People's United Financial's (PBCT) CEO Jack Barnes on Q2 2016 Results - Earnings Call Transcript

| About: People's United (PBCT)

People’s United Financial, Inc. (NASDAQ:PBCT)

Q2 2016 Results Earnings Conference Call

July 21, 2016 05:00 PM ET

Executives

Andrew Hersom - SVP, IR

Jack Barnes - President and CEO

David Rosato - CFO

Analysts

Casey Haire - Jefferies

Ken Zerbe - Morgan Stanley

Bob Ramsey - FBR

Mark Fitzgibbon - Sandler O’Neill

Collyn Gilbert - KBW

Matthew Breese - Piper Jaffray

Presentation

Operator

Good day ladies and gentlemen and welcome to the People’s United Financial, Inc. Second Quarter 2016 Earnings Conference Call. My name is Brian and I will be your coordinator for today. At this time, all participants are in a listen-only mode. Following the prepared remarks, there will be a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes.

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

Andrew Hersom

Good afternoon and thank you for joining us today. Here with me to review our second quarter 2016 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 one of this presentation which is posted on our website, peoples.com under Investor Relations.

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

Jack Barnes

Thank you, Andrew. Good afternoon. We appreciate everyone joining us today. Turning to the overview on the second quarter on slide two, we are pleased with the Company’s second quarter performance. Net income of $68.5 million or $0.23 per share represents increases in net income of 11% from the prior year quarter and 9% from the first quarter. The results this quarter reflect our continued focus on improving operating leverage through ongoing revenue growth and proactive expense management.

Revenues increased 4% from the prior year quarter, driven by improvements in both net interest income and non-interest income, while growth of 1% from the first quarter reflected higher non-interest income. Total expenses increased modestly from a year ago, but declined on a linked quarter basis, as expected. As a result of our revenue growth and the ability to control costs, the efficiency ratio for the quarter is 60.4%, which represents improvement of 120 basis points from the prior year quarter and 230 basis points on a linked quarter basis.

Loan production rebounded in the second quarter as the portfolio experienced annualized growth of more than 7% with particularly strong results in commercial and industrial lending as well as residential mortgage. This marks our 23rd consecutive quarter of loan growth. While deposit balances ended the quarter modestly lower due to seasonal decline in our retail and municipal businesses, franchise-wide cross-sell and commercial deposit gathering assets continued to be successful. Excluding municipal deposits, commercial deposit balances grew more than 16% during the quarter on an annualized basis.

Before passing the call to David to go over the second quarter in more detail, I wanted to take a moment to talk about our announced acquisition of Suffolk Bancorp and Gerstein Fisher, which are two more successful steps in executing our strategy of growing and strengthening People’s United in the New York metro area.

The acquisition of Suffolk is an excellent strategic and cultural fit and complements our previous acquisitions and organic growth in the market. Their impressive Long Island footprint, particularly on the Island’s eastern end where we currently do not have a presence, further bolsters our franchise in its very attractive banking market. Suffolk provides proven loan origination capabilities as well as a unique low cost core deposit base which very few banks poses. The transaction offers revenue synergies that present the substantial upside opportunities, which were not modeled into the economics of the deal.

We are excited about both extending our full suite of products and services, and utilizing our larger balance sheet to provide more comprehensive solutions to Suffolk’s customer base. Compelling cost savings also exist as we have identified achievable reductions that amount 15% [ph] of Suffolk standalone expense. Further, our complementary business models, shared commitment to relationship banking, and conservative risk management philosophies will ease the integration and deliver value to both customers and shareholders.

And the week since the acquisition announcement, we have started integration activities and spent more time with the Suffolk team. As a result, we feel even better about the consideration given and the expected benefits of this transaction.

Following our acquisitions of the Bank of Smithtown in 2010 and 57 branches from RBS Citizens in 2012, People’s United has been well-received in the New York metro market. Since the end of the first quarter of 2010, our New York franchise has experienced organic compound annual loan and deposit growth of 35% and 28%, respectively. Today we have $4.9 billion of loans in New York and $3.5 billion of deposits. All of this progress gives us confidence in our ability to successfully build upon the additional presence the Suffolk transaction provides us in the New York metro market.

Today’s announcement of an all cash transaction for Gerstein Fisher of $3 billion investment management firm is our most significant wealth management acquisition to-date and is expected to bring our total assets under administration to nearly $20 billion of which $8 billion is under discretionary management. The firm’s well-known quantitative investment approach and scalable technology platform will complement our excellent range of investment solutions as well as enhance our brand in the wealth management marketplace. Gerstein Fisher’s strong track record of growth and presence in New York will enable us to leverage our banking products and services with their clients. This transaction complements recent investments in our fee-based business and will further diversify revenues with additional non-interest income.

An exciting and invaluable aspect of each transaction is that the accomplished leaders of these firms will join People’s United in critical leadership roles. Howard Bluver, Suffolk’s President and CEO will assume the role of New York Market President of People’s United. Howard’s deep roots in the region, understanding of the local economy and proven track record for growth will further our momentum in this important market.

Gregg Fisher, Gerstein Fisher’s founder and CIO will join People’s United as Head of Quantitative Research and Portfolio Strategy. Gregg’s highly respected expertise in the invest management as well as his commitment to innovation and research will strengthen our wealth management capabilities, enabling us to further deepen existing client relationships and forge new ones.

With that I’ll pass it to David.

David Rosato

Thank you, Jack.

Turning to slide three, you can see net interest income was flat with the first quarter. Net interest income continued to benefit from ongoing loan growth. This benefit to net interest income was offset by a $1.1 million decline in accretion from runoff in the acquired portfolio, as well as $400,000 in higher borrowing costs.

On slide four, net interest margin of 2.79 was 4 basis points lower than the first quarter. New loan volumes negatively impacted margins by 3 basis points, as new business yields were lower than the total loan portfolio yield. In addition, a lower securities portfolio yield reduced the margin by 1 basis point.

Moving to slide five, the loan portfolio grew $527 million or 7% annualized from the first quarter. Originated loan growth for the quarter totaled $600 million. Originated loans in the commercial portfolio increased $413 million from the first quarter, driven primarily by $372 million of C&I growth. Equipment financing and commercial real estate contributed growth of $30 million and $11 million respectively. Within C&I, we experienced strength across several categories including middle market C&I, asset-based lending and most notably, in mortgage warehouse lending. The end of period balance for mortgage warehouse reached $1.2 billion, up $217 million from March 31st. Retail contributed a $187 million of originated loan growth, which was driven by continued strong residential mortgage growth of $199 million, partially offset by lower balances in the consumer portfolio.

As is our practice, most of the residential mortgages retained in our portfolio were hybrid adjustable rate mortgages. We experienced acquired loan runoff of $73 million this quarter, the largest amount since the first quarter of 2015 and it was primarily in the commercial real estate portfolio. The remaining balance of the acquired portfolio at quarter-end was $692 million.

Slide six shows the change in deposits by segment from the first quarter. Commercial balances continued to benefit from franchise-wide deposit gathering efforts and grew $102 million or 4% annualized. Retail balances in line with historical second quarter trends declined $208 million or 4% annualized. As a result, total deposits declined $106 million or 1% on an annualized basis. As expected, the seasonality in our municipal business negatively impacted quarter-end deposits by $200 million. Excluding municipals, total deposits experienced annualized growth in the second quarter of 1% while commercial deposits grew more than 16% annualized. We expect municipal balances to rebound in the third quarter, in line with historical seasonal trend. It is also worth noting that our cost of deposits remained at 35 basis points for the third consecutive quarter.

On slide seven we look at non-interest income, which increased $3.1 million or 4% compared to the first quarter. Higher non-interest income benefited from several categories including increases of $1.1 million in commercial bank lending fees, $1 million in bank owned life insurance, and $900,000 in bank service charges. The $1.5 million increase in other was primarily driven by the gain on the sale of an interest in a real estate investment. The primary offset to these increases was $2.3 million decrease in insurance revenues, largely due to the seasonal nature of insurance renewals which are higher in the first and third quarters of the year.

On slide eight, we illustrate the key components of changes in non-interest expenses on a linked quarter basis. Total expenses of $213 million decreased 2% from the first quarter. As expected, compensation and benefits decrease $2.7 million, resulting from lower payroll related and benefit costs, which are traditionally higher in the first quarter. In addition, professional and outside service costs were $1 million lower in the quarter. The largest offset to these improvements was $1.2 million in higher regulatory assessments. As you will recall, the first quarter of 2016 and the fourth quarter of 2015 benefited from credits received for overpayment of FDIC assessments made in prior quarters.

As we continue to optimize our branch delivery channel, we closed six branches during the quarter. From the beginning of 2011, we have closed 61 branches of which the majority were traditional branches. During the same timeframe, we have opened 26 branches, most of which are more cost efficient in store locations.

On slide nine, you can see our efficiency ratio in the second quarter of 60.4% improved 230 basis points from the first quarter and 120 basis points from a year ago. As Jack referenced earlier, this result demonstrates our continued focus on improving operating leverage through ongoing revenue growth and proactive expense management.

Slide 10 is a reminder of our excellent credit quality across each of our portfolios. Originated non-performing assets as a percentage of originated loans and REO at 64 basis points remains below our peer group and top 50 banks and has improved from recent quarters.

Net charge-offs for the quarter remained at a very low level. These levels reflect the minimal loss content in our non-performing assets. Our conservative and well-defined underwriting philosophy remains a hallmark of People’s United. We continue to build the business for the long term and will not sacrifice credit quality to achieve growth.

As shown on slide 11, return on average assets increased five basis points on a linked quarter basis points and three basis points from the prior year quarter. Notwithstanding this improvement, our return on average assets continues to be impacted by the low interest environment. Our return on average tangible equity was 10.1% for the second quarter, an increase from 9.4% in the first quarter and 9.5% in the prior year quarter.

Turning to 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 history of exceptional risk management. As previously discussed, we plan on issuing 200 to 250 million of preferreds this year, enabling a more optimal capital structure and enhancing our already strong capital position. While all of our regulatory ratios are well above internal long-term operating targets, this issuance will further bolster ratios in the range of 60 to 80 basis points and support continued growth.

On slide 13, we display our interest rate risk profile for both parallel rate changes and yield curve twist. As you can see, we remain asset sensitive and well-positioned for an eventual increase in interest rates, particularly in an immediate parallel rate shock as our loan mix continues to trend towards floating rate loans.

At quarter end, over 43% of the loan portfolio was either one-month labor or prime-based compared to 42% at March 31st and 41% a year ago. So, same lower long-term rates remain a headwind for our risk positioning as evidenced by our long and down scenario on this slide. Therefore, we have begun to reinvest monthly security portfolio cash flows into treasury and municipal securities rather than mortgage backed securities to mitigate prepayment risks to lower rate. This is a modest change in portfolio strategy but one that will decrease downside risk if rates were to again move lower.

Before passing the call back to Jack to wrap up, I want to draw your attention to slide 14, as we have provided an update to the full year 2016 goals we outlined in January. We have lowered our loan growth range from 6% to 8% to a range of 4% to 6%. Subsequent to announcing the original goal, we decided to reduce the transactional portion of our New York multifamily portfolio to focus our resources on full service relationships. This approach is consistent with other geographic markets of our commercial real estate business. During this transition, the legacy New York multifamily portfolio has run off at a faster rate than new business has been originated. However, as mentioned on our call in April, new leadership and talent has been added to our New York group [ph] and we are excited about their abilities to further expand and strengthen our lending activities in the greater New York metro markets. It is important to know, excluding the New York multifamily business, the rest of our loan portfolio is performing in line with our original goals.

The next goal we are updating is net interest income. In addition to our revised loan growth goal, current interest rates along with ongoing global economic uncertainties impacting rates are different than what was expected six months ago. As such, we have lowered the net interest income growth range from 7% to 9% to a range of 5% to 7%. Embedded in this goal is the expectation for net interest margin to be in the range of 2.75 to 2.85; this is lower than the original range of 2.85 to 2.95, which included an assumption of 125 basis-point interest rate increase in mid-2016 and a steeper yield curve. This updated net interest margin range is derived from many different factors. Two of the most significant are an assumption of no Fed interest rate increases during 2016 and a continuation of the current flat yield curve environment.

We are also lowering our total expense range of $865 million to $885 million to a range of $860 million to $870 million, which excludes any merger related costs associated with recently announced acquisitions. As a result of our continued execution of strong cost controls, we have effectively managed expenses while continuing to make investments in revenue producing initiatives in the franchise. The net effect of these changes does not impact our original full-year expectations with respect to earnings.

Finally, it is important to note that full-year goals for deposit growth, non-interest income, credit and capital are unchanged.

With that, I’d like to pass it back to Jack for closing remarks.

Jack Barnes

Thank you, David. The ability to consistently return capital to our shareholders is a key part of our business model and illustrates the success we have had in maintaining asset quality while growing the balance sheet. We have demonstrated this commitment by increasing our annual dividend for 23 consecutive years. The Board and management understand the importance of the dividend and the significant impact it has on the valuation of the Company’s shares.

As a result, one of our most important objectives is protecting the dividend as the Company grows in size. Therefore, it is important for both current and prospective shareholders to know, we will not move the Company past the $50 billion asset threshold without knowing we have regulatory support for our dividend. As such, we will continue to reduce our dividend payout ratio by growing earnings and working with our regulators as we thoughtfully grow the franchise.

While the Suffolk acquisition is strategically important transaction, it is relatively small at 5% of our asset size. Since integration is a core competency of People’s United, this transaction does not preclude us from exploring other acquisitions. With pro forma assets of $42 billion, we’re mindful of the $50 billion asset threshold and the potential implications of crossing it. However, we will continue to be opportunistic in regards to acquisition including those that would take us over the $50 billion level. We will only execute a larger transaction that would allow us to preserve our dividend.

As we have discussed in the past, we have been building our readiness to cross the $50 billion threshold for the past couple of years through an internal project known as B50B. [Ph] The project involves a formation of a cross-functional readiness review teams that have completed GAAP analysis on each of the requirements that will be imposed on us when crossing 50 billion. Accordingly, based on these analyses, we continue to build out modeling, data management and staff capabilities. In recent years, we have already made investments to enhance our corporate infrastructure in areas such as enterprise risk management, model development and validation, internal audit, compliance, operational risks, and BSA/AML. Our goal is to complete this process internally over the next few years and avoid unusual onetime costs.

In closing, the Company has had a very solid quarter as we continue to successfully execute in the marketplace to find solutions and value for our customers as well as build the franchise for the long term.

This concludes our presentation. And now, we’ll be happy to answer any questions that you may have.

Operator, we’re ready for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Your first question comes from the line of Casey Haire with Jefferies.

Casey Haire

Good afternoon, guys. Thanks. Maybe I will start on the loan growth guide, Dave. I appreciate that multifamily has gotten very competitive and as always been transactional in nature. But obviously, there is a lot of regulatory scrutiny there. I was wondering if that had any impact or any pressure from regulators to slow down multifamily, given that you guys are -- that’s been a big grower for you and you are around that 300% ratio?

Jack Barnes

So, Casey, this is Jack. No, there wasn’t any regulatory pressure. As you might recall, really back in second half of 2014, we made the market aware that we were starting to pull back on our expectations for production in this particular segment as the spreads were getting thinner and thinner and the terms and conditions were being pushed in the market. So, we really began slowing down production and gradually pulling away from it at that time. So, when we got to late last year, we made a decision because the production was really low enough that we actually shutdown the unit and began in the new folks that we’ve been describing to build our relationship base model back out.

Casey Haire

Switching to the fee guide, unchanged; it would imply a pretty steep ramp in the back half of ‘16. Just what are the drivers there? And does that include the Gerstein Fisher deal, which closes in the fourth quarter; does this include that contribution?

David Rosato

Hi, Casey; it’s David. No, it is completely exclusive of Gerstein Fisher. The second half of the year for us for fee income tends to be fairly strong. The insurance business will rebound. The cash management, wealth management usually are stronger in the back half as well. And we’ve had I would say really good experience with bank service charges, especially in the second quarter; they performed a little better than we were expecting. So, bank service charges, cash management, insurance, and then as our loan volumes pick up you will see commercial origination fees as well as our swap business come back. So, we feel fairly confident on the back half of the year around fees.

Casey Haire

And that’s versus -- that flat expectation is versus a 342.2 number in ‘15?

David Rosato

Yes, that is correct.

Casey Haire

Just last one from me on the capital front. You guys are looking at that 250 million preferred issuance. I know you guys managed to that 7 to 7.2 TCE ratio, which the preferred issuance really won’t help. So, what capital ratio; is it total capital Tier 1 leverage, which one are you guys after the TCE ratio most focused on?

David Rosato

I would say, we’re obviously focused on all of our capital ratios. I would say the one that tends to be the tightest for us periodically is total risk based capital. It’s a function mostly of the nature of our balance sheet. We originate a lot of 100% risk-weighted assets within our commercial businesses. And we’ve gotten the tightest to that one periodically. The last capital transaction we did was 400 million of subordinated debt at the bank a year and a half ago or so, and that’s what drove that transaction. The preferred, not only will it help Tier 1, but it’ll also help total risk-based capital.

Operator

Your next question comes from Ken Zerbe with Morgan Stanley.

Ken Zerbe

Just a question on expenses, I think I heard you mention the 860 to 870 new expense guide does not include any merger cost. Could you quantify what merger expenses that you do expect from the deals and the timing of those?

David Rosato

We’re not ready to quantify them, Ken. We would expect to see a little bit in the third and fourth quarter as some builds start to come in. But it’s not going to be anything largely material. And we will call those out as non-operating.

Ken Zerbe

And then, just a quick question on the CRE balances. If I heard you right, you are building out a team to kind of ramp that up again. But, just given some of the debate in the industry about whether now is the right time to close CRE or not are you seeing enough positive things in CRE that you are willing to continue to grow or to ramp up CRE in New York? I am not sure that other banks are -- some of the banks at least are not as optimistic about the current environment for CRE?

Jack Barnes

So, Ken, this is Jack. I would say, first of all, CRE is our most significant portfolio and a very big business for us. And we have a lot of long-term relationships that we value very much. As you probably realize, our concentration level is below 300. The other thing that is probably less apparent is that we have elevated and enhanced our risk management process around CRE over the last number of years and have really been operating with enhanced due diligence processes well-established and in our run rate around the portfolio. So, we feel very confident about moving forward in commercial real estate lending and going above the 300 level. And we have demonstrated our ability to manage that risk. Given the diversification of our business lines and the portfolios, I don’t expect that will go too far above the 300 level in the immediate -- intermediate I guess, I’d say future. But it wouldn’t be a concern for us to go above 300. And we like the balance and diversification. So, we will continue to move everything forward.

I really am very optimistic about the talent and the folks that we brought into New York and we are looking forward. They have got a nice full pipeline and they have got some great relationships and we expect to do some great business there and build that out. We are by the way -- just to add one thing -- sorry to cut you off, but the -- in Long Island, we’ve really had a great success over the last four, five years. And as you know Suffolk has a lot of nice long term customers. So, we are looking forward to all of that coming together.

Operator

Your next question comes from the line of Bob Ramsey with FBR.

Bob Ramsey

Could you maybe touch on the Gerstein Fisher acquisition and maybe how we should be thinking about annual revenues and expenses from that business?

David Rosato

Sure Bob, it’s David. So, just to reiterate a little bit in the press release and what we said, an all cash transactions modestly accretive to 2017 earnings, an IR are over 15%. And they’re, as Jack outline, just a very nice fit with us and a very well run business. They have annual revenues of a little over $17 million. That’s about all we’re going to disclose at this point in time.

Bob Ramsey

Okay. Nothing on the expense side you can help us with?

David Rosato

No. And then, this will not have much of an impact in 2016. It should close in the middle or so of the fourth quarter is our expectation. But, we will include it in January when we talk about 2017.

Bob Ramsey

And I know you will talk about the preferred you plan to issue. What is the timeline; is that likely to be a fourth quarter event; could it be sooner or how are you thinking about it?

David Rosato

We, as in my prepared comments, we just said in the back half of this year. It’s subject to market conditions with lower rates and spreads tightening that certainly the waiting that -- or the waiting seems to be paying off in the near term, but we’re not going to provide anymore guidance other than the back half of this year, at this time.

Bob Ramsey

Okay. And then, I guess final question, I know you talked about how you guys are thinking about the dividend as you work towards getting to 50 billion and you’ve still got some runway there. But, does that mean that we should not anticipate dividend increases between now and that point? And when you do get right across the 50 billion, if you are not able to get sort of an all clear signal from regulators, does that mean you just sort of sit tight and wait until you can or how do you plan to sort of manage that process?

Jack Barnes

Hi, this is Jack. So, I am going to start with the comment that you made is as you point out, we expect it will take us sometime to get there. And, I think that’s important as the market begins to focus on the implications of our crossing 50, both with dividend and with expenses. And so, we are trying to clarify our view on that. But, to your point, this isn’t going to happen tomorrow. But, I’d say a couple of things. If you -- first of all, we’re very committed to our dividend as stated. We continue and have continued to increase our dividend a penny a year. And we continue to -- that is our approach with the dividend. And the Board and the management is very committed to staying on that path. If you look at our history, we’ve steadily brought the dividend payout ratio down by improving earnings. We’re continuing to build our plans around that and we’re making steady progress and we’re going to continue to make steady progress as we move through moving from 40 billion to 50 billion. And we strongly believe that with the actions we’re taking, we will continue to improve profitability. And, we’ve tried to clarify our efforts around being prepared on 50 billion on many fronts. We’ve talked to our regulators about this issue and have very good lines of communication. I’d also point everybody to what’s happening through the CCAR process, right. Many, many peoples’ dividend payout ratios are coming up; I think the high mark this time around is 40% payout. We know there is discussion about deals out there that might be approved at 50. So, as we continue to bring our payout ratio down over time and the environment changes, we feel that we will successfully navigate from where we are today to $50 billion mark and continue to maintain our dividend performance.

Operator

Your next question comes from the line of Mark Fitzgibbon with Sandler O’Neill.

Mark Fitzgibbon

Jack, just a follow-up on the prior question, I guess I am curious why manage the Company around the dividend payout ratio, given that it’s so much higher than your peers? Doesn’t that kind of tie your hands on a variety of strategic decisions as you move forward? Why not just to adjust the dividend payout ratio now and then you’d have more flexibility from a strategic standpoint?

Jack Barnes

We have, again, for years, we’ve run the Company with very much focused on producing very high quality earnings and consistent performance over time. So, I referenced the consistent asset quality while we’ve grown the balance sheet. And because of the ability to produce that we’ve then committed to a strong dividend payout. And we’ve also been very focused on reducing that payout as we move from $20 billion bank to a $40 billion bank. We’ve consistently been focused on improving earnings and profitability and reducing that payout ratio.

And we think that that’s what our shareholders appreciate and that again our price on the shares reflects that appreciation, and we’re very committed to it. We don’t think it really -- I don’t think, Mark that it really has limited strategically. And I understand the questions about what might happen at 50, but again we’re at 40; we’ve gotten support for this level; we clearly are strongly confident in our ability to close Suffolk, and we’re going to continue on the path we’re on.

Mark Fitzgibbon

And then, I was curious, you guys had really good C&I growth this quarter. I wondered if you could share with us whether that was in any particular part of your franchise or focused on any particular industry.

Jack Barnes

Well, it was -- the really encouraging thing about it is that it was really across the different business lines and portfolios. I know, David called out in the section about that mortgage warehouse particularly had a very strong quarter and really that team has not only had a strong quarter but they’ve had a strong couple of years. And some of it’s the market, but I would really say that most of it is their relationships and their knowledge and understanding of the business that they’ve built over time. So that is a constant pleasure and a source of pride for us. And if you look across equipment finance, the middle markets, even business banking, we had some very modest but a lot of progress on almost every front. So, it’s very encouraging.

Mark Fitzgibbon

And lastly, I wondered, was there a BOLI [ph] gain this this quarter?

David Rosato

There was a BOLI [ph] debt benefit received of about $900,000.

Operator

[Operator Instructions] Your next question comes from the line of Collyn Gilbert with KBW.

Collyn Gilbert

Just a question around your expense guidance. What is it? And necessarily this year but just kind of over next year and as that franchise grows, where do you see the greatest opportunity to really lower expenses? I know you guys talked about how you’re closing branches and reopening more efficient branches. I mean, is that the primary area? I am just trying to understand how and where kind of that maybe expense reduction or expense control is going come?

David Rosato

Hi Collyn, it’s David. You are defiantly right, we are with some of the branches that we closed we have seen some of the constant retail as well as some of the occupancies expenses come down. It’s more for us than just closing branches within retail, there is also technology rollout that are both enhancing customer experience but allowing us to reduce FTEs as well. So that has definitely over the last couple of years been a key component of expense control. But it’s -- for us, it’s really much broader than that. Everyone on the call has heard us talk about our earmark [ph] process and how we approach expense management. And I -- from my perspective, the too much of effect of years of thinking and actively managing expenses is starting -- not starting to payoff, it continues to payoff. And that’s what it’s all about. It just several years ago, back in 2011, we made a conscious decision to have a few members of the management team highly focused on expenses on a very active weekly basis and reviewing everything that we spent as a Company, both tactically and strategically. And that effort is still in place and it’s ingrained into the Company now. And that’s what it is. It’s really that simple.

Collyn Gilbert

And then, Jack, just back to your comment on that you would look to seek regulatory support to continue to pay the dividend, if you were to cross the $50 billion threshold. How do you ensure that? Is that just through the dialogue that you maintain again with the regulators or do you -- are you going to run your own sort of capital stress testing and provide them with the capital plan ahead of that $50 billion threshold? I guess how do you know that you will be okay with your dividend policy once you cross $50 billion?

Jack Barnes

Well, I cannot ensure that. And I think everybody understands that. But, yes, I do expect it. We have very good communication with our regulators. And we also deliver our three-year plan every year and we talk about where we’re headed and we follow that plan. And we’re moving ourselves forward very consistent with what we dialogue about, and they appreciate that. And we’ve made, as I’ve pointed out, consistent progress over time with the payout ratio and we’re going to keep improving it. And so, we expect when we get to that point -- we have been getting support right to this point, we expect to have continued support. And as we move from 40 to 50, we’ll see where the payout ratio is and we’ll see what the regulatory attitude towards the payout ratio. And, we’re -- cash versus repurchase programs are et cetera, right? There is many people that are paying -- have total payout that are 100%. So, that’s where our confidence in being able to navigate from where we are today to that point and successfully continue our dividend approach.

Operator

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

Matthew Breese

Just on the margin, the guidance was lower obviously but just thinking about that longer term, if the shape of the yield curve remains flat and the Fed remains on hold, could we see that pace of margin compression continue into 2017?

David Rosato

I wouldn’t trend it out as -- so, margin was down 4 basis points linked quarter. I wouldn’t want you to you think that we expect that type of decline all the way through the end of 2017. There is a lot of factors in, Matt, as you know. The shape of the yield curve from our perspective as well as the volume and mix of loan production are the two key drivers. The yield curve has remained flat, but what is interesting is that the gap down in interest rates that we saw post Brexit has completely reversed already. And then, in the second quarter what I didn’t say in my prepared remarks was we did quite a bit more of LIBOR based production in the quarter and so the mix has an impact. Our spreads actually widened a little bit, but the new business yield went down, not because of spreads, but because of mix. So, the way I would think about it is we had, if you look year-over-year, the margin was down about 9 basis points in a year, but in a year that really had some dramatic changes, both in interest rates and the shape of the yield curve. So, there is more pressure -- there are more forces that are bringing the margin down than bringing the margin up today. And I think that will be in place for the balance of this year. It’s too early to call 2017 at this point.

Matthew Breese

But all else being equal, you expect a leveling off and the pace wouldn’t quite as dramatic?

David Rosato

That would be our expectation as we sit here today.

Matthew Breese

And then, back to the dividend and M&A. If the regulators aren’t more forgiving the payout ratio and you approach 50 billion, would you be willing to manage the balance sheet to remain under 50 billion and maintain the dividend?

Jack Barnes

Yes, we would. But I would say, again, we’re at 40. We have a long way to go to pass through that time and a lot of time to think about the implications of that. It’s not something we’re focused on today. We’re much more focused on improving the level of income generation and bringing the dividend payout ratio down. So, we’re committed to the dividend at the level it is with the annual $0.01 increase. And we’re working real hard to improve earnings, so that that payout ratio keeps coming down.

Operator

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

Andrew Hersom

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

Operator

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