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Edited Transcript of PBCT earnings conference call or presentation 17-Jan-19 10:00pm GMT

Q4 2018 People's United Financial Inc Earnings Call

BRIDGEPORT Jan 22, 2019 (Thomson StreetEvents) -- Edited Transcript of People's United Financial Inc earnings conference call or presentation Thursday, January 17, 2019 at 10:00:00pm 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

* David Jason Bishop

FIG Partners, LLC, Research Division - Senior VP & Research 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 - Principal & Senior Research Analyst

* Steven A. Alexopoulos

JP Morgan Chase & Co, Research Division - MD and Head of Mid-Cap and Small-Cap Banks

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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. Fourth Quarter and Full Year 2018 Earnings Conference Call. My name is Chelsea and I will be your coordinator for today. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

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

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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 fourth quarter and full year 2018 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.

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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 full year overview on Slide 2. 2018 was another noteworthy year for People's United. We continue to strengthen the profitability of the bank as operating earnings increased 33% to $461.4 million, the highest level in the bank's history. In addition, operating earnings per common share of $1.31 was up $0.27, marking the ninth consecutive annual increase. These strong results generated an operating return on average assets of 1.02% and an operating return on average tangible equity of 14.6%, which increased 21 basis points and 280 basis points, respectively, for last -- from last year.

In June, we successfully closed and integrated the acquisition of Vend Lease, an equipment finance company established in 1979 that operates primarily in the hospitality industry. The transaction further strengthens our network of specialty finance experts and bolsters our nationwide businesses.

In October, we also successfully closed the acquisition of First Connecticut Bancorp, the holding company for Farmington Bank. The transaction is the classic in-market acquisition of a high-quality franchise that bolsters our well-established presence in Central Connecticut and Western Massachusetts. The integration is progressing extremely well, the core system conversion will take place later this month and we are on track to realize projected cost saves.

In November, we announced the acquisition of BSB Bancorp, the holding company for Belmont Savings Bank. The transaction will deepen our presence in the Greater Boston area, particularly in the suburbs west of the city, which are attractive banking markets. The addition of Belmont enhances our already robust team of commercial and retail bankers in Boston and complements the strong organic growth we have achieved in the Commonwealth. We are confident the acquisition will close early in the second quarter, pending regulatory and shareholder approvals.

We are pleased with the advancements made in 2018 to strengthen organic growth capabilities and further position the franchise for long-term success. We continue to invest in revenue-producing initiatives and talent, highlighted by the addition of 3 senior bankers to lead our newly established Franchise Finance, Technology and Not-For-Profit verticals.

During the year, we also continued to improve our digital capabilities and technology infrastructure. Highlights include investing in a digital marketing strategy to engage clients, generate leads and increase sales productivity, engaging with our fintech partners to establish digital origination channels for deposits, consumer and small business lending and wealth management.

Also in 2018, People's United remained steadfast in its community support. Through the bank's 2 foundations, over $3.8 million was awarded to more than 600 organizations. This commitment is a vital part of our culture and helping communities across our footprint to grow and thrive is good for our business.

Finally, we are pleased People's United was ranked best employer among U.S. banks and as a top company globally on the Forbes 2018 World's Best Employers Global 2000 List. This is a very noteworthy recognition for the bank and a reflection of our guiding principles.

Looking at the full year results in more detail, we're very pleased with our strong financial performance. Total revenues of $1.6 billion increased 10% from 2017, driven by both organic growth and recent acquisitions. This increase reflects improvement in both net interest income and noninterest income. In addition, the performance was highlighted by a 14 basis point expansion in the net interest margin to 3.12%, marking the strongest full year result since 2013.

Total expenses, excluding merger-related costs, finished the year at $985 million, an increase of $55 million or 6% from a year ago. We are pleased with these results given the inclusion of Vend Lease and First Connecticut into the franchise during the year and having Suffolk and LEAF on the books for a full 12 months.

As a result of our revenue growth and well-controlled expenses, we continue to enhance operating leverage as evidenced by a 3 (sic) [30] basis point improvement in the efficiency ratio year-over-year to 57.4%. This is a particularly strong result as beginning with the first quarter of 2018, the metric includes the unfavorable impact of tax reform, which results in the lower FTE adjustments to net interest income.

Loan balances at year-end were at $35.2 billion, an increase of $2.7 billion or 8%, driven entirely by the addition of Farmington. Excluding this acquisition, the loan portfolio was essentially unchanged from year-end 2017.

As we discussed on our October call, we did not expect to achieve our 3% to 5% loan growth goal for the year, primarily due to continued headwinds in commercial real estate and the industry-wide slowdown in the home equity market. Our commercial real estate business was specifically impacted by the one-off of the transactional portion of our New York multifamily portfolio, which totaled $434 million for the year. In addition, other headwinds included heightened competition from both bank and nonbank lenders, lower demand and above-average payouts.

However, it is important to note that we did experience strong stand-alone results across many of our businesses that were in line with our expectations for the year. For example, equipment financing grew 11%, driven by impressive LEAF production, with middle-market C&I and asset-based lending achieving growth of 4% and 9%, respectively. These results highlight the importance and impact of our well-diversified portfolio.

Moving on to deposits. Period-end balances finished the year at $36.2 billion, up $3.1 billion or 9% from 2017. This increase was driven both -- by both the Farmington acquisition and organic growth. Excluding Farmington, period-end balances increased $821 million or 2%.

Consistent with our strategy of balancing organic growth and thoughtful M&A, we announced today the all-cash acquisition of VAR Technology Finance. Founded in 1990 and headquartered in Mesquite, Texas, VAR, with an exclusive focus on the technology sector, produced approximately $180 million in originations in 2018 and ranked among the top independent privately held equipment finance companies nationwide for new business volume. The transaction has closed and we are transitioning VAR from an origination-for-sale model to an origination-to-hold model.

Similar to our acquisition of Vend Lease, VAR will become a division of LEAF, enabling it to leverage LEAF's technology platform, marketing and leading automation capabilities. The company is a strong cultural fit as VAR and LEAF have shared a business partnership for many years, leading us to have a deep understanding of their operating model and underwriting process. We are excited to welcome VAR and its strong brand and reputation in the technology sector to the People's United family.

Looking ahead to 2019, we expect the year to be similar to 2018 in terms of economic and political uncertainty. In particular, uncertainty around the Federal Reserve monetary policy and the ultimate impact on the yield curve will likely be the prevailing themes for banks this year. However, our long-term approach to managing the business has and will further enable us to move the company forward regardless of these uncertainties.

Driven by our commitments to expense management, excellent asset quality and a diversified business mix, we have delivered improved returns even while experiencing subdued loan growth in certain segments. As shareholders and prospective shareholders, you can be assured we will thoughtfully manage through the upcoming year and continue to build a strong banking franchise for the long term.

With that background in mind, let me outline our goals for the full year 2019 as listed on Slide 3. It is important to note the following goals incorporate a full year of Farmington and Vend Lease results as well as VAR Technology. However, these goals do not include the pending acquisition of Belmont. Once the Belmont transaction is closed, we will update these goals accordingly.

The first goal is to grow our loan portfolio in the range of 3% to 5% on both a period-end and average balances basis. This goal excludes the transactional portion of our New York multifamily portfolio, which is in runoff mode. Period-end balances for this portfolio finished 2018 at $968 million, while the average balance for the full year was approximately $1.2 billion. We expect the runoff in the transactional New York multifamily portfolio to be $400 million to $500 million for the full year.

Secondly, our continued focus on gathering deposits is expected to drive deposit growth in a 3% to 5% range on both a period-end and average balance basis.

The next goal is for net interest income to increase in the range of 10% to 12%. Embedded in this goal is the expectation for the net interest margin to be in the range of 3.15% to 3.25%. This net interest margin range is derived from many different factors, one of which is an assumption that no increases in fed funds during the year.

We expect noninterest income on an operating basis to grow in the range of 2% to 4% as compared to $376 million in 2018. Operating noninterest expenses, which exclude merger-related costs, are anticipated to be in the range of $1.04 billion to $1.06 billion as compared to $985 million in 2018.

As a reminder, this range includes a full year of results from Vend Lease, Farmington and VAR Technology. In addition, it assumes an increase of approximately $12 million in expenses as a result of adopting the new lease accounting standard on January 1, 2019, which limits the type of lease origination costs eligible for deferral in our equipment financing businesses. Previously, such costs were deferred and recognized as an adjustment of yield over the related lease term.

We also expect to maintain excellent credit quality with a provision in the range of $35 million to $45 million. In addition, we anticipate our effective tax rate for the year to be in the range of 20% to 22%.

Finally, we plan to maintain strong capital levels with the expectation that at year-end, holding company common equity tier 1 capital ratio will be in the range of 10% to 10.5%.

With that, I will pass it to David to discuss the fourth quarter in more detail.

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

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Thank you, Jack.

Our fourth quarter financial performance resulted in a strong finish to the year as evidenced by another quarter of record earnings and operating return on average tangible common equity of 15.5% and a 160 basis point improvement in the efficiency ratio linked-quarter. Operating earnings of $134.2 million increased 18% from the third quarter and benefited from the Farmington Bank acquisition and further net interest margin expansion. The quarter was also favorably impacted by a lower effective tax rate.

It's important to note the fourth quarter concluded the following items which were deemed nonoperating: A tax benefit of $9.2 million realized in connection with tax reform, security losses of $10 million pretax or approximately $8 million after-tax incurred in response to the current period tax reform benefit and merger-related expenses of $8 million pretax or approximately $6 million after-tax.

Turning to Slide 5. Net interest income of $332.6 million increased $26.2 million or 9% on a linked-quarter basis. The loan portfolio contributed $39.5 million of the increase to net interest income and benefited from higher yields on new business as well as the continued upward repricing of floating rate loans. Net interest income also benefited $2.4 million from higher yields and balances in the securities portfolio. The largest offset to these increases were higher deposit and borrowing costs, which collectively reduced net interest income by $15.7 million.

Net interest margin of 3.17% expanded 2 basis points from the third quarter. As displayed on Slide 6, this expansion was primarily driven by the loan portfolio, which favorably impacted the margin by 17 basis points as new business yields continue to increase and remain higher than the total portfolio yield. The net interest margin also benefited 1 basis point from higher yields in the securities portfolio. Conversely, higher deposit and borrowing costs lowered the margin by 14 basis points and 2 basis points, respectively, for the quarter. The addition of Farmington unfavorably impacted the net interest margin by approximately 2 basis points.

Looking at loans on Slide 7. Average balances of $35 billion increased by approximately $2.9 billion or 9% compared to the third quarter. This increase was entirely driven by the addition of Farmington. Excluding the acquisition, average loan balances were essentially flat. On a period-end basis, loans ended the quarter at $35.2 billion, an increase of $3 billion or 9% from September 30, driven by both the addition of Farmington and organic growth. Excluding the acquisition, balances increased $276 million or 1%. Organic growth benefited from strong production in equipment finance, ABL as well as our health care and large corporate verticals. These results were partially offset by lower mortgage warehouse lending balances and continued runoff of the transactional portion of the New York multifamily portfolio. Period-end balances in the mortgage warehouse lending portfolio ended the quarter at $802 million, down $80 million, while balances in the transactional portion of the New York multifamily portfolio declined $79 million in the quarter.

Moving to deposits on Slide 8. Average balances of $36 billion increased $2.9 billion or 9% linked-quarter, while period-end balances were also up 9%. These results were driven by both the addition of Farmington and organic growth. Excluding the acquisition, average and period-end balances increased $576 million and $667 million, respectively. It is important to note the quarter-end loan-to-deposit ratio remained at 97% despite Farmington's elevated loan-to-deposit ratio.

While our deposit costs were up 10 basis points for the quarter, we continue to focus on controlling pricing. Our interest-bearing deposit beta is 27% since the beginning of the current cycle of increasing interest rates. In comparison, our loan yield beta is 37% during the same period. Specifically for the fourth quarter, our interest-bearing deposit beta was 49% compared to 57% in the third quarter while the loan beta was 40%.

Turning to noninterest income on Slide 9. Fourth quarter noninterest income totaled $88.7 million. Late in the quarter, we sold approximately $236 million of securities with an average yield of 1.82%. As I referenced earlier, the $10 million pretax loss as a result of these sales was deemed nonoperating and offset a $9.2 million tax benefit realized in connection with tax reform.

On an operating basis, noninterest income was $98.7 million, up $6.4 million or 7% from the third quarter. These results were primarily driven by an improvement in customer interest rate swap income of $3.5 million, higher bank service charges of $2 million and an increase in commercial lending fees of $1.7 million. The largest offset to these increases was a $3.1 million decrease in insurance revenues.

On Slide 10, noninterest expense of $262.7 million increased $21.4 million or 9% linked-quarter. Included in the fourth quarter were $8 million of merger-related costs with $3.7 million in professional and outside services, $3.5 million in comp and benefits, $600,000 in occupancy and equipment and the remainder in other. In comparison, the third quarter incurred $500,000 of merger-related costs. Excluding merger-related costs, noninterest expenses of $254.7 million increased $13.9 million or 6% linked-quarter. The largest components of this increase were $12.3 million in higher compensation and benefit costs and a $2.4 million increase in occupancy and equipment. The increase in both categories was primarily driven by the addition of Farmington. Overall, Farmington added $14.3 million to operating expenses in the quarter. The largest offset to these increases was a $2.6 million reduction in regulatory assessments, driven entirely by the elimination of the FDIC surcharge.

As a reminder, payroll taxes, 401(k) matches and other employee benefit-related expenses as well as winter-related operational costs are highest in the first quarter of the year. Accordingly, based on historical experience, these expenses are expected to be higher in the first quarter compared to the fourth quarter.

As Jack referenced earlier, we continued to enhance operating leverage as evidenced by improvement in the efficiency ratio as displayed on Slide 11. The efficiency ratio for the fourth quarter was 55.1%, an improvement of 160 basis points linked-quarter and 100 basis points from a year ago. We are very pleased with the significant progress we have made and we will continue to seek ways to improve operating leverage.

We remain focused on maintaining excellent asset quality, which is the result of our conservative and well-defined approach to underwriting. As demonstrated on Slide 12, originated nonperforming assets as a percentage of originated loans and REO at 61 basis points was up modestly from a very low level in the third quarter. Net charge-offs of 9 basis points were consistent with the third quarter and continued to reflect the minimal loss content in our nonperforming assets. 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, our risk management process remains extremely diligent across each of our portfolios.

Moving to returns on Slide 13. Return on average assets of 111 basis points increased for the sixth consecutive quarter and improved 15 basis points from a year ago. Return on average tangible common equity of 14.9% increased 40 basis points from the third quarter and 110 basis points year-over-year. On an operating basis for the quarter, return on average assets was 112 basis points while return on average tangible common equity is 15.5%. As we continue to build the earnings power of the company, we expect further improvement in these metrics.

Continuing on to our final slide on Page 14, capital ratios remain strong, especially in light of our diversified business mix and long history of exceptional risk management.

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 Ken Zerbe with Morgan Stanley.

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

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Maybe just a good place to start up, not to be naive about this, but with VAR Technology Finance, could you just -- would you mind giving us an example? What is the type of lending that the technology does that would be considered an equipment finance loan?

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

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Sure. So a lot of what VAR does is finance the purchase of software and some hardware in the reselling market. So there are many companies out there that will sell software for and hardware for the major companies. They want and allow people to get in the middle of those transactions. With companies like ours, we -- our IT department would hire or would -- excuse me, would buy software through a reseller and what VAR does is they offer financing for that transaction.

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

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Got it. So I guess, what is the underlying collateral? Because if, I mean, if something were to happen like -- because it doesn't seem -- I mean, maybe I'm wrong, but it doesn't seem like the software itself would be a good piece of collateral to support that loan.

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John P. Barnes, People's United Financial, Inc. - Chairman of the Board & CEO [5]

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Well, the underwriting in those transactions are often done with very high-quality companies, so I'll go back to the example of us. Many of their clients are, in fact, very high-quality customers. And this is a company that's been around for 30 years and it's cycle-tested and it has a great track record.

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

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Got you. Understood. Okay. It sounds different from a normal finance loan, which is why I asked that. I think that does clarify it quite a bit.

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

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Sure. Yes. Thank you. It is unique. Thank you.

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Kenneth Allen Zerbe, Morgan Stanley, Research Division - Executive Director [8]

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Yes. And then just a small question. The -- aside from the $9.2 million tax benefit that you mentioned in the quarter, was there any other tax benefits included in that line? I think the net tax rate seems a little bit below ex that item.

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R. David Rosato, People's United Financial, Inc. - Senior EVP & CFO [9]

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It was, Ken. It's just the Qs coming in -- I'm sorry, the Ks coming in on a lot of our tax-advantaged items, our low income housing tax credits, et cetera. So we filed taxes in October and the benefit was all in the last quarter of the year.

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Operator [10]

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Your next question comes from Casey Haire with Jefferies.

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Casey Haire, Jefferies LLC, Research Division - VP and Equity Analyst [11]

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Just want to make sure I'm understanding the loan growth guide. So is the right way to think about it, you strip out the $968 million of multifamily and then draw that down another $450 million say and then the remaining loans of, let's call it, $34.2 billion, you'd grow that 3% to 5%? Is that the right way to think about it?

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

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Yes, that's exactly right.

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Casey Haire, Jefferies LLC, Research Division - VP and Equity Analyst [13]

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Okay. Great. Okay. And then on the NII, I'm sorry if I missed it, but what was the purchase accounting impact in the fourth quarter?

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

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About $3 million, Casey.

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Casey Haire, Jefferies LLC, Research Division - VP and Equity Analyst [15]

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Okay. And was that -- was any of that excess accelerated pay down?

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

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No. No.

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Casey Haire, Jefferies LLC, Research Division - VP and Equity Analyst [17]

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Okay. So it was all scheduled accretion?

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

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Correct.

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Casey Haire, Jefferies LLC, Research Division - VP and Equity Analyst [19]

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Okay. Great. And then lastly, just a big picture question. Post the -- would love to get some updated thoughts on your home state of Connecticut, how you're feeling about it post-election? Obviously, there's been 2 actions here with the Belmont Savings Bank as well as VAR Tech. Are you -- is this an indication of -- that you're not feeling as good about your home state of Connecticut and we should expect more out of Connecticut actions?

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

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No, not at all. Clearly, the Farmington deal would demonstrate that we're still interested in Connecticut, but we just had the opportunities that came up from Belmont and, as we said, we certainly want to continue to build out the Greater Boston area and the Massachusetts. And VAR continues to build out our capabilities in the equipment finance there, so all consistent. We're glad to continue and we have had -- Connecticut middle market has been one of our best growing portfolios, continue to enjoy those -- the strength that comes from Connecticut there and in deposits.

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Operator [21]

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Your next question comes from Steven Alexopoulos with JPMorgan.

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Steven A. Alexopoulos, JP Morgan Chase & Co, Research Division - MD and Head of Mid-Cap and Small-Cap Banks [22]

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I wanted to start on the NIM. So you guys should benefit in the first quarter from the December hike, and that should put you in your range. How do you think about the NIM trending after that, if the Fed does stay on hold?

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John P. Barnes, People's United Financial, Inc. - Chairman of the Board & CEO [23]

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There's -- it's a basis point or 2 per quarter upward creep, but the NIM is what we're thinking, really driven by new loan business being accretive to overall loan portfolio.

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Steven A. Alexopoulos, JP Morgan Chase & Co, Research Division - MD and Head of Mid-Cap and Small-Cap Banks [24]

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Okay. That's helpful. And then when we look at the new way you're providing the loan guidance, ex the runoff, 2018 is a little noisy with deals closing. What was 2018 organic loan growth on the same basis, excluding the runoff of multi-family organic?

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John P. Barnes, People's United Financial, Inc. - Chairman of the Board & CEO [25]

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Yes. It was really flat for the year, inclusive of the runoff of multi-family. So if you back that out, it's about 1.5%.

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Steven A. Alexopoulos, JP Morgan Chase & Co, Research Division - MD and Head of Mid-Cap and Small-Cap Banks [26]

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Okay. So what's the road map that gets us from 1.5% to -- up 3% to 5% in 2019?

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

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Do you want to walk through, Jeff, some of the kind of expense -- expectations in the different businesses and different spaces?

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Jeffrey J. Tengel, People's United Financial, Inc. - President [28]

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Yes. So this is Jeff Tengel. We think we're going to benefit from some of the investments that Jack mentioned earlier. We've done -- we've hired some key people in some businesses that really weren't active in 2018 that we expect to get a lot of benefit from in '19, specifically in the Franchise Finance space, the technology vertical and our not-for-profit team. We also have had really strong performance in some of our existing businesses, asset-based lending being one of them, our health care business being another. And so we expect continued strong performance in those businesses as we move through 2019. And then Jack also alluded to just our core middle-market business in Connecticut, and I would include Massachusetts in that as being just really solid, strong performers. So that's really what gives us confidence. When you couple that with the robust growth we've had in our equipment and finance businesses, I think that's what gets us to the 3% to 5%.

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John P. Barnes, People's United Financial, Inc. - Chairman of the Board & CEO [29]

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Steve, the only other thing I would add is that we had just shy of $250 million contraction at our mortgage warehouse business that we wouldn't expect to repeat to that extent this year.

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Operator [30]

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

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

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Maybe just actually following up on Steve's question about the margin, I mean, what would cause us, I guess, then to get to the low end of that, to that guide, the 3.15%, if we're not assuming any other moves? Would it be more potentially on the deposit pressure side or just not seeing that loan mix that you're anticipating when you get that 1 to 2 basis points a quarter of growth?

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

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It would be 2 things. On the asset side, if -- I mean, we've operated this year in an extremely flat yield curve, but the second half of this year was worse -- of last year was worse than the first half. So if the yield curve inverts or even farther out the curve inverts or continues to flatten would be number one, and then the other large drivers will be deposit pressure. If the Fed does go on hold, you would expect more rationality in pricing in the CD market amongst commercial banks. And that should -- if that doesn't happen, that would add pressure.

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Jared David Wesley Shaw, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [33]

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You mentioned good growth in the large corporate lending side. How much of that was shared national credit? Or was that really self-originated?

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

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It's shared national credit.

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Jeffrey J. Tengel, People's United Financial, Inc. - President [35]

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Yes. Our large corporate business is all -- for the most part, shared national credits.

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Jared David Wesley Shaw, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [36]

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Okay. And then would you expect to see that grow in 2019? Or are you happy with that as a level here?

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Jeffrey J. Tengel, People's United Financial, Inc. - President [37]

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No. We would expect that to grow. That market is -- we don't have as much ability to kind of drive growth because it is not -- it's self-originated. We're buying loans unlike the middle market, but we don't see anything on the horizon right now that would suggest it won't grow in 2019.

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Jared David Wesley Shaw, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [38]

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Okay. And then I guess my final question is, as you look at Boston and the Belmont acquisition, how do you feel you're positioned after now? Do you feel that you have the mass to really be able to grow organically the way you want to? Or would you look at doing additional acquisitions, sort of in Eastern New England, at some point to deepen that?

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John P. Barnes, People's United Financial, Inc. - Chairman of the Board & CEO [39]

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Yes. Sure. So I'll start with we really are happy with the way that we've been growing organically in the Greater Boston area. And we really brought in a lot of great talent over the last, I don't know, now, 5 or 6 years and through the period. And we've built very strong teams that are long market participants, if you will. So there's a couple of really, really interesting nice things about Belmont for us. On the commercial side, they have a commercial real estate team -- lending team that's been in the market for decades and very well known to the market, very well known to our folks. So we think that those people are going to help move our business forward. And on the retail side, see kind of interestingly, we've been in like Lexington, Wellesley and towns to the west and had great success. And Belmont is -- in Belmont and Cambridge and a few towns where we were wanting to get to. So the combination of the footprint on the Western side of Boston is now going to be very strong. And so we're excited about that. We've spent a lot of time now with the bankers there. Our culture fit is really strong and in good shape. And they have some good commercial deposit-generating efforts that we'll enjoy as well. So really, if you went and looked at the map, you'd see there's some really nice synergies going on there that we're looking forward to enjoy.

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Jared David Wesley Shaw, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [40]

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And in terms of additional M&A down the road, do you think that you're good where you are or that you'd evaluate opportunities?

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John P. Barnes, People's United Financial, Inc. - Chairman of the Board & CEO [41]

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I think we would love to be opportunistic and continue to move forward in that area. I think there's a lot of opportunity for us to continue to do that.

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Operator [42]

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Your next question comes from Brock Vandervliet with UBS.

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Brocker Clinton Vandervliet, UBS Investment Bank, Research Division - Executive Director & Senior Banks Analyst of Mid Cap [43]

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Just following up on that other question, what would you say you're looking for in terms of the DNA of some of the franchises you're looking at or you have acquired? Is it primarily geographic or product or a bit of both? You seem to be one of the few franchises in the market who's an active buyer right now, and I'm curious what you're looking for.

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John P. Barnes, People's United Financial, Inc. - Chairman of the Board & CEO [44]

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Sure. So our first preference is for commercial banks that operate in a very similar manner to us, relationship-oriented commercial banks. And we are open-minded to looking at others, but that would be the starting point. We like in-market deals across our footprint, but we are willing to look at adjacent markets as well. But if you look at Suffolk and Farmington and Belmont, we think those are great deals for us that move the company forward and make a lot of sense.

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Brocker Clinton Vandervliet, UBS Investment Bank, Research Division - Executive Director & Senior Banks Analyst of Mid Cap [45]

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And I realized the guide is ex BSB. Is there anything you can say about it specifically with respect to combined pro form margin? Because I believe BSB's NIM is quite a bit below yours.

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

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Sure, Brock. I mean, you can look at their balance sheet and their margin and put the 2 together, and you'll see some downward pressure on our margin. Over time, we will be working to remix their balance sheet. They have quite a bit more residential mortgages than we do. And we will be remixing that more commercial and less residential over time. So we will -- the initial margin dilution over -- going forward will be reduced.

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Operator [47]

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Your next question comes from Collyn Gilbert with KBW.

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

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I just want to clarify, what exactly is happening with the lease accounting changes? Sorry about that. Is it how we account for the lease amortization expense?

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

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Collyn, it's David. So the new lease accounting is -- it basically says that currently, part of the origination cost that we get to defer upfront through FAS 91, certain categories of those expenses are no longer deferrable. So origination expense will go up. That's the $12 million that we called out. It's -- what will happen is the -- so on that next lease, higher expense to originate but also higher yield over time. So it's really just a time value of money concept, nothing different. If the average lease is 4 years, for example, across that portfolio, we will earn that $12 million back over -- pro rata over the 4 years. That's the way you should think about it.

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

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Got it, okay. So nothing is happening to the amortization of expense -- lease expense line? It's all happening more on the balance sheet yield?

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

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Yes. Yes. So if you think about it, of the $12 million on -- that's an expectation based on the number of leases we might do with this year. It takes the life of the lease to get the full expense back through higher loan yields.

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

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Okay. Okay. All right. And then just some balance sheet question, just so I understand some of the movements that occurred this quarter. So you had a big cash build, kind of what -- and I presume that came from deposit growth was really strong this quarter. So maybe just talk about kind of the deposit movement, how much of that perhaps is seasonal and how should we think about the liquidity build going forward. I mean -- yes, I'll stop there.

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

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So just the minor point. If you look at cash-in due on the balance sheet, that was just really very end-of-quarter influx of cash and the way -- that was excess reserves at the Fed at 12/31. That's all that really was. That's already normalized. On the deposit side, we had a very good quarter for the deposit growth. The fourth quarter is usually one of our stronger quarters, so no surprise there. And I can't say anything unusual. It was broad-based across money markets, DDA, commercial, retail and government banking. Nothing unusual from a -- driving the increase.

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

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Okay. And then the borrowing, just kind of how you're thinking about the use of borrowings going forward. I know it's been kind of -- obviously, we're seeing upticks in the cost there, but just how you're thinking about the borrowing strategy going forward.

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John P. Barnes, People's United Financial, Inc. - Chairman of the Board & CEO [55]

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Sure. Well, obviously, the better deposit growth is the fewer Fed funds or short-term home loan advances we'll be doing. What I would say is we talked about this for quite a few years now about the growing capabilities of our commercial bank to drive deposit growth, we continue to benefit from that. And as that continues to gain momentum, we will have a lower reliance on borrowings to fund growth. And we -- in 2018, we had particularly strong success in our government banking activities, so large wins of large clients. And I think that momentum is going to continue as well.

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

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Okay. Okay. And the just...

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John P. Barnes, People's United Financial, Inc. - Chairman of the Board & CEO [57]

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And then the only other thing, Collyn, I would mention is when we go through these acquisitions, we're thinking a lot about funding and some of the benefits of the deposits that are coming in. And we're thinking a lot about new households. And so as we grow and then we get into -- strengthen ourselves in markets, we're certainly turning on the marketing and looking to use some of our new digital marketing and online account opening strength to drive some growth on the retail side. So we're optimistic and certainly working at doing that as well.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [58]

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Okay. Okay. And then just a housekeeping item. What was the fee impact this quarter from FBNK?

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John P. Barnes, People's United Financial, Inc. - Chairman of the Board & CEO [59]

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It was about $3 million.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [60]

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Okay. And then one last question. Can you just remind us what the historical loss rates have been in your equipment lease businesses now that you've rolled up so many acquisitions within that segment?

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John P. Barnes, People's United Financial, Inc. - Chairman of the Board & CEO [61]

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Sure. And it's really quite different by portfolio. So starting with our oldest PCLC going back all the way to the financial crisis, the largest on an annual basis loss rate we had was in the low to mid-70s, 70 basis points. The average over the last 10 years has been about 30 basis points. PUEFC, so they've been with us since 2010, the old FinFed, their maximum loss rates we ever saw from them on an annual basis was about 21 or 22 basis points. And their average under our ownership since 2010 has been 5 to 6 basis points. And then lease is a little different animal. It's been with us last time, but the management team has been cycle-testing for a long period of time. They will run loss rates in the low to mid-70s up to just under 1% through the cycle.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [62]

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Okay. Okay. Okay. That's helpful. And sorry, just one last question. The SNC book, how big is it now? And how big do you intend to grow that?

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Jeffrey J. Tengel, People's United Financial, Inc. - President [63]

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It's about a little over $1 billion, and I would say it's been growing at about 10% a year or so. We would expect that to continue. I would also add, it's a pretty conservative book. It's generally BB-ish in terms of the credit profile, BB-ish or better.

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

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And Collyn, I would just add to that, that our approach to what we call large corporate is, in our opinion, quite a bit different than some other banks that -- and what I mean by that is it's predominantly a Northeast-oriented book. It's -- there's a long relationship if we have the ability to cross-sell to that customer base. That means -- and the group is highly, highly disciplined in cross-selling derivatives, foreign exchange, has a lot of success in getting deposits. And then when I say also Northeast space, we do a lot of bank at work with those organizations. So we get in there and get access to their employee base. So we just don't want to convey or leave the impression it's just purchased asset.

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Jeffrey J. Tengel, People's United Financial, Inc. - President [65]

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We have direct relationships with the management of the company and have a regular calling program with them, and as David suggested, have enjoyed quite a bit of cross-sell success.

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Operator [66]

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Your next question comes from Matthew Breese with Piper Jaffray.

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

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Just to start, I was hoping to get some thoughts or some additional color on the competitive dynamics as it relates to gathering deposits. And I know your earlier commentary, you said that if that Fed does pause, hopefully, there's some lessening there. But have you seen anything change as the Fed has changed its tone at the very least?

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John P. Barnes, People's United Financial, Inc. - Chairman of the Board & CEO [68]

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Have we seen anything changed since the Fed "might have gone on hold" is 30 -- in the last 30 days? No. I can't -- couldn't say that.

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R. David Rosato, People's United Financial, Inc. - Senior EVP & CFO [69]

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The only thing I would mention is that it does seem like there are a few people in the market with great offerings right now. Maybe there's a pause or a slowdown in that. We've seen some of the competitors that were out there with rates that are advertising other things right now.

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John P. Barnes, People's United Financial, Inc. - Chairman of the Board & CEO [70]

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Good point.

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

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Interesting. Okay. And then going to M&A, should we take your strategy to reduce the size of your transactional New York City multi-family portfolio as an indication towards your appetite to acquire banks having that -- in that asset class and in that geography?

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John P. Barnes, People's United Financial, Inc. - Chairman of the Board & CEO [72]

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Say that, the less -- having less or having some?

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Matthew M. Breese, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [73]

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Should we take your strategy of reducing New York City multi-family as an indication of your appetite of buying banks heavy in that asset class and in that geography?

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John P. Barnes, People's United Financial, Inc. - Chairman of the Board & CEO [74]

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Yes. Well, I would say banks that are heavy in that asset class, if you -- I think I got your question. Would we have less appetite for them? I would say yes.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [75]

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Understood. Okay. And then following that M&A question line, I was hoping to just get a little bit more color on the thought process of striking the right balance between EPS growth, tangible book value dilution and creating long-term shareholder value and how you go about a number of deals more recently. A lot of them made sense, small, digestible, lots of cost saves. But how do you strike that balance between growing the bottom line and growing tangible book value?

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

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I mean, I think probably the biggest -- we're obviously looking for accretable deals and the strategic assets of the deals like I described the Belmont positives. And we're very attentive to tangible book value earn-back period. And so we look at the deal as a whole with both of those issues fully in sight and look to balance the 2. So I think we think of them much more about moving -- strengthening the profitability, moving the company, getting the expenses out, taking advantage of that but also being very attentive to what's the impact on tangible book value.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [77]

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Understood. And then my last one is just around the subject of CECL. Is there anything you can provide for in terms of where you stand, what the impacts might be day 1, what that true-up reserve might look like?

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R. David Rosato, People's United Financial, Inc. - Senior EVP & CFO [78]

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Matt, it's David. I would just say we are busy as every other bank is on CECL. From what we hear back from our industry peers as well as our regulators, we're right where we should be in building out our models and starting to run some scenarios and thinking it through. But we're not prepared to start to publicly disclosing what we think the impact would be upon adoption.

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Operator [79]

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Your next question comes from Dave Bishop with FIG Partners.

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David Jason Bishop, FIG Partners, LLC, Research Division - Senior VP & Research Analyst [80]

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A quick question for you. I think you mentioned in the preamble that loan yields benefited from higher new production there. I'm just curious in terms of new loan yields fourth quarter versus third quarter. Maybe just run us through maybe some of the current yields versus prior quarter of new production yields.

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John P. Barnes, People's United Financial, Inc. - Chairman of the Board & CEO [81]

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Sure. We spent a lot of time looking at the differential between new business and the existing portfolio. And we really saw no change linked quarter of what that differential was. What I would say is the last 2 quarters have been the highest differential that we've experienced so far in the last 3 years.

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David Jason Bishop, FIG Partners, LLC, Research Division - Senior VP & Research Analyst [82]

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Okay. Then just maybe just a sense of new C&I yield, CRE yield, just curious on what they're coming on the books at.

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John P. Barnes, People's United Financial, Inc. - Chairman of the Board & CEO [83]

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I'm sorry, you are specifically asking about spreads in which product line?

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David Jason Bishop, FIG Partners, LLC, Research Division - Senior VP & Research Analyst [84]

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Commercial and industrial, CRE loans as well.

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John P. Barnes, People's United Financial, Inc. - Chairman of the Board & CEO [85]

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Yes. Middle-market C&I is -- spreads are around 2.5% these days. CRE is a little bit tighter, we see spreads 2% to 2.25%.

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David Jason Bishop, FIG Partners, LLC, Research Division - Senior VP & Research Analyst [86]

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Got it. And then just one final question, shifting gears. There was a little bit of an uptick in the commercial real estate nonaccruals there. Just maybe some color in terms of what you're seeing on the credit front as it pertains to nonperforming assets.

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John P. Barnes, People's United Financial, Inc. - Chairman of the Board & CEO [87]

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Sure. That was just one loan that caused that uptick. Nothing more than that. We get one once in a while, and we'll work through that relatively promptly.

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Operator [88]

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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 [89]

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Thank you. Our 2018 performance was strong, as demonstrated by another year of record earnings and higher returns on both average assets and average tangible common equity. These results benefited from a further net interest margin expansion, improvements in operating leverage and sustained excellent asset quality.

We continued to make important strategic investments across the franchise in both talent and technology while further enhancing profitability. We also strengthened the company by adding Farmington Bank, Vend Lease, VAR Technology to the People's United family and look forward to bringing Belmont Savings on board soon. Looking ahead to 2019, we are excited about realizing on the opportunities across our diverse portfolio of businesses, deepening customer relationships and delivering value to shareholders.

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

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Operator [90]

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