation

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Operator [1]

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

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.

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

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Good afternoon, and thank you for joining us today. Here with me to review our second quarter 2019 results are Jack Barnes, Chairman and Chief Executive Officer; David Rosato, Chief Financial Officer; Kirk Walters, Corporate Development and Strategic Planning; and Jeff Tengel, President. 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.

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

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Thank you, Andrew. Good afternoon. We appreciate everyone joining us today. Let's begin by turning to the second quarter overview on Slide 2. We are pleased with our second quarter performance. Operating earnings of $135 million increased 24% from a year ago, and operating return on average tangible common equity of 14.6% improved 40 basis points. On a per common share basis, operating earnings were $0.34, up $0.02 year-over-year. These strong results reflect the continued success of our strategy, balancing organic growth with thoughtful M&A. Higher revenues and our continued emphasis on controlling costs generated a second quarter efficiency ratio of 55.8%, an improvement of 260 basis points from the prior year quarter and 150 basis points linked-quarter.

Total revenues of $454 million, grew 15% from a year ago due to increases in both net interest income and noninterest income. We experienced particularly strong noninterest income results, highlighted by a record quarter for customer interest rate swap income. The net interest margin of 3.12% improved 2 basis points from a year ago, but declined 8 basis points from the first quarter, while new business yields remained higher than the total loan portfolio yield, the margin contracted primarily due to increased deposit costs and the acquisition of Belmont.

Period end loans and deposits increased 9% and 7%, respectively, from March 31 driven by the addition of Belmont and organic growth. Excluding Belmont, loan and deposit balances increased 1% and 2%, respectively.

Our organic loan growth continued to highlight the importance of our diversified business mix. Strong production in mortgage warehouse lending, core middle market C&I, health care and equipment finance more than offset the continued headwinds in commercial real estate and planned reductions in residential mortgage balances.

We continue to see good levels of business activity across our markets and remain optimistic about the growth opportunities in the second half of the year. We are also encouraged by our continued success gathering deposits. Results this quarter benefited from higher-than-expected municipal balances and a large short-term deposit from a commercial customer.

Despite observing some recent modest easing in deposit pricing, we still view the market as highly competitive. As we have previously indicated, we expected deposit costs increases to continue for 2 to 4 quarters following the end of the Fed tightening. As such, our deposit costs were up 10 basis points for the quarter. However, we remained focused on controlling pricing and recently made our second move in the last 2 months to lower CD deposit costs. As I'm sure you all know, earlier this week, we announced the acquisition of United Financial Bancorp, the holding company for United Bank. We are excited about this financially attracted transaction that further deepens the bank's presence in Connecticut, our largest and most profitable market and also enhances our franchise in Western Massachusetts. We look forward to working closely with the United team to integrate the companies to best serve our combined customer bases.

With the closing of the Belmont acquisition in April, we've begun to leverage our expanded customer and employee base to build upon our strong organic growth in Massachusetts, particularly in the Greater Boston area. We are especially pleased with Belmont's commercial real estate team, which is generating good production. Integration continues to go extremely well, the core system conversion will take place later this month, and we remain confident in achieving the transaction's attractive returns. Adding to the momentum our franchise is generating in the Greater Boston area, we opened a new branch in the Seaport District of the city earlier this week. We are excited to have a location in this vibrant and growing part of Boston to serve our customers.

We are also pleased to announce Board of Directors approved the repurchase of up to 20 million common shares, which reflects our strong capital position and commitment to returning capital to shareholders. It is important to note the share repurchases will be made at the discretion of the company following the close of the United acquisition.

With that, here is David.

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

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Thank you, Jack. Turning to Slide 3. Net interest income of $340.1 million was up $15.3 million or 5% from the first quarter. The loan portfolio contributed $30.8 million of the increase to net interest income and benefited from higher yields on new business. Net interest income also benefited $2.1 million from an additional calendar day in the second quarter. The primary offsets to these increases were higher deposit costs, which reduced net interest income by $14.4 million.

In addition, lower balances in the securities portfolio and increased borrowing costs lowered net interest income by $1.8 million and $1.4 million, respectively. As displayed on Slide 4, net interest margin of 3.12% declined 8 basis points linked-quarter. The loan portfolio had a 6 basis points favorable impact on the margin as new business yields remained higher than the total portfolio yield. However, increased deposit costs caused the margin to contract 14 basis points.

Consistent with the projection we provided in April, the addition of Belmont negatively affected the margin by 6 basis points for the quarter before purchase accounting adjustments. However, the net effect of Belmont's purchase accounting adjustments served to offset this impact by approximately 4 basis points.

Turning to loans on Slide 5. Average balances of $38.2 billion increased by $3.2 billion or 9% from the first quarter. On a period end basis, loans ended the quarter at $38.6 billion, up $3 billion or 9% from March 31. These increases were driven by the addition of Belmont and organic growth.

Excluding the acquisition, average and period end balances increased $490 million and $383 million, respectively, or 1% on each basis. Organic growth was primarily driven by mortgage warehouse lending, middle market C&I across the franchise and equipment finance. Mortgage warehouse balances ended the quarter at $1.2 billion, up $340 million linked-quarter.

C&I growth also benefited from good results in our health care vertical and equipment finance continued to experiences -- experience strong production by LEAF.

The largest offsets to these increases were lower balances, excluding the addition of Belmont in commercial real estate and residential mortgage. Commercial real estate continued to be impacted by the headwinds we have discussed previously, including elevated competition and continued higher payoffs.

The reduction in residential mortgage balances was planned as we remixed the balance sheet given recent acquisitions having a higher percentage of lower-yielding residential mortgages than our stand-alone portfolio. Balances in the transactional portion of the New York multi-family portfolio, which is in runoff mode, ended the quarter at $881 million down $59 million from March 31. The portfolio has runoff less than anticipated as balances have only declined $86 million since year-end. As such, we now expect the runoff to be $200 million to $300 million for the full year, a decrease from our expectation in January of $400 million to $500 million.

Moving on to deposits on Slide 6. Average balances of $39.2 billion increased $2.8 billion or 8% linked-quarter. While period end balances of $39.5 billion were up $2.6 billion or 7%. These results were driven by both the addition of Belmont and organic growth.

Excluding the acquisition, average and period end balances increased $713 million and $600 million, respectively, or 2% on each basis. Deposits benefited from higher-than-expected municipal balances and a $500 million short-term deposit from a commercial customer.

Our interest-bearing deposit beta is 37% since the beginning of the current cycle of increasing interest rates, up 5 percentage points from 32% at the end of the first quarter. In comparison, our loan yield beta is 41% during the same period, a decline of 1 percentage point linked-quarter from 42%.

Looking at Slide 7. Noninterest income had a very strong quarter at $106.3 million, an increase of nearly $12 million or 12% on a linked-quarter basis. The result was primarily driven by a record quarter of customer interest rate swap income, which increased noninterest income by $4.6 million. $2.4 million in higher commercial banking lending fees reflecting higher prepayment income and loan syndication fees.

A $1.2 million increase in bank service charges, primarily resulting from an additional calendar day in the second quarter and higher investment management and cash management fees, which collectively improved noninterest income by $1 million.

Conversely, insurance revenue was down $1.8 million in the quarter reflecting the seasonality of commercial insurance renewals. On Slide 8, noninterest expense of $278.4 million, increased $1.2 million linked-quarter. Included in the second quarter were $6.5 million of merger-related costs in the following categories: $4.7 million in professional and outside services; $1.5 million in compensation and benefits; and the remaining $300,000 in occupancy and equipment and other. In comparison, the first quarter incurred $15 million of merger-related costs with nearly $12 million in other noninterest expense, primarily reflecting the cost of 15 branch closures associated with the Farmington Bank acquisition.

Excluding merger-related costs, noninterest expenses of $271.9 million were up $9.7 million or 4% linked-quarter. The largest drivers of the increase was $5.9 million in higher compensation and benefit costs, primarily reflecting the addition of Belmont and $1.4 million in increased professional and outside expenses.

Overall, Belmont added approximately $7.2 million to operating expenses in the quarter. Turning to Slide 9. Efficiency ratio of 55.8% improved 150 basis points from the first quarter and 260 basis points from a year ago.

We are very pleased with the significant progress we have made and remained focused on seeking 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 56 basis points were up modestly linked-quarter, but remained below our peer group in top 50 banks.

A single C&I account drove the increase in nonperforming assets for the full quarter. Net charge-offs of 5 basis points improved from an already low level and continued to reflect the minimal loss content at our nonperforming assets.

As we have previously said, sustaining excellent asset quality is an important lever in building long-term value and the hallmark of People's United. As such, even though the credit environment continues to be benign and has for an extended period, we remain committed to our conservative and well-defined underwriting process that has served us well for so many years.

Briefly on Slide 11 and 12. Return on average assets improved 8 basis points linked-quarter to 104 basis points, while return on average tangible common equity increased 110 basis points to 14.1%. On an operating basis, return on average assets was 106 basis points, while return on average tangible common equity was 14.4%.

As you can see on Slide 12, capital ratios remain strong given our diversified business mix and long history of exceptional risk management. Before opening the call up for questions, I want to draw your attention to Slide 13 as we have provided an update to our full year 2019 goals. As a reminder, the goals updated in April simply reflected the addition of Belmont as People's United's stand-alone goals were unchanged. Given the current interest rate environment and the expectation of monetary policy easing by the Federal Reserve, we have adjusted our full year goals for net interest income and net interest margin.

Please note, these goals do not include United Financial. Our updated full year 2019 goals are as follows: Net interest margin is expected to be in the range of 3.05% to 3.15% compared to the previous range of 3.10% to 3.20%. Embedded in this expectation is the assumption of 2 25 basis point decreases in the Fed funds rate.

Our prior assumption was for no change in the Fed funds rate during the year. As a result of our lower NIM expectation, we anticipate net interest income growth to be in the range of 11% to 13%, down from 13% to 15%. Importantly, the full year goals for loans, deposits, noninterest income, noninterest expense, provision, effective tax rate and capital remain unchanged. Now we'll be happy to answer any questions you may have.

Operator, we're ready for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Casey Haire from Jefferies.

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Casey Haire, Jefferies LLC, Research Division - VP and Equity Analyst [2]

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David, a question for you on the NIM guide. The 2 cuts, is that July-September? And then what does that assume you guys are able to do on the deposit side to offset the asset yield pressure?

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

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What that guidance is based on is July and December cuts, Casey.

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Casey Haire, Jefferies LLC, Research Division - VP and Equity Analyst [4]

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Okay. So very limited in -- okay, so effectively 1 as it relates to '19. And then what can you guys do on the deposit side or liability side to offset that pressure?

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

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Sure. So we found a couple of things, Jack referenced a little bit. Within the last week, we brought down some of our promotional money market rates, getting ahead of what we expect from the Fed. So we're down about 20 basis points in money markets in a couple of our larger markets.

The -- in our CD book, we've actually made 2 separate moves in the last 2 months. So cumulatively our 6-month CD special that we're running is down 30 basis points and our 11-month is down 60 basis points cumulatively, and we actually have an inversion in our CD rates now.

It will take a little bit of time for that to roll through, but with those moves and more that we expect post the Fed actually moving on July 31, we'll do our best to offset as much of the NIM pressure as we can.

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Casey Haire, Jefferies LLC, Research Division - VP and Equity Analyst [6]

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Okay. Great. Just switching to your loan growth guide, the 10% to 12%. I'm doing my math right, that implies a pretty decent range of about 700 -- a little less $700 million between the low and high points. How are pipelines shaping up? I know you had a very nice mortgage warehouse quarter and that can be seasonal, just trying to get a finer point on the loan growth guidance based on pipelines.

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John P. Barnes, People's United Financial, Inc. - Chairman of the Board & CEO [7]

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Yes. Casey, it's Jack. I'll let Jeff answer that and give you some color on what's going on in the different business lines and markets.

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Jeffrey J. Tengel, People's United Financial, Inc. - President [8]

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Yes. Casey, this is Jeff Tengel. We think the pipelines are -- they're still pretty healthy that we haven't seen a material decline or decrease in the pipelines from what we've been moving through during the first half of the year. So our expectations are that the second half all else being equal will look pretty similar to the first half, kind of setting aside that oftentimes we'll see the second half have a little bit of increase as we move through December, in particular the equipment finance businesses tend to have a very strong end of the year. We haven't seen any signs of slowdown in any of the businesses that we've been highlighting here acknowledging the headwinds in commercial real estate. But apart from that, everything seems to be in pretty good shape.

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Casey Haire, Jefferies LLC, Research Division - VP and Equity Analyst [9]

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Okay. Great. And just last from me, the other income line and obviously, the swaps were very strong this quarter, but the fee guide does imply a pretty decent step down, 91, 95 in the back half of the quarter if I'm doing my math right, is that jive with what you guys are thinking?

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

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Yes. So Casey, we -- fee income is running better than we expected and we really had a great second quarter. There is some volatility, as you know, in some of those line item. So yes, the way I think about it is if that strong momentum continues, we're going to be on the high end or maybe even above the guidance. But we didn't change it just because of the volatility of some of those line items.

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Operator [11]

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Your next question comes from Ken Zerbe from Morgan Stanley.

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Kenneth Allen Zerbe, Morgan Stanley, Research Division - Executive Director [12]

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Was hoping you guys can talk about the 20 million shares that you had authorization for. I understand it needs to wait until United's closed. But can you talk about thereafter, like, how quickly would you like to purchase or try to finish the 20 million shares?

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R. David Rosato, People's United Financial, Inc. - Senior EVP & CFO [13]

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The way I would think about it, Ken, is it would -- we -- it's important to have that in place. We are looking at that at this point in time as an -- opportunistically. So we're not putting out a time frame and an expectation that all those shares will be bought immediately. It's really subject to market conditions post the close of the United transaction.

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Kenneth Allen Zerbe, Morgan Stanley, Research Division - Executive Director [14]

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Got you. Okay. So it could be anywhere from a couple of quarters to a few years?

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R. David Rosato, People's United Financial, Inc. - Senior EVP & CFO [15]

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Yes. That's with reasonable expectations we sit here today.

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Kenneth Allen Zerbe, Morgan Stanley, Research Division - Executive Director [16]

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Understood. And I guess along the same lines, when we think about your capital ratios in using the 20 million shares, it really looks -- my calculation is it looks like it reduces your capital ratios if you did it all one chunk by about 90, 100 basis points on CE Tier 1. Is there a capital level or capital ratio that you're targeting that you don't want to go below that might be the most restrictive? Help us think about the timing of the buybacks.

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R. David Rosato, People's United Financial, Inc. - Senior EVP & CFO [17]

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There is what I would say is your number is directionally correct. We could buy all those shares back in a relatively short period of time and still be fine from our capital target.

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Kenneth Allen Zerbe, Morgan Stanley, Research Division - Executive Director [18]

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Okay. That helps. And then switching gears a little bit, the other fee income looks like it is one of the biggest. I understand your guidance is for lower fee income going forward, but so what was in the other fee line, I think it's the $4.3 million in your slide?

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R. David Rosato, People's United Financial, Inc. - Senior EVP & CFO [19]

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There was a bunch of odds and ends. One of the main drivers was you'll see on the balance sheet that we have equity securities. We have one equity security position, which have to be mark-to-market through income statement. That was about $800,000. We also had some a little over $400,000 of all the income in the quarter. And after that, it's pretty much odds and ends.

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Kenneth Allen Zerbe, Morgan Stanley, Research Division - Executive Director [20]

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Got you. Okay. And then one last question, if I could. In terms of the transaction on New York City multifamily portfolio, just try to reconcile. Obviously, I heard your comments that the payoffs are slower, but at the same time kind of you and many other banks talk about payoffs in their normal CRE portfolio being much faster. Is there anything unusual about this portfolio? Like, why weren't the payoffs affect this portfolio or is this more a little more multi -- sorry, rent-stabilized stuff that might stay on your books for a lot longer?

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R. David Rosato, People's United Financial, Inc. - Senior EVP & CFO [21]

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Yes. This is a New York broker originated multi-family. It is certainly not all rent controlled, but there is some portion of that portfolio that does have rent control properties in it.

The -- we had a high level of maturity in that portfolio last year and then refinancings away from us out of that portfolio. The actual maturities this year are -- came down quite a bit. But when we gave original guidance, we were expecting the level of refinancing to remain elevated. And I think what we've all learned now through the first 6 months of this year, is the activity levels in that mark -- that segment of the market have really slowed down and that led to quite a bit of much larger portfolio at this point in the year than we originally expected.

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Operator [22]

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Your next question comes from Jared Shaw from Wells Fargo Securities.

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Jared David Wesley Shaw, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [23]

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Just a first question on the United deal and with their exposure to D.C. Solar. They took a $9 million writedown this quarter, is that in addition to the writedown that you provided us on Monday or is that part of the valuation that you put on there?

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R. David Rosato, People's United Financial, Inc. - Senior EVP & CFO [24]

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No. Our $41.7 million, it was the full amount of the balance sheet exposure plus prior tax credits of what you see. United's number is a subset of what we had conservatively modeled.

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Jared David Wesley Shaw, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [25]

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Okay. So these aren't -- these are -- that $9 million is, I guess, the way to look at it coming out of that, were a part of that $41.7 million total exposure not about -- not in addition to it. Okay. And then what's the anticipated total of goodwill from the United deal?

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R. David Rosato, People's United Financial, Inc. - Senior EVP & CFO [26]

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The -- I don't have that number handy right now. Give me a second. And it's subject to quite a bit of change as marks move.

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Jared David Wesley Shaw, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [27]

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Sure, yes. And we can follow up after, if that's easier.

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R. David Rosato, People's United Financial, Inc. - Senior EVP & CFO [28]

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Yes, I'd appreciate that.

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Jared David Wesley Shaw, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [29]

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Okay, sure. And then just following up on Ken's question on the multi-family, when you're saying that the pace of refis are slow, are you also saying as that being driven by the pace of just sale, secondary market sales of those properties slowing and where in the past...

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R. David Rosato, People's United Financial, Inc. - Senior EVP & CFO [30]

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Yes.

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Jared David Wesley Shaw, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [31]

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Okay. So it's not that people are holding on to their loans past that reset date. It's just more that the -- your anticipated sales schedule has slowed down?

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R. David Rosato, People's United Financial, Inc. - Senior EVP & CFO [32]

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Yes. And just the transaction activity in that market has slowed down as people react to the new legislation.

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Operator [33]

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Your next question comes from Brock Vandervliet from UBS.

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Brocker Clinton Vandervliet, UBS Investment Bank, Research Division - Executive Director & Senior Banks Analyst of Mid Cap [34]

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Just following up on that last question on multi-family. Would you consider selling that portfolio since it now looks like it may be around for much longer than we thought it would be?

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R. David Rosato, People's United Financial, Inc. - Senior EVP & CFO [35]

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We thought about it from time to time and we certainly we could. But today as rates go down, and it's hanging around a little longer, that's a good thing from our perspective. So yes, I -- never say never, but I would guess we will not wind up selling those assets.

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Brocker Clinton Vandervliet, UBS Investment Bank, Research Division - Executive Director & Senior Banks Analyst of Mid Cap [36]

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Okay. Fair enough. And what's your sense of your rate sensitivity now relative to the shock test results we saw in the Q given Belmont. Has it changed? Has that changed materially?

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R. David Rosato, People's United Financial, Inc. - Senior EVP & CFO [37]

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No. It -- Belmont was slightly liability sensitive, but once they were aggregated into us, remember they are only up roughly 5% of our asset size, they had a very modest impact overall.

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Brocker Clinton Vandervliet, UBS Investment Bank, Research Division - Executive Director & Senior Banks Analyst of Mid Cap [38]

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Okay. And David, you appear to be using the forward curve, as you look into next year where the curve implies several more cuts, are you comfortable with your rate positioning or are there things you would look to do in addition to hedge that out? I guess, United will help you in that regard because it is a more liability sensitive.

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R. David Rosato, People's United Financial, Inc. - Senior EVP & CFO [39]

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Yes. United will have a small positive impact, small reduction in our asset sensitivity. The -- I think the real question that we spend our time on is, feeling pretty good about the asset side of our balance sheet from a rate sensitivity perspective. Credit spreads have held up, have been steady. The -- our securities portfolio is a longer duration and provides a nice hedge there.

The hedging at the where we are today is a pretty bullish statement because any 10-year swap is immediately negative to carry perspective versus 1-month LIBOR or 3-month LIBOR. So we haven't rushed out to hedge anything in the derivatives market right now. If we get substantially more constructive on rates going down and the curve steepening, our ALCO committee will continue to evaluate that.

But as we sit here today, we're modestly asset sensitive and we're comfortable with that for now.

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

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And as we told you, we are actively moving now to manage our deposit cost and we'll continue to look at that if the forward curve is right on what's going to happen with short rates.

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Operator [41]

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Your next question comes from Collyn Gilbert from KBW.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [42]

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Maybe if we could just start, David, with some margin. The margin guidance that you guys gave the 3.05% to 3.15%, I know you touched on some of this, but just thinking about it in terms of the waterfall chart that you guys put in the slide deck on Slide 4, just for the impact this quarter.

If we could -- maybe if you could kind of walk through how that would look in your guidance?

You talked about a little bit on the deposit side and where you're seeing, you're reducing some promotional rates so that's helpful, but just -- also just thinking about the loan maybe how in this scenario you're thinking about loan yields. I guess, that that's really the big thing on the loan yields and then on the borrowing side, too.

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R. David Rosato, People's United Financial, Inc. - Senior EVP & CFO [43]

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Sure. The -- what I would say just looking at Slide 4, the big numbers there is the 14 basis points around deposits. And what I would say is, in the second quarter what we were able to do to lower deposit costs was very modest, right? And the moves that I talked about a few minutes ago were later in the quarter and didn't impact the quarter. When I think about the asset side, we have about 43% of our loans are prime on 1-month LIBOR, so that's where the headwind is, and I think that those loans will continue to bring price down as 1-month LIBOR moves down, if the forward curve is correct. We have a nice offset in our securities portfolio and our other -- in our equipment finance business, which is very nice yields, great cash flow and is all fixed rate.

The -- as I think about the back half of the year, with the Fed moving it's deposit management that is where the work has to be done. And just generally speaking, I think it's been hard for banks to be too aggressive in lowering deposit costs until we get the cost cover of the Fed at making that first move, and I think we all collectively think that's right around the corner.

So our margin guidance of 3.05% to 3.15% is looking -- is assuming a step down in margin of approximately 3 basis points a quarter is kind of how I would term it -- position it today.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [44]

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Okay. Okay, that's helpful. And then if we take that -- well, let's -- if we just transition, sorry, for a minute to UBNK. So I believe you guys have said in your deal metrics that you were using consensus estimates at, for 2020, I think, of $1.09. It looks as if now having digested UBNK's quarter and speaking with them that achieving that is going to be a big challenge. How does that come into play with your outlook in terms of your EPS accretion targets and the like?

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R. David Rosato, People's United Financial, Inc. - Senior EVP & CFO [45]

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UBNK for 2019 is not going to have a big impact on us just because of the closing of the deal. It's -- the way we think about that is, more of how we -- what we do once we take -- once we merge with them and some of the balance sheet changes that we make at that point is obviously going to be dependent on time of closing and how we feel and where interest rates are at that time.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [46]

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Okay. I was -- it's really more the 2020 number than I'm honing in on, like, if it's shakes out to be $1 versus $1.09, you think you still -- is what you're saying, you still think you have enough sort of balance sheet optionality there to recover that whatever lost earnings may happen for the company between now and when you close the deal or now and when you integrate the deal?

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R. David Rosato, People's United Financial, Inc. - Senior EVP & CFO [47]

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Yes, that's our position.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [48]

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Okay. Okay. And then just on the buyback, I'm sorry I think you said it, David. So your -- if we look at your capital targets in that Tier 1, the 10% to 10.5% range, and your -- did I hear you correctly in saying that you -- even if you did execute on this buyback pro forma with UBNK you still would have -- still be within those targeted capital ranges?

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R. David Rosato, People's United Financial, Inc. - Senior EVP & CFO [49]

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Yes. Our operating target for CET 1 would allow us to buy that stock back in a relatively quick period of time a quarter or 2 and still be above our operating targets.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [50]

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Okay. All right. I guess I'm trying to figure that out we can maybe talk off-line. I guess, just thinking conceptually, UBNK is going to lower your capital levels, you're not really going to be generating much capital just given the -- probably the direction of earnings, but you're saying you will. You're still optimistic.

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R. David Rosato, People's United Financial, Inc. - Senior EVP & CFO [51]

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Yes. But we are also -- the first thing we said on the first question that came around about the buyback was, we are positioning that as -- it's nice to have it in place. We've lowered our dividend payout ratio quite a bit over the last couple of years, it's down around 50% today.

It's our -- so we have another capital management tool, but we did position it as opportunistically. So we are not saying we will definitely buy all those shares back in a predetermined amount of time.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [52]

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Okay. Okay. Okay and then just finally tying this all together with kind of a NIM guide. If we kind of assume that full year range that would mean in the fourth quarter, you'd theoretically perhaps have a NIM as low as, say, 2.95% or so. So you're going into 2020 with a 2.95% NIM with continued pressure kind of assume still be coming in the first quarter just because of what that December rate cut that would be factored in. That's just -- how are you thinking about that and just in the totality of still wanting to generate EPS growth or will 2020 be a year that maybe you don't generate EPS growth or you don't hit your financial targets. I'm just trying to title together, just seems like it'd be a -- it's going to be a meaningful drop in earnings per share in 2020 with this NIM?

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John P. Barnes, People's United Financial, Inc. - Chairman of the Board & CEO [53]

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Well, it's -- Collyn, it's Jack. I mean, I think as we've described on lowering the NIM guidance, we're looking at the high potential of the Fed lowering rate, right, and that's the primary driver of that change in the guidance. And as we go into -- through rest of the year and into 2020, there is a lot of levers, right, to use to kind of fight that headwind. We've described the work that we continue to do on remixing the assets on the balance sheet and improving yields and changing the makeup, the percentage of portfolios.

We continue to work on growing DDAs and we continue to work on our deposit costs. So there is a lot of different ways that we can fight the pressure on rates coming down with the Fed. As you know, none of us know where that's going to go really. I mean, I think our challenge in our job is to react to what is going on in the market externally and then manage what we can manage.

So again, if you would just assume that the December rate decline is going to kick in and that maybe there's another one that's in isolation, and it doesn't give us any credit for taking actions to fight that off.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [54]

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Got it. Okay.

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R. David Rosato, People's United Financial, Inc. - Senior EVP & CFO [55]

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I would just add to that, the 2.95% NIM that you quoted feels very aggressive to me as we're much lower than where, I think, we'll wind up being as it stands.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [56]

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Sorry. You know what, David, my bad. Also I have UBNK already in my model, so that includes UNBK and yours does not. But anyway, I didn't mean to interrupt. Continue.

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R. David Rosato, People's United Financial, Inc. - Senior EVP & CFO [57]

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Well, yes, okay. So I was just going to say if the interest rate environment it gets crystal clear that we are going to substantially lower rates, there's going to -- we're going to have to take substantial action to protect our NIM, that's both on hedging, on the asset composition side as well as the liability side.

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Operator [58]

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(Operator Instructions) Your next question comes from Matthew Breese from Jaffray.

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

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Just want to continue the NIM discussion, hop on the NIM PIG file, so to speak. Just curious, is there any other drivers of compression and maybe you could just give us a sense for what accretable yield amounted to this quarter for the NIM and where you expect it to go by the end of the year in terms of a headwind?

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

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Really not much of a factor in the quarter. The real driver, the positive around our NIM is we still have a nice differential between the new business that's hitting the books and our current loan portfolio yield. That's been going on for quite a few quarters now. There's is -- benchmark interest rates are moving down, but spreads are staying constant. And I think that metric will continue in the back half of the year as well.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [61]

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And what is the difference now between the incremental new loan and what's on the books?

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R. David Rosato, People's United Financial, Inc. - Senior EVP & CFO [62]

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It's a little over 50 basis points.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [63]

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Okay. Okay. And then is the -- I know you mentioned you had a rather large $500 million commercial deposit, sound short term in nature. With the expectation that rolls off the balance sheet, is that a driver of NIM compression as well? And if so, how much?

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R. David Rosato, People's United Financial, Inc. - Senior EVP & CFO [64]

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It was a modest driver of NIM compression in the second quarter. It won't be here for too much of the third quarter, and it was on the balance sheet for about half of the second quarter. We called it out more because it was large and it came and it will be going.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [65]

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Okay. Okay. And then you mentioned that some of the growth this quarter came from the health care space. Could you guys give us a sense for what your exposure is to the segment? What types of loans you're providing there and geographically, where it's centered?

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Jeffrey J. Tengel, People's United Financial, Inc. - President [66]

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Sure. This is Jeff again, the health care -- our health care business is mostly senior housing. Seniors -- if you think about us, and it's mostly in our footprint. So we're providing financing for assisted living, skilled nursing facilities we also do. There is not much in the way if you think about hospitals because so many in the hospitals have consolidated in the Northeast. So there's probably a bigger concentration in the senior housing in some of the not-for-profit agencies.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [67]

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And what's the size of that portfolio? How much did it grow this quarter?

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Jeffrey J. Tengel, People's United Financial, Inc. - President [68]

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This quarter, they grew $100 million. Little over $100 million.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [69]

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Okay. On the balance of?

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Jeffrey J. Tengel, People's United Financial, Inc. - President [70]

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About 750-ish.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [71]

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Okay. Okay. And then my last question just with regards to CECL, we're getting pretty close to the deadline here. I'm just curious if there is any sort of additional commentary or expectations for Day 1 and then go forward provision?

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

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We're not prepared to talk about putting any numbers out there. Our expectation, we'll be doing that in early October on our third quarter conference call as well as putting additional disclosure in the Q. Comments are very similar to last quarter, which is where we have a cross-functional team across the bank that's been working on CECL for over a year now. We have developed all of our models, we're just about ready to start parallel testing on the back half of the year, and we'll provide more clarity in 3 months.

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Operator [73]

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Your next question comes from Brock Vandervliet from UBS.

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Brocker Clinton Vandervliet, UBS Investment Bank, Research Division - Executive Director & Senior Banks Analyst of Mid Cap [74]

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Just on accounting, purchase accretion for Q2. Do you have that number?

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R. David Rosato, People's United Financial, Inc. - Senior EVP & CFO [75]

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I don't, off the top of my head. It was similar to -- somewhat similar to last quarter, I can follow up with what the exact number was.

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Brocker Clinton Vandervliet, UBS Investment Bank, Research Division - Executive Director & Senior Banks Analyst of Mid Cap [76]

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Okay. Okay. Yes, I think it was about $6 million last quarter. Great. I'll follow up offline.

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R. David Rosato, People's United Financial, Inc. - Senior EVP & CFO [77]

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Okay. Thanks.

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Operator [78]

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Thank you. Ladies and gentlemen, since there are no further questions in the queue, I'd now like to turn the call over to Mr. Barnes for closing remarks.

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John P. Barnes, People's United Financial, Inc. - Chairman of the Board & CEO [79]

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Thank you. In closing, we are pleased with our strong second quarter performance, which was highlighted by a 24% increase in operating earnings from a year ago, 260 basis point improvement year-over-year in the efficiency ratio, reflecting higher revenues particularly strong noninterest income growth and well-controlled expenses.

Solid organic loan and deposit growth, new business yields remaining higher than the total loan portfolio yields and sustained exceptional asset quality. Thank you for your interest in People's United. Have a good night.

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Operator [80]

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