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Edited Transcript of PBCT earnings conference call or presentation 20-Apr-17 12:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 People's United Financial Inc Earnings Call

BRIDGEPORT Apr 21, 2017 (Thomson StreetEvents) -- Edited Transcript of People's United Financial Inc earnings conference call or presentation Thursday, April 20, 2017 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew S. Hersom

People's United Financial, Inc. - SVP

* John P. Barnes

People's United Financial, Inc. - CEO, President, Director, CEO of the People's United Bank, President of the People's United Bank and Director of the People's United Bank

* R. David Rosato

People's United Financial, Inc. - CFO, Senior EVP, CFO of People's United Bank and Senior EVP of People's United Bank

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Conference Call Participants

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* 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 and Senior Analyst

* Kenneth Allen Zerbe

Morgan Stanley, Research Division - Executive Director

* Matthew M. Breese

Piper Jaffray Companies, Research Division - Principal and 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. First Quarter 2017 Earnings Conference Call. My name is Andrew Christianson. I will be your coordinator for today. (Operator Instructions) As a reminder, this conference call 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 go ahead, sir.

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

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Thank you. Good morning, and thank you for joining us today. Here with me to review our first quarter 2017 results are: Jack Barnes, President and Chief Executive Officer; David Rosato, Chief Financial Officer; Kirk Walters, Corporate Development and Strategic Planning; and Jeff Hoyt, Chief Accounting Officer. Please remember to refer to our forward-looking statements on Slide 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. - CEO, President, Director, CEO of the People's United Bank, President of the People's United Bank and Director of the People's United Bank [3]

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Thank you, Andrew. Good morning, everyone. Appreciate everyone joining us today.

Let's get started by turning to the overview on Slide 2. We are pleased to report first quarter net income of $70.8 million, which increased 13% from a year ago. The quarter benefited from a 4-basis-point improvement in net interest margin from the fourth quarter, which was primarily attributable to loan yields on new business exceeding the total portfolio yield during the quarter.

Revenues grew on both a linked quarter and year-over-year basis as a result of both higher net interest income and noninterest income. Revenue growth drove an efficiency ratio of 59.4%, which is comparable to the fourth quarter and an improvement from a year ago, despite modestly higher expenses. We remain focused on enhancing operating leverage through revenue growth and proactive expense management. Therefore, over time, we continue to expect further improvements in the efficiency ratio.

Loan balances declined 1% on an annualized basis, primarily as a result of paydowns in the mortgage warehouse lending due to the rate-driven nature of the business. Excluding mortgage warehouse lending, the loan portfolio experienced an annualized growth of 3%, driven by favorable results in residential mortgage as well as middle market commercial and industrial lending, highlighting the importance of our diversified business mix. In addition, we remained successful gathering deposits across the franchise as evidenced by 9% annualized growth since year-end. As a reminder, the first and fourth quarters are typically our strongest quarters for deposit growth.

Looking forward, at quarter-end, loan pipelines were solid, causing us to remain optimistic about our commercial lending segments, while expecting a somewhat lower level of growth in retail. Our view is that our commercial customers are managing their businesses very thoughtfully in light of the current environment. While uncertainty exists due to unknowns around potential fiscal, regulatory and tax law policy changes, we find clients remain hopeful and are looking to take advantage of growth opportunities as they arise.

With the acquisition of Suffolk Bancorp completed, we are excited to further strengthen and expand People's United in the New York Metro area. Experienced teams on both -- from both companies have worked closely together throughout the integration process to ensure a seamless transition for clients. As planned, the core system conversion will take place in early May.

Howard Bluver, former President and CEO of Suffolk, is now our New York Market President. Howard's deep roots in the region, understanding of the local economy and proven track record growth will greatly benefit the franchise. In addition, Suffolk's Board of Directors has agreed to function as an advisory board to support integration, provide market insight and help meet our growth expectations.

All of the expectations that we had at the announcement of the transaction have only been strengthened. We are optimistic about the revenue synergies of the combined company, particularly given the success achieved by the 2 teams working together on client relationships in the months leading up to closing.

We also remain committed to the cost saves we originally set forth. Our team has identified and scheduled to close 13 branches, which include both Suffolk and People's locations. Overall, the positive economics of the transaction remain unchanged. And as such, we are very confident this combination of similar customer-focused cultures will create significant value for shareholders.

Suffolk is a terrific complement to our already strong position in Metro New York area. Since the end of 2012, our New York franchise has experienced organic compound annual loan growth of 18%, making it our fastest-growing market within the company's footprint over the period.

At quarter-end, we had $5.7 billion of loans in New York, which represented 19% of our total loan book and trails only Connecticut's $7.8 billion portfolio.

The addition of Suffolk will bring New York's loan portfolio almost on par with Connecticut and we expect in time will become the largest market. In New York, the experienced commercial real estate team we brought in last year continues to generate increasing momentum. As such, the headwind related to the decision to reduce the transactional portion of our multifamily portfolio has abated, as new business originated from the full service relationships is offsetting approximately $20 million in monthly runoff.

It's also important to note the strength of our Massachusetts franchise. Since the end of 2012, we have experienced organic compound annual loan growth of 8% in the Commonwealth, making it our second fastest-growing market. At quarter-end, we had $5.5 billion of loans in Massachusetts. I spent time during the quarter visiting customers and employees in Massachusetts and came away impressed with the continued progress we are making and the momentum that we are generating, particularly in the greater Boston area.

As we noted on our call in January, we opened a branch in Copley Square at the end of the last year. It is an excellent location to serve clients and has been very well received. In addition, during the quarter, we began the onboarding process for the Commonwealth of Massachusetts, as we were selected to manage its core banking services, which is a significant win for People's United and should drive further opportunities for the bank.

Finally, we are extremely pleased that Greenwich Associates recently recognized People's United for its commitment to service with 7 2016 Excellence Awards in middle-market banking, both nationally and in the Northeast.

It's an honor to be recognized once again by Greenwich Associates, and more importantly, by our clients. Therefore, I want to take a moment to thank our employees for their unwavering commitment to providing excellent, exceptional service that delivers thoughtful, straightforward solutions that address the financial needs of our clients. This commitment in combination with the breadth of products and services we offer truly differentiates People's United in the market.

With that, I'll pass it to David to discuss the first quarter's results in more detail.

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

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Thank you, Jack. Turning to Slide 3, net interest income increased $1.8 million or 1% on a linked-quarter basis. The loan portfolio contributed $7.8 million to net interest income due to higher yields on new business, repricing of floating rate loans as well as slightly higher average balances. The largest offset to this increase was a $3.4 million reduction in net interest income resulting from 2 fewer calendar days in the first quarter. In addition, higher deposit costs and volumes lowered net interest income by $2.6 million.

Moving to Slide 4. Net interest margin of 282 basis points increased 4 basis points from the fourth quarter. New loan volumes favorably impacted the margin by 9 basis points, as new business yields were higher than the total portfolio yield.

The margin also benefited by 3 basis points from a higher yielding securities portfolio aided in part by a reduced level of premium amortization of mortgage-backed securities. 2 fewer calendar days in the first quarter unfavorably impacted the margin by 2 -- by 4 basis points, while higher deposit and borrowing costs collectively reduced the margin by another 4 basis points. Deposit costs were 36 basis points in the quarter, up 2 basis points from the fourth quarter.

On Slide 5, you can see period-end loan balances dropped slightly from December 31. The decrease of $58 million or 1% annualized was due to a $307 million reduction in the commercial portfolio largely offset by strong retail growth of $249 million.

On an average basis, the total loan portfolio was up slightly from the fourth quarter. Retail was driven by residential mortgage growth of $271 million, partially offset by lower balances in the consumer portfolio. As we have grown our residential mortgage portfolio in recent years, originations continue to be of standing quality. The portfolio's LTV and FICO metrics have remained consistent, and the overwhelming majority of business retained continues to be hybrid, adjustable-rate mortgages. For originated mortgages added to the portfolio during the quarter, the average LTV is 66% and the average FICO score is 760.

The decline in the commercial portfolio was primarily attributable to a lower C&I balance of $207 million. Within C&I, mortgage warehouse balances ended the quarter at $822 million, a $263 million decrease from year-end. As Jack mentioned earlier, this decline was attributable to paydowns due to the rate-driven nature of this business. Excluding mortgage warehouse, the C&I portfolio grew 3% on an annualized basis.

Slide 6 shows the change in deposits since December 31. Deposits increased $645 million or 9% on an annualized basis during the quarter. While deposit growth occurred across all categories, the increase was primarily driven by higher interest-bearing checking and money market balances.

On a business segment basis, deposits in both retail and commercial increased during the quarter by $504 million and $141 million, respectively. Once again, please note the first and fourth quarters are typically our strongest quarters for deposit growth.

On Slide 7, we look at noninterest income, which increased $500,000 or 1% compared to the fourth quarter. During the quarter, we sold approximately $500 million of lower yielding, short maturity securities, which resulted in net security losses of $15.7 million. These investment sales increased our asset sensitivity, which should be beneficial as the Fed further tightens monetary policy. We have partially repurchased securities to offset the loss carry income and expect all securities to be repurchased before quarter-end. As such, the overall transaction is income-neutral and enables us to hold a smaller securities portfolio.

As you will recall, in the fourth quarter, we reported net security losses of $6 million. Included in noninterest income was a $16.1 million gain from the exchange of an ownership interest in a legacy, privately held investment. As a reminder, in the fourth quarter, we reported a $6.3 million gain from the sale of a similar type investment.

Insurance revenues increased noninterest income by $2.3 million, reflecting the seasonal nature of commercial insurance renewals, which are higher in the first and third quarters of the year. In addition, the quarter benefited from higher investment management fees of $1.8 million, primarily attributable to a full quarter result from Gerstein Fisher. As you will recall, the acquisition of Gerstein Fisher closed in November of last year. The primary offset to these improvements was a $1.7 million lower net gain on the sale of residential mortgage loans.

On Slide 8, we illustrate the components of changes in noninterest expenses on a linked-quarter basis. First quarter expenses of $226.1 million increased $8.9 million or 4% from Q4. Included in the quarter's results were merger-related and acquisition integration costs of $1.2 million compared to $1.6 million in the fourth quarter. For the first quarter, $700,000 of these costs are reported in professional and outside services, $400,000 in occupancy and equipment and the remainder in other.

Compensation and benefits, excluding fourth quarter merger-related and acquisition integration costs of $700,000, increased $12.3 million. This result was primarily due to seasonally higher payroll and benefit-related cost as well as an increase in health care and incentive expenses.

The line was also impacted by a higher salary expense reflecting a full quarter of Gerstein Fisher, annual merit increases and new hires to support continued growth of the bank.

The primary offsets to this increase were lower regulatory assessment of $800,000 as well as lower professional and outside service expenses, excluding merger-related and acquisition integration costs in both quarters of $600,000 due to the timing of certain projects.

Before moving to the next slide, I wanted to mention the income tax expense for the quarter reflects a $1 million benefit associated with the adoption of new stock-based compensation accounting rules, which require the income tax effects of vestings and exercise be recognized in income tax expense. For the period, this benefit had the effect of lowering the effective tax rate by 1%.

Turning to Slide 9. Our efficiency ratio in the fourth quarter was 59.4% consistent with the fourth quarter and improved from the prior year quarter. As Jack referenced earlier, we continue to focus on enhancing operating leverage through revenue growth and thoughtful expense management.

Maintaining excellent asset quality is an important lever in building sustainable long-term value. As such, we are pleased with our continued exceptional results as demonstrated on Slide 10. Originated nonperforming assets as a percentage of originated loans and REO at 63 basis points remains well below our peer group and top 50 banks.

First quarter net charge-offs of 3 basis points remained at a very low level and continue to reflect the minimal loss content in our nonperforming assets.

Moving to Slide 11. On a linked-quarter comparison, return on average assets and return on average tangible common equity declined 5 basis points and 10 basis points, respectively, primarily due to the seasonally higher first quarter payroll and benefit-related costs previously discussed. As displayed on the slide, compared to the first quarter of 2016, each of these return metrics showed improvement.

Continuing onto Slide 12. Capital levels at both the holding company and the bank continue to be strong, especially in light of our diversified business mix and long history of exceptional risk management.

Finally, on Slide 13, we display our interest rate risk profile for both parallel rate changes and yield curve twist. As you can see, we are a bit more asset-sensitive compared to last quarter, primarily due to a smaller security portfolio resulting from the previously discussed investment sales.

We remain well positioned for additional increases in interest rates. At quarter-end, 44% of our loan portfolio was either 1-month LIBOR or prime based, consistent with year-end and up from 42% a year ago.

Before passing the call back to Jack, I wanted to briefly comment on our full year 2017 goals. As a reminder, the goals we outlined in January did not incorporate Suffolk. With the transaction closing less than 3 weeks ago, we are currently going through the purchase accounting process. As such, we are not going to provide an update to these goals to include Suffolk until the second quarter earnings call in order to fully complete the process.

However, we wanted to share some March 31 data points for Suffolk. The loan portfolio closed the quarter at $1.656 billion, while deposits were $1.852 billion.

The inherent earnings strength of Suffolk remains in place and joining People's United will only serve to enhance its potential going forward.

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John P. Barnes, People's United Financial, Inc. - CEO, President, Director, CEO of the People's United Bank, President of the People's United Bank and Director of the People's United Bank [5]

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Thank you, David. Our prudent capital management has enabled us to deliver shareholder value through the consistent return of capital while still growing organically and investing strategically in the franchise. We remain committed to this strategy as evidenced by the board declaring a common dividend for the 95th consecutive quarter.

In addition, we are pleased to announce the board also voted to raise the common dividend to an annual rate of $0.69 per share. This marks the 24th consecutive year of common dividend has been increased.

This concludes our presentation. Now we'll be happy to answer any questions that 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) We'll be taking our first question for the day from the line of Jared Shaw from Wells Fargo Securities.

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Jared David Wesley Shaw, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [2]

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Yes, just if we could start a little bit on the loan portfolio and some of the opportunities as we look post Suffolk. Could you give us an update on where you were in terms of commercial real estate concentration for the quarter? And then, as we look to see growth going through the rest of the year, do you think that there is an opportunity to expand as some of the competitors have pulled back from the CRE market? And if you could also then talk to what the investors are looking for in terms of cap rates and if that's dramatically changed?

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John P. Barnes, People's United Financial, Inc. - CEO, President, Director, CEO of the People's United Bank, President of the People's United Bank and Director of the People's United Bank [3]

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Sure. So we are below the 300% of capital, somewhere around 285 in terms of our commercial real estate concentration levels. So we're not concerned about that. And as we've talked about in the past, we have enhanced risk management around the monitoring of that portfolio and have not been concerned when we move above 300%. So just so everybody has kind of got some perspective on our sense of that. We see good potential growth in the commercial real estate portfolio. Our strongest markets pipeline right now are in New York, particularly revolving around the new team we have there, and Connecticut, where we have a lot of long-standing strong relationships and, again, a good solid pipeline. The rest of the markets, I'd say are kind of in line with historical perspective. And I would say just generally to your question about, I think, cap rates and where the market is, it feels like there's no significant change in People's appetite for investment with good properties. And we focus on good operators with a lot of experience and people continue to invest.

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Jared David Wesley Shaw, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [4]

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If I could just ask one additional question. As you look at your asset sensitivity and post the Suffolk deal, should we expect to see maybe opportunities from more restructuring on the securities book, in either the Suffolk book or your book? And then what would you expect -- would you expect a big change in your pro forma asset sensitivity post the conversion or integration?

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

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Yes. Jared, it's David. No. The most -- the components of the Suffolk portfolio that we liked, we've taken on board. They had a few asset classes that were similar to ours; and the others we have since exited. But the -- again, they're only 5% of our asset size. So it's not going to have a noticeable impact on our overall interest rate risk profile. So you should expect us to maintain sensitivity very similar to what we have. I would note that you saw an uptick in sensitivity this quarter. That was primarily due to the sales of securities late in the first quarter at approximately $500 million of short CMO paper.

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Jared David Wesley Shaw, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [6]

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And then just finally, at 40, you're going to be closer to the $50 billion threshold now with Suffolk. What's the appetite for additional M&A versus organic growth in terms of passing the $50 billion threshold?

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John P. Barnes, People's United Financial, Inc. - CEO, President, Director, CEO of the People's United Bank, President of the People's United Bank and Director of the People's United Bank [7]

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Well, we continue to prepare to cross $50 billion. As we've described in the past, we're making good progress on that front. And as we've said, again, in the past, if the right opportunity were to come along in M&A, then we would be, certainly, looking to respond to that. And dealing with the process with our regulators, having the dialogue about that potential and feel good about having a good solid dialogue with the regulators about that, and so we wouldn't be shying away from a conversation just because of the $50 billion mark.

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Operator [8]

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Our next question comes from the line of Casey Haire from Jefferies.

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

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Dave, wanted to follow up on the securities restructure. Can you just give us a sense as to when this took place in the quarter? And then also, maybe disaggregate how much of the uptick in the securities portfolio yield was from premium am. And from the restructuring? Just trying to get a sense of where that securities yield could potentially go in the next quarter.

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

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Sure. The way -- first of all, the sales were late in the first quarter. Again, what we emphasized was short maturities, low yielding. So the average yield on that portfolio is about 1.33%. And after funding costs, it only had about a 35 basis point positive spread. Our strategy will be exactly the same as what we talked about 3 months ago, when we did this in the first -- or in the fourth quarter, is to replace that income with higher-yielding securities, which allows us to shrink the securities portfolio; it's additive to capital, it's additive to the margin, but it's income neutral. The overall effect on the yield of the securities portfolio was about 3 basis points or so.

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

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Okay, great. All right. And then just switching to the loan growth front. You guys are tracking pretty nicely towards your -- towards the bottom end of your loan growth guide for the year, even with the mortgage warehouse downdraft. I'm just -- is that in line with your thinking, and do you see stability in the mortgage warehouse lines going forward or is there further pressure there?

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John P. Barnes, People's United Financial, Inc. - CEO, President, Director, CEO of the People's United Bank, President of the People's United Bank and Director of the People's United Bank [12]

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Casey, it's Jack. Yes, we're basically feeling at this time exactly as you described. So the utilization on the mortgage warehouse lines dropped to somewhere in the mid-40% range and that's a low point for sure. And we would think it's going to be somewhere in the range, maintain the balance that it's -- where it is now. We didn't plan on balances that were very different from where we are now. So in terms of expectations and our guidance, I think kind of in line with that. I described a little bit about the pre pipelines, talking with Jared and I would reinforce that on the C&I side. I think, particularly, the Boston area and Connecticut have very solid opportunities in front of us. So we're feeling fine about where we are.

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

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Okay, great. And just last one from me, Dave. On the fee guide, looks like it's coming in a little light this quarter, tracking below that 5% to 7% guide. Are you guys still feeling good about that? I mean, it does seem like you're going to need a very steep ramp in the remaining 3 quarters here to hit the low end of that guide.

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

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Casey, thank you. It's David. We're still comfortable with the guidance that we provided. The first quarter, from both a loan origination and a fee income perspective was slow, but seasonally slow not unlike last year. So we would expect to see a ramp in most of the line items as the year progresses. And we'll provide an update with the Suffolk guidance next quarter. But where we stand today, we're still comfortable with the guidance.

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John P. Barnes, People's United Financial, Inc. - CEO, President, Director, CEO of the People's United Bank, President of the People's United Bank and Director of the People's United Bank [15]

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And the day count impact.

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

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Yes, and in first quarter, 2 fewer calendar days, 3 fewer business days did have an impact across a lot of those businesses. And the lower originations activity affected, for example, our FX business, our customer interest rate swap business, et cetera. We feel fine about those as the year unfolds.

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

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Okay, great. I mean it does look like that other income line, net of the securities for the onetime gain, was a little low. Maybe, there was some -- I don't know if there was any noise in there, but that did seem like you're under in there.

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

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It stepped down a little over $1.5 million quarter-over-quarter, once you make the adjustment for the securities, the 1x.

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Operator [19]

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We'll be taking our next question from the line of Steven Alexopoulos from JP Morgan.

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Steven A. Alexopoulos, JP Morgan Chase & Co, Research Division - MD and Head of Mid-Cap and Small-Cap Banks [20]

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I'd like to start on the efficiency ratio. You guys have chopped quite a bit of wood on the expense front over the past few years. Curious how much is left to do on the expense side. And are we getting closer to the point where you really need to start seeing stronger revenue growth to start moving the efficiency ratio needle?

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John P. Barnes, People's United Financial, Inc. - CEO, President, Director, CEO of the People's United Bank, President of the People's United Bank and Director of the People's United Bank [21]

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Yes, Steve. I mean, as we've said on the expense front, it's working at it every day and working at our expense management process. But there are certainly no large unique efforts there that we have planned. You'll remember, in -- it seems like '13, '14, '15, we closed a lot of branches, particularly in places where we had either dense -- density locations, Connecticut, but also places where we acquired banks in the same market like in Boston. So we've made a lot of progress on that front. We continue to work at that kind of thing, but we -- it won't be any big 10 or 15 at a time. It'll be continuing to work at it over time. So on the expense front, just continue to work to realize saves wherever we can, more about automating processes, continuing to put in technology to improve efficiency where we can. It is, I think, mostly a revenue opportunity for us. And there are just many, many markets, New York and Massachusetts, and many business lines, ABL, equipment, finance, large corporate, where we've grown businesses, but they have plenty of potential to continue to grow. And as we do that, we'll -- we expect to see revenue expansion.

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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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Okay. That's helpful color. And maybe for David on the deposit side. Overall, deposit costs were up only modestly in the quarter. Can you talk about what you're seeing from a local markets view as you go out there and raise deposits? And how are you thinking about deposit betas for the rest of the year?

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

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Sure. The -- we haven't really seen any noticeable customer demand or push for higher deposit costs. The 2 basis point linked-quarter increase was really driven by our brokered deposits, which are essentially debt funds, index-type deposits. The -- from a -- if I look across the retail businesses and the commercial businesses, the only segment where we've really seen any type of pressure is very small subset of the largest government banking clients. So that would be the state money that we have in a few states. They're the savviest of that client vertical. And so that's -- we've seen a little bit there, but your bread and butter municipality across our franchise, we have not. On the retail side, we're seeing the -- a few more banks run CD specials across the markets, not incredibly aggressive, but modestly more aggressive than we've seen over the past few quarters. But again, our increase in deposits really wasn't across our core customer base. It was across the brokered deposits that we have on the balance sheet.

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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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So does that mean you expect betas to remain very low for the rest of the year?

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

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Yes, so if you think about betas, we have now 3 25-point rate increases, so 75 basis points and our deposit costs are up 2 basis points. If you go to our very low at 33, so you can say we're up 3 basis points for a 75-basis-point move, we're up a delta of 0.04. We would think that when the pace of Fed moves becomes closer together and more consistent, if we get to that, you're going to see increasing pressure on betas, and we would expect them to slowly gravitate towards more normal betas, which I would say for the industry, in aggregate, is probably around 0.5 or so. But I don't think we're close to that point by any means right now.

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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. That's really great color. If I could squeeze one more in. I'm sorry, if I missed this. On the mortgage warehouse, what was the split of purchase and refi in the quarter?

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John P. Barnes, People's United Financial, Inc. - CEO, President, Director, CEO of the People's United Bank, President of the People's United Bank and Director of the People's United Bank [27]

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In the mortgage warehouse business or in our business?

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Steven A. Alexopoulos, JP Morgan Chase & Co, Research Division - MD and Head of Mid-Cap and Small-Cap Banks [28]

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Yes. No, in the mortgage warehouse business.

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John P. Barnes, People's United Financial, Inc. - CEO, President, Director, CEO of the People's United Bank, President of the People's United Bank and Director of the People's United Bank [29]

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I don't -- I would say, it was probably close to 50-50 off the top of my head. I don't have that in front of me, Steve.

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Steven A. Alexopoulos, JP Morgan Chase & Co, Research Division - MD and Head of Mid-Cap and Small-Cap Banks [30]

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Okay.

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R. David Rosato, People's United Financial, Inc. - CFO, Senior EVP, CFO of People's United Bank and Senior EVP of People's United Bank [31]

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I think it was a little bit more. It was the refis were still...

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John P. Barnes, People's United Financial, Inc. - CEO, President, Director, CEO of the People's United Bank, President of the People's United Bank and Director of the People's United Bank [32]

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A little more than 50%.

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R. David Rosato, People's United Financial, Inc. - CFO, Senior EVP, CFO of People's United Bank and Senior EVP of People's United Bank [33]

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A little over 50%, maybe...

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John P. Barnes, People's United Financial, Inc. - CEO, President, Director, CEO of the People's United Bank, President of the People's United Bank and Director of the People's United Bank [34]

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Yes. What we're seeing generally in our bank and in the business, there is much, much more talk about purchase activity. And we're seeing it in the numbers and, of course, the refi applications have dropped pretty considerably.

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Steven A. Alexopoulos, JP Morgan Chase & Co, Research Division - MD and Head of Mid-Cap and Small-Cap Banks [35]

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Okay. Have you historically been about 50-50 in that business?

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John P. Barnes, People's United Financial, Inc. - CEO, President, Director, CEO of the People's United Bank, President of the People's United Bank and Director of the People's United Bank [36]

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I would say, no, no. As that business goes in the last few years, it was much higher refi and smaller purchase. So the expectation in the business is that as the economy improves and the demand for housing stock improves -- or increases, I should say, then purchases will pick up. And it is picking up both in our footprint, in our retail bank and in that business.

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

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Steve, just to add a little more color to that. So not our mortgage warehouse business, but our retail business, in the first quarter, 65% of the volume was refinance, 35% purchase. I would add to that though that just in this quarter, we've seen the purchase component creep up, which is normal seasonality.

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Operator [38]

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Our next question comes from the line of Kenneth Zerbe from Morgan Stanley.

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Kenneth Allen Zerbe, Morgan Stanley, Research Division - Executive Director [39]

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Great. Just going back to the commercial real estate because it seems like you're somewhat bullish about the growth outlook there. Obviously, just there're still concerns about credit quality in the industry right, in underwriting terms in the industry. And we've seen some indications that the terms have gotten better. From your experience, like, is that -- how meaningful are those industry changes? And is that having any noticeable impact on your ability to grow commercial real estate?

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John P. Barnes, People's United Financial, Inc. - CEO, President, Director, CEO of the People's United Bank, President of the People's United Bank and Director of the People's United Bank [40]

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I would say that challenge generally is a challenge for us. We are pretty firm in our underwriting approach. And you can see that in our results over time, including right now, the level of nonperformers, the delinquency and charge-off in our key portfolio is minimal. So we kind of always deal with a pressure from a competitor that will do something that we're not willing to. I would say on the larger properties, most of our competition is the moderate to larger banks and the discipline around underwriting is there, pretty consistent with ours. So I don't think there is a big problem from my perspective, generally in the industry. Locally, smaller banks often are more aggressive with a borrower and a property that they feel they know very well. And they will work hard to either keep or win that type of business. So that's our biggest challenge on the competitive front.

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Kenneth Allen Zerbe, Morgan Stanley, Research Division - Executive Director [41]

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Got you. Okay. And then the other question. Just in terms, could you update us on the timing of potential merger costs over the next few quarters?

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R. David Rosato, People's United Financial, Inc. - CFO, Senior EVP, CFO of People's United Bank and Senior EVP of People's United Bank [42]

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You'll see most of those costs next quarter, but some will -- in the second quarter, but some will leak over into the third quarter as well.

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Kenneth Allen Zerbe, Morgan Stanley, Research Division - Executive Director [43]

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Got you. But by fourth quarter, it's totally gone or done?

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

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Yes, it should be except for maybe a few odds and ends, but...

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Operator [45]

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Our next question comes from the line of Matthew Breese from Piper Jaffray.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - Principal and Senior Research Analyst [46]

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Just going back to the security portfolio for a second. I just wanted to get a sense for how we should be thinking about modeling it from a size perspective and are the restructurings done? And maybe said another way, what percentage of assets would you like to hold the securities portfolio at?

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John P. Barnes, People's United Financial, Inc. - CEO, President, Director, CEO of the People's United Bank, President of the People's United Bank and Director of the People's United Bank [47]

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The question of whether we would expect any more restructurings, the short answer to that would be no, we're not foreseeing that. And I should add, if I wasn't clear to Jared's first question, any restructuring having to do with the Suffolk portfolio has also been completed. What we're really trying to do is recognize that we're in a slowly rising interest rate environment we believe with even though some of the timing of the next Fed moves in the last few weeks has started to leak out into the market, the first quarter was -- generally had expectations for 2 to 3 more Fed tightenings. And we've seen a flatter yield curve. So we traditionally have always run a smaller securities portfolio than our peer group. In the last couple of years, when rates have been down, that has crept up closer to the peer group, but still below. So what we're trying to do going forward in the environment that we foresee is just to run a smaller portfolio or as small of a portfolio as we can while still generating the proper amount of income as well as to manage our rate sensitivity. So I wouldn't look for all of these loans to go back or all of these securities to be going back on the balance sheet anytime soon. And the other important point in this is similar to what we did last quarter, the bonds that will be repurchased will cover the income that was given up from the sales. So it's income-neutral transactions.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - Principal and Senior Research Analyst [48]

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Understood. Okay. And then going to expenses, the $225 million core number, is that a good number to work off of for the rest of the year? And as a follow-up to that, how do you think that'll trend in 2Q and 3Q? Will there be any pullback from changes in seasonality?

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

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Well, as you know, expenses are historically elevated in the first quarter. So if you make that adjustment and then calculate that out, use that as the run rate for the year, I would say you would be underestimating the expenses that will resort. Some of our expenses were a little subdued in the first quarter due to the timing of projects. We do expect a little expense build over the course of the year plus, don't forget, we'll be adding Suffolk into the mix and then we will be updating guidance come the beginning of July.

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

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Okay. Is it suffice to say that excluding Suffolk, expenses should head towards the upper end of your guidance for the year, the $915 million number?

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

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I wouldn't say the upper end of the guidance. I would say we're still comfortable with the guidance that we provided 3 months ago.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - Principal and Senior Research Analyst [52]

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Okay. And then on the margin, considering the twist scenario and how the tenure has moved over the past several weeks, how will that impact things over the course of the year now with the tenure back to 20?

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R. David Rosato, People's United Financial, Inc. - CFO, Senior EVP, CFO of People's United Bank and Senior EVP of People's United Bank [53]

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If the yield curve stays flat or goes flatter, it's not good for the margin. The -- we modeled 1 in our original guidance, 1 25-basis-point increase in the middle of the year, and it's come earlier, obviously. And it seems like we might get another one this year. So if you put that together, that's positive to the margin. Our guidance for the margin was 2.80% to 2.90%. First quarter, which is usually, a lower quarter because of the day count, we were at 2.82%. So if rates continue to rise, if the yield curve does not flatten further, we're comfortable with that guidance and think we may wind up gravitating towards the upper end of that all else equal. But really, the key, as you're pointing out in your question, is the ultimate shape of the yield curve, and we've seen a flattening of the yield curve in the first quarter quite considerably. The 10 year is down about 15 basis points, 12/31 to 3/31. And the 2 year is up, probably 5 -- maybe, even 5 to 7 basis points and Fed funds are up 25.

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Operator [54]

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We'll be taking our last question from the line of Collyn Gilbert from KBW.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [55]

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So just to talk quickly on the credit side. The uptick in commercial NPLs and the equipment finance and C&I portfolio, what was driving that and kind of what's your outlook there?

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John P. Barnes, People's United Financial, Inc. - CEO, President, Director, CEO of the People's United Bank, President of the People's United Bank and Director of the People's United Bank [56]

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Really, very isolated on a few credits, just unique situations. And no, not concerned about that at all in terms of the overall outlook, so just had a transportation-related company that had operating issues.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [57]

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Okay, okay. And then just tying to that, you guys had provided guidance at the end of the year for a provision running in the $40 million to $50 million range for '17; obviously, coming in much lower than that on an annualized basis. Are you still holding to that same guidance then, which would suggest a bump up in the provision as we go out through the year?

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John P. Barnes, People's United Financial, Inc. - CEO, President, Director, CEO of the People's United Bank, President of the People's United Bank and Director of the People's United Bank [58]

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Yes, we are right now. Obviously, we had very good performance in the quarter and we have in the last number of quarters. So we -- our thinking really is that 2 things. We look at net charge-offs in the quarter and then we look at loan growth. And this quarter's level of provisioning was tied to both of those. As we move through the year, we expect continued strong credit performance and the pace of our loan growth and provisioning around the growth of the portfolio will kind of determine where we end up in that range if that makes sense, Collyn.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [59]

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Okay. Yes, yes, that's helpful. Okay. And then just on the investments that you guys have been able to monetize and I apologize if you may have gone over this last quarter. But can you just remind us of what the overall pool is of these investments, and maybe, what your outlook is for future gains from here?

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

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Sure, Collyn. It's David. There's really nothing left of substance that's similar to what happened in the last 2 quarters. Last quarter -- at year-end, that was a legacy People's United investment; this quarter, were actually 1 investment, but came from 2 different acquired banks over time and really, nothing else that we see on the horizon.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [61]

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Okay. Okay, that's helpful. And then, just bigger picture on the M&A front. Jack, I mean, you indicated that, obviously, approaching $50 billion is not causing you to shy away from M&A. Would your preference be, I mean, given where you guys, how much you've built the infrastructure and the overall organization over the years, would your preference be at this point to do a larger deal if it should present itself rather than kind of some of the smaller ones? Or how do you think about the size of M&A now as we look out over the next few years?

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John P. Barnes, People's United Financial, Inc. - CEO, President, Director, CEO of the People's United Bank, President of the People's United Bank and Director of the People's United Bank [62]

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Well, I'll speak to the M&A thing for a second. I guess, just for the record, my strong preference would be for Congress to move the $50 billion mark to $250 billion or something. Do away with it. But I'm still hopeful that something will happen on that front. So on the M&A front, I would continue to have everybody think about us being opportunistic. And so whether it's something like Suffolk, that isn't large but is a meaningful in terms of improving our presence in the market and strengthening our position, bringing on some really talented folks who really think that that deal is bigger than it looks when you think of all of the potential it has to help us move forward. And so whether it's something at $2 billion or $2.5 billion or at $10 billion, it really is about what will it do for us, how good is the opportunity, how accretive is it, what does it do for the shareholder. It's not really necessarily about size.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [63]

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Okay. Okay, that's helpful. And then just one final question tied to that. Are you guys thinking about Long Island any differently now or your approach as you integrate Suffolk, given the fact that Sterling is going to be moving out onto the Island with Astoria, which is a different competitor certainly than what [ NYB ] would have been? I mean, just curious to get your thoughts on, if you're thinking about that initiative any differently or how -- what your outlook is there for Long Island?

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John P. Barnes, People's United Financial, Inc. - CEO, President, Director, CEO of the People's United Bank, President of the People's United Bank and Director of the People's United Bank [64]

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Yes, so I would say, the way we're thinking about, we're bringing in 22 relationship managers and all of their customers into the bank. Those folks are middle-market lenders, C&I lenders, business bankers and some commercial real estate. So we're strengthening our relationship manager presence on the Island, we have got great footprint, convenience to customers, our brand is stronger, I think, every day. We've got a lot of marketing going on right now actually, as we move through the integration. And so we see opportunity even with the -- a story of Sterling and other activity, if you really think about the Island, Chase is very big out there, Capital One, TD, M&T. There's a lot of competition, very good competition. And we've been facing that since we started establishing our presence there in 2010. And so we steadily build our presence there. And as we kind of shared in the comments we made, we've grown nicely in New York and continue to make good progress, not only there, but in Westchester County and in Manhattan. So we feel really good about what we're doing. We'd like to move faster, we always want to move faster. And we're trying to do that looking forward to the Suffolk folks joining us and trying to do exactly that.

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Operator [65]

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Thank you very much. Ladies and gentlemen, there are no further questions in the queue. I would now like to turn the call back over to Mr. Barnes for closing remarks.

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John P. Barnes, People's United Financial, Inc. - CEO, President, Director, CEO of the People's United Bank, President of the People's United Bank and Director of the People's United Bank [66]

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Thank you. In closing, our first quarter performance provided a solid start to the year as referenced by and reflected in enhanced year-over-year profitability, improvement in the net interest margin, loan yields on new business outpacing total portfolio yield, continued revenue growth, further success gathering deposits and sustained exceptional asset quality.

In addition, with the acquisition of Suffolk completed, we're very optimistic about the opportunities for further strengthening and the growth of our franchise in the New York Metro market.

Thank you all very much for your interest in People's United, and have a good day.

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Operator [67]

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Ladies and gentlemen, thank you, again, for participation in today's conference call. This now concludes the program, and you may now disconnect your phones at this time. Everyone, have a great day.