First Niagara Financial Group, Inc. Q1 2010 Earnings Call Transcript

| About: First Niagara (FNFG)
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First Niagara Financial Group, Inc. (NASDAQ:FNFG) Q1 2010 Earnings Call Transcript April 26, 2010 10:00 AM ET


John Koelmel – President & CEO

Mike Harrington – CFO

Kevin O'Bryan – SVP & Chief Credit Officer


Theodore Kovaleff – Horowitz & Associates

Damon DelMonte – KBW

Collyn Gilbert – Stifel Nicolaus

Tom Alonso – Macquarie


Greetings and welcome to First Niagara's first quarter 2010 earnings call. At this time, all participants are in a listen-only mode. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. John Koelmel, President and Chief Executive Officer for First Niagara. Thank you. Mr. Koelmel, you may begin.

John Koelmel

Thank you very much, Claudia. Good morning, everyone. As always, welcome to the call, and I'm again joined by Mike Harrington, our CFO, as well as Kevin O'Bryan, our Chief Credit Officer, and after my opening monologue, Mike and Kevin will give you their color commentary on the quarter.

2009, obviously was a very eventful year for us, and we have long understood expectations were high. As we started another year, hence we are very, very pleased with the solid beginnings of 2010. I feel we put another excellent quarter up on the table, and far more importantly for us, I believe we've got a lot of positive wind at our backs and that the opportunity flow that we see in markets as well as otherwise in our travels continues to build.

And while I'm very upbeat and excited about the future, I do want to spend a couple of minutes talking and reflecting from my perspective on where we are today and what we have accomplished and, frankly, do my best to specifically address the execution risk question mark that has often been referenced in discussing our recent growth as many have wondered how well we were going to be able to digest the big bites we have taken over the last year or so. And this is our first opportunity to definitively look in the rearview mirror, and there's no question I'm incredibly proud of what we see.

We just completed the Harleysville transaction, clearly our largest and I am real proud to tell you our most efficient transaction yet. It was on the ground in Harleysville and Eastern Pennsylvania two weeks ago day two and three. Team was incredibly energized. Processes were very efficient. The conversion itself, whether it be over the weekend or in the first couple of days, no hiccups at all to report. Most importantly, we had a lot of happy customers, and frankly real important to us, they are bringing new money in the door. They were doing it day one, day two, day three, and that has continued over these first couple of weeks.

That has enabled the team to shift their focus from playing offense to new business development. The market opportunity, very, very obvious that it will mirror what we have experienced across our legacy footprint, as well as what you will hear us chat a bit more about in Western PA. We are just as ready to outperform there as we are across the rest of our business.

Obviously that model on the heels of our charter conversions, from the OGFs to the Fed and the bank holding company and the OCC as a commercial bank, those approvals were received in late March. No question, especially in light of today's environment, it was the right next step for us and the right time to advance that, albeit adding a nuance or complication or two to navigating the Harleysville transaction, but very, very pleased with the outcomes and very, very proud and pleased to sit here as a commercial bank today rather than operate as a thrift.

These are challenging times, (inaudible) minimize what was necessary to get over that regulatory conversion hurdle. No surprise to anybody, antennas are up, the whole world is paying attention. The bar is definitely, as I said, higher, and I think the fact that we successfully cleared that hurdle speaks very, very well to the strength of the organization.

Western PA, Pittsburgh, Erie markets referenced a couple of times already. My version of going gangbusters. They are well ahead of any expectations that we had. We are only seven months in. Core deposits, as we reported this morning, are already back to pre-close levels, already back to the levels that we saw Labor Day weekend when we completed that transaction.

All-in deposit attrition, even as we managed down that CD book, is still less than 10%. Very importantly, we were able to put that liquidity to work in that market, in particular the (inaudible); those first several months are plus or minus 750 million. We had another 300 million in the pipeline as we sit here.

All of that speaks volumes as to how well the team is working and very importantly how well received we have been in the market and how opportunistically we are working that market as a team. And it further affirms to us and hopefully all of you that we can very successfully compete on an incrementally bigger stage against some very strong competition.

And in terms of the economics of this transaction, Mike will chat a little bit more later, but needless to say, the fact that we are outperforming this quickly, this strongly, means that not only are the accretive lifts this quarter meaningfully better than we anticipated, but the returns on that investment will be enhanced for years to come.

And I would certainly hope that that gives all of you that much more confidence in terms of our ability to execute Eastern Pennsylvania so we built off that very, very successful conversion as well as anywhere else we may have to plant our flag.

All of that is why we are continuing to invest and build out the business, strengthen the foundation and steer the company for larger opportunities and even better days ahead. We announced a couple of months back the initiation of our President's search to work with me and the leadership team. We are in the middle of the interview process there and confident we will have a good outcome sometime over the next few months.

I think we announced or are announcing this morning, we have got new leadership in place in Eastern Pennsylvania, Bob Kane who has come on board from PNC joins Joe Tedesco, who is now on market back from Atlanta and in the Philly market with Wachovia years back as our one-two punch in Eastern Pennsylvania, and very, very pleased with what they are going to bring in not only in leadership but just presence and visibility, in addition to some of the others that you have heard us talk about that are resident in that market as well.

Back at the house we have got new leader to start a week from today and oversee our operations world. She will partner in tandem with John Petrey, who came on board a number of months back to reposition our IT world. We have also recently recruited new leadership in internal audit, as well as enterprise risk management, and bigger picture the bench is progressively deeper across the organization.

And hence, obviously no one is more proud than I of all that we have accomplished over the last 12 to 18 months and the team that's gotten us here. There is also no doubt we are a much better organization today than we were 12 months ago, than we were 18 or 24 months ago. And that is more than just a point to be proud of. I believe it is very relevant and necessary to ensure we are poised and ready opportunistically to move forward.

This morning's announcement also confirms that we have been able to accomplish all that without taking our eye off the core business. The numbers we think speak for themselves. Nice bump-up on a linked-quarter basis and, as I have already referenced, a very meaningful move compared to the year ago quarter with the benefit of Western PA, as well as outside growth in the legacy business.

We are doing our best to keep it simple. It will always be about capital, credit and liquidity, and please be assured that we continue to manage the business with the same discipline today that has gotten us here over the last several years. Very, very focused on deploying that excess liquidity over the next two to three years and rotating the balance sheet, as Mike is prone to saying, to bolster that loan portfolio and benefit from better spreads and yields in the net asset class. Do that with the continued sound underwriting and the benefits of perpetuating our terrific track record on the credit side.

You have heard me before. It is all about the positive funding, and we are making great strides and success in our existing, as well as new markets, to take more share and deepen relationships and obviously continuing to be very attentive to our capital position. Witness the outcome of our recent debt offering, as well as other opportunistic moves that we have and will continue to make.

So we are proud of all that we have transitioned how we have done that to serve both Main Street as well as Wall Street. Today's climate, in particular, it is impossible to do over than catch everybody talking about the Dodd bill and regulatory reform and what bad guys Wall Street and big banks and the industry are in general.

We continue to very positively talk about ourselves as poster children for doing it right whether it be serving our customers; whether it be bolstering the job market locally, as well as in Western and Eastern Pennsylvania; whether it be that corporate citizen role we are stepping into the void left by many others, and making our little slice of a world a little better place to work and play.

So, as I sit here, while we look at this as more of a beginning and certainly anything but the end, we believe it is very clear that we are very successfully making the transition as to building over the last couple of years. Get out and talk about ourselves present tense as opposed to future tense as a $20 billion bank with a $3 billion market cap with more than 250 branches across two states, two states that we think are demographically very well positioned in this economic climate.

(inaudible) with a team that's even better, stronger and more terrific than it has historically been and one, most importantly, that is executing incredibly well.

So for me and us as an organization, it makes it easy to keep marching straight ahead. We have, as I said, an even greater flow of opportunity to grow our franchise whether that's in market and deepen what we have and continue to benefit from, leverage the competitive disruption and dislocation, take more share in each of the markets where we currently do business, as well as continue to push our shopping cart otherwise opportunistically to enhance or stretch our footprint.

So you will see us continue to invest for the transforming organization, recruit talent, and otherwise scale ourselves for bigger days ahead. Continue to work the M&A front, confident opportunities will be there.

No question, like everybody else paying attention to what's going on in Washington, but, frankly, not at all distracted by that. The politicians will do their thing, and we will play the hand that has been dealt. Some unnecessary outcomes of the current reality, but we successfully stayed above the fray so far, and I am very happy confident we will continue to do that as we move forward.

So all-in could not be more proud of where we are, the transitions we have made, the transformational platform that we have placed for even bigger, better days ahead, and very, very confident in our ability to move forward.

With that and taking it back now to the realities of the last three months, I'm happy to flip it over to Mike and Kevin.

Mike Harrington

Thank you. Good morning, everyone. As John said, we are off to a terrific start in 2010. The first-quarter performance continues. Our track record is delivering consistent high quality results. It is a very solid first quarter with operating income of $33 million or $0.18 a share. As already noted, very solid earnings over the linked-quarter end over the prior year.

I will cover the principal earnings drivers related to that performance. Before I do so, as usual, on a linked-quarter basis, when I am talking about averages, I will be doing so – when I'm talking linked quarter, I will be talking about averages versus end of period.

Starting with commercial loan growth, it was up 15% for the quarter. This is broad-based, came from the broad-based business development efforts both new and existing customers from the middle market as well small business sector and also from upstate New York and Western PA, and really the growth we are seeing out of Western PA and the contribution we are seeing there has really been terrific. So one-third of that growth we saw in the portfolio, the 15% annualized, so a third of that growth came from Western PA.

We are also seeing good activity in the business C&I, especially strong activity there. And of note this quarter is we are starting to see traction in the healthcare sector. So we made an investment in that sector. We want to go after that that sector and originate credits, and we start to see that activity pay off in this quarter.

And lastly, on the commercial front, still continue to see and make quality commercial real estate loans.

Turning to the retail side, home equity growth continued, up 11% in the quarter. This is due to increased line usage, as well as acquisition of new customers. And then moving on to credit quality, very solid shape on that front, and we don't see anything right now that would change our viewpoint as we look forward.

So with that, I will take a break and let Kevin talk to you a little bit about our credit picture.

Kevin O’Bryan

Thanks, Mike. Good morning, everyone. I'm happy to report that our credit quality continues to be strong and consistent with our expectations. Delinquencies remain stable across all of our portfolios, a trend of next to no consumer charge-offs or residential charge-offs continues. We experienced a modest upward pressure on non-performers during the quarter, but two of those three loans are from acquisitions long cast, and they don't represent the way we do business now or our model going forward.

The increase in charge-offs as noted, it was driven primarily by our choosing to do a discounted sale of a SNC. There is enough uncertainty in this business that we choose not to engage in an extended complex workout when we can do this, and when we have the opportunity to go forward and put a problem behind us, we ought to do that. We have messaged that consistently. The remainder of the SNC portfolio, less than 4% of our overall portfolio is very strong.

It exhibits none of the risk characteristics of the two loans that we have chosen to put behind them. It is also worth remembering or noting that without the impact of the recent SNC sale, charge-offs for the quarter would have been 33 basis points, and if you take the two SNCs over the last four quarters out of the equation, charge-offs would have been stabilized at about 40 basis points.

I don't bring this up to minimize our problems, but when we experience them, we deal with them, and we go forward and the SNCs are really out of the broader context of the way we look at our portfolio and the way we do business going forward.

Western Pennsylvania, as has been mentioned by both John and Mike, very strong loan production, very strong loan quality. This is relationship business, and our team on the ground is leveraging the relationships, and we are being presented with some very good opportunities as we are in other parts of our existing footprint. What we are seeing now is new loan activity of a very high credit quality across all regions.

Moving to Harleysville, as we have mentioned before, it is our intention to liquidate as much of that portfolio as we can, the troubled portfolio as quickly as we can, and that initiative is underway. The credit costs of that transaction even as a discounted sale are in sync with what we have modeled as a function of our credit market. Then besides that, there has been no measurable deterioration in that portfolio as we sit here.

Economic trends across our entire two state footprint are showing modest improvement, particularly upstate New York, unemployment levels are down a little bit. Home prices are up a little bit. There is still a lot of foreclosure activity out there, but we have managed our way through that very well. There is also evidence in the Philadelphia market that commercial exhibit is picking up, and there is also some evidence both based on the liquidation of our own ORE, certainly liquidation opportunities we have already seen in Harleysville. That liquidity is coming back to the market. And, as an indicator, that is something that we pay some attention to, and it has a direct impact on our ability to manage our troubled assets.

So given the length of the current downturn and the plotting pace of the recovery, we think we are positioned pretty well. We think our experience has been very good and looking forward particularly to when the economy turns around; we think that will expand our portfolio in very good stead going forward.

So with that, I will turn things back over to Mike.

Mike Harrington

Great, Kevin. Thanks. Moving on to core deposits, another great story here. Up 7% annualized in the quarter. The source was led by a retail money market and some seasonal increases in municipal pumps as well. The same growth rate applied to the Western Pennsylvania marketplace as well.

We continue to de-emphasize CDs. So, as you saw during the quarter, they were down 9%. Core deposits have represented 73% of total deposits, and our liquidity remains excellent with our loan to deposit ratio at 76%. Now that is up towards 100%. That is up from the previous quarter, which is good because part of our objective here is to redeploy that liquidity in order to accelerate our earnings growth.

Turning to the P&L; ideal situation here, higher revenues, lower expense. Net interest revenue was up 1% for the quarter. We were able to overcome the fewer days that are in the quarter and some modest margin compression with sizable asset growth, earnings asset growth.

Just talking about the net interest margin, our margins actually performed better than expected following the Nat City branch acquisition. From a core business perspective, our margin continued to expand, if you look at our deposit costs, with lower deposit costs offsetting a slight decrease in loan yields. Really the factor affecting the overall margin decline was a lower securities yield due to (inaudible) prepayments on mortgage-backed securities.

I would just like to take a minute and just take a step back and remind everybody what has been going on in that portfolio. The Nat City acquisition was a part of that acquisition, a liquidity play for us. Two-thirds of our existing investment portfolio has been invested in the last nine months, and that investment was made to deploy the liquidity.

The primary objectives as always with us from an investment standpoint is ensure we have cash flow and obviously protect against rising interest rates, but to make sure we have cash flow in any environment so we could take that cash and redeploy it, as I mentioned earlier, into loans as rotated into loan assets.

Given the low level of rates when we were buying over the last six to nine months, we did not feel re-payments were likely to spike. So we purchased securities that were really protected and protected us against extension risks. Unexpectedly prepayments did increase. We saw some modest decrease late last year in rates, which created a mini refinance wave.

And you also had the programs from Ginnie Mae and Freddie Mac, programs to buy back delinquent loans out of their securities portfolio. So the combination of those two things increased prepayments and caused the yields in our loan portfolio or our securities portfolio to drop.

Going forward we don't expect these programs to have a material effect on the securities portfolio and would not expect the yield on that portfolio to drop like it did in this quarter.

Just looking forward relative to the margin, although we are still fine-tuning our purchase accounting estimates, our current analysis indicates that the inclusion of the Harleysville balance sheet will have a limited effect on our current run rate margin.

Turning to fee income and non-interest expense, nothing really dramatic here. We had nice pickup in branch-based Wealth Management sales. A lot of that pickup is coming from the Western PA marketplace. And that also has some seasonal softness in NSF, as well as a trend in overdrafts, which continue to be hard to predict.

Expense levels benefited from the absence of fourth-quarter items and typical end of year type of items and the timing of our continued investment in our business.

Overall the balance sheet remains very strong. Our capital levels coming out of Harleysville's closing will be robust. Our TCE to TA ratio in excess of 8%, and our liquidity at the holding company remains ample and more so after our recently completed 10-year senior debt offering, which added additional liquidity on a net basis at the holding company.

Wrapping things up, we are in a great position. Western PA is doing very well with the accretive benefit from an income perspective being at least 50%, better than anything we've modeled when we announced the deal a year ago, due in large part to the better loan deposit activity that we have already mentioned, the loan activity, loan and deposit activity, and the really good traction we are getting in the Wealth Management business in that market.

So Western PA going very well. At Harleysville after two weeks it looks to be it is going as well as we could possibly have hoped. Really retention right now, we are down maybe 1% from a deposit standpoint. That is on the existing balances we bought, and, as John noted earlier, we are seeing some good traffic and opening new accounts in those markets and also originating new loans.

The combination of these two highly accretive transactions affords us the ability to continue building our capacity to become a larger institution. This cost is embedded in our current operating results. While, at the same time, these transactions also allowed us to absorb the costs related to carrying excess capital.

So all-in-all a fine way to kick off the year; the franchise is strong, it is growing, and we are getting better every day. Our excitement and confidence couldn't be higher as we push ahead.

And with that, we would be glad to take your questions.

Question-and-Answer Session


(Operator Instructions) our first question is coming from Theodore Kovaleff, Horowitz & Associates. Please state your question.

Theodore Kovaleff – Horowitz & Associates

Hi there.

John Koelmel


Kevin O’Bryan

Good morning.

Theodore Kovaleff – Horowitz & Associates

Two questions for you. Item one; I'm wondering if the average size of your loans has increased as your footprint has been increased?

John Koelmel

Yes, it has. And it is our – just to expand on that a little bit, it is our philosophy as we look at those kinds of loans as the loan size increases that we get very careful about our credit profile. But yes, it has been a very pleasant surprise in a way that we have seen larger loans and even better credit opportunities. So, yes, the answer is yes.

Kevin O’Bryan

It is not attributable just to the transactions. That type of activities that happened over the last couple of years across the legacy footprint, as some of the bigger guys have pulled back, as some of their service or credit availability issues have started to bubble to the top. We were moving up markets as we talked about it and have been doing so for the last couple of years.

So what we are seeing in Pittsburgh and Western PA, and I'm confident we will see in Eastern PA, frankly, just a continuation of what had readily evolved fairly rapidly while across upstate New York as well.

Theodore Kovaleff – Horowitz & Associates

Okay. And a corollary to that, what about on the lower side? Have you seen any fall-off on the smaller loans?

Mike Harrington

No, not particularly. We have a very – that line, that business line, to reach that market segment is doing as well proportionately as the rest of our business lines.

So no, and I think to further John's point, there was a period of time there that there were not a lot of other players in a variety of market segments, and we have been pretty consistent about being open for business and looking at opportunity. So no, the answer is no. We have not seen any diminishment in that business line.

John Koelmel

And strategically for us then, the middle markets, small business sector, that is what we have been working for the last five years and the ability to move up markets and supplement/complement to that core strategy.

And Kevin just reaffirmed the fact that we, frankly, have been the one constant in the game. It has benefited us with incremental revenue rather to the strategic focus we had, just circumstances.

So the deal flow that you are seeing it was 3.5 billion of originations a year ago, or a 1 billion in the quarter this year, really is well represented across those sectors – large and medium and small – in terms of the type of deal flow and activity.

Theodore Kovaleff – Horowitz & Associates

Great. And then my other totally unrelated question is, with regard to the timeframe for integration of the Eastern Pennsylvania group, roughly how long will that take until you can be considering another acquisition?

John Koelmel

Well, the shopping cart is always in motion. I'm incredibly confident, and I have always been in a team. We have here our ability to walk and chew gum when it comes to how we operate the business, as well as pursue other opportunities.

So I hope you and everyone begins to share that confidence in light of the quick outcomes that we have seen in Western PA, the fact that Eastern PA was as smooth as it was. I don't really believe we are ready to keep pushing forward, and we had the capacity and competencies to do that.

I don't say that to imply we are overheated for the next opportunity, but we are always pushing that shopping cart and always operating with eyes wide open.

Theodore Kovaleff – Horowitz & Associates

Great. Thank you.

John Koelmel



Our next question is coming from Damon DelMonte from KBW. Please state your questions.

Damon DelMonte – KBW

Hi, good morning guys, how are you?

John Koelmel

Hi, good morning Damon.

Damon DelMonte – KBW

Mike, I was wondering if you could quantify for us the potential of fees at risk for Reg E that comes on in July.

Mike Harrington

Well, we estimate that this year that would process around 6 or $7 million. But that was just for planning purposes. I think the point around Reg E is it is a moving target. We are seeing customer behavior change – improve if you want to view it for from that perspective.

So the occurrences of overdrafts per account continued to trend down as customers managed their money in a more thoughtful way. But so to give you the technical answer was from how we thought about it, but I still think it is going to be a moving target.

We are doing things to mitigate that impact whether it be product changes, changes in how we charge what we charge for overdrives, and product changes. We are really trying to be responsive to our customers and what they need and what they want.

John Koelmel

I really thought it would be a runaway kind of number there. It is very fluid, and my bias continues to be, we are no different than anybody else in the industry; we cannot afford to give up that much in revenue. So you got to look at it on a net basis, and we are all doing our best to find our way to ensure the net impact is, frankly, minimized.

So our focus is not on qualifying worst case exposure there. We are continuing to manage the business to do everything we can to minimize any downside there and with the expectation our competition is doing the same. Because, as an industry, we just cannot afford to give back that much revenue.

Damon DelMonte – KBW

Great. Thank you. And then with respect to the margin, could you just give us a little more guidance on the outlook for the coming quarter? I think you mentioned, Mike, that the addition of Harleysville will be pretty neutral to the current run-rate. So can we assume that the low 360 level is a good run-rate?

Mike Harrington

Well, somewhere we are at 361 this quarter I would say it had modest impact, if it has any at all. So I don't want to get too precise because we are still in the process of fine-tuning our estimates. But somewhere in the zone between 360 and 355 certainly is within the realm of possible outcomes.

Damon DelMonte – KBW

Okay. And do you know how much the margin was hit this quarter by the security buybacks?

Mike Harrington

There was probably in the $5 million range.

Damon DelMonte – KBW

Okay, that’s all I have for now. Thank you.

John Koelmel

I think, as we chatted about it before, all things being equal, we would have seen the margin widen from last quarter by another 6 or 7 basis points. So yes, the impact on this quarter's margin is probably the better part of the 15 basis points in terms of that securities move.


Thank you. Our next question is coming from Collyn Gilbert with Stifel Nicolaus.

Collyn Gilbert – Stifel Nicolaus

Thanks. Good morning guys.

John Koelmel

Good morning, Collyn.

Mike Harrington

Hi, Collyn.

Collyn Gilbert – Stifel Nicolaus

Just to start off, Kevin, can you just give us a little bit of color again on the Harleysville's non-performing portfolio, just kind of the size and timeline and potential financial impact on that sale?

Kevin O’Bryan

Sure. We are going to liquidate as many of those loans as possible. Certainly all of the classifieds, nearly all the classified loans and most of the credit size, that discussions and activity around that sale is happening as we speak. All of our efforts are focused on getting it accomplished by second-quarter end.

Everything in terms of impact – I don't want to get too specific – but everything in terms of impact that we have seen on numbers that have been quoted to us and things that we are considering right now as we speak, tells us that the net sales and the consequences of that sale will fall well within the capacity of our credit mark line.

John Koelmel

Just to add a little bit on that Collyn, you're talking about 3 or 400,000 million of loans or something in that zone. And, as Kevin said, the haircut that we had modeled nine months ago when we looked at the deal we think should reasonably if not comfortably cover the liquidation value.

And you have heard us talk before we are not in the workout business. So we don't take on the additional burden and comfortable as, frankly, (inaudible) management to actively worked that portfolio for eight months. It is in a much better place than it was when we first looked at it last June and July.

And the opportunity is right for a variety of reasons to just move forward and put it behind us and deploy our time and effort and energy in a more opportunistic offensive fashion.

Collyn Gilbert – Stifel Nicolaus

Okay. That is helpful. And then Mike, can you give us a sense of a potential run-rate on expenses pro forma with Harleysville, how we should be thinking about the expense line?

Mike Harrington

We are going to stay away from just predicting expenses right at this point in time. But our efficiency ratio is probably an easier way to look at that, and we would expect that ratio should be in the high 50s on a go forward basis.

Collyn Gilbert – Stifel Nicolaus

Okay. And is that taking into consideration, too, that impact of Reg E, or is that something outside of that?

Mike Harrington

No, that is taking that into consideration as well. Not just Reg E but our mitigating strategies around Reg E to mitigate that top line impact.

Collyn Gilbert – Stifel Nicolaus

Okay. Okay, that is helpful. Thanks. And just a final question. In terms of the strength that you are seeing in Western PA, can you guys talk at all about if any of that strength is deriving from the build out of the Marcellus shale line and if you can kind of give any anecdotes or just commentary to that effect?

Mike Harrington

I don't know if the credit activity and the loan activity is directly related to the Marcellus shale activity and what's going on in Western PA. I would doubt that we would sign a whole lot of what we have done. This is just basic business.

We have got a tremendous team down there, and, as we stated before, we purchased a very small portion of the portfolio that they had –this team had formerly managed, and there is just a lot of activity coming our way as those customers that did not come with us initially are looking to rejoin the folks that formally serviced them.

Kevin O’Bryan

Collyn, let me just jump in on that. On the C&I side, it is coming – the demand is coming from a very diversified set of industries. So it is strong companies in retail and there is some materials business and professional businesses, professional companies. So it is not focused in any one's segment.

Collyn Gilbert – Stifel Nicolaus

Okay. That is helpful. That is all I had. Thanks, guys.

Kevin O’Bryan

Thanks, Collyn.


(Operator Instructions) our next question is coming from Tom Alonso with Macquarie. Please state your question.

Tom Alonso – Macquarie

Good morning, guys.

Kevin O’Bryan

Good morning, Tom.

Tom Alonso – Macquarie

Just real quick on the MBS, the securities portfolio stuff, the 13 basis points you mentioned. Was any of that on the premium amortization and you will sort of get that back next quarter, or is it all just foregone interest?

Mike Harrington

Well, yes, I mean it's exactly what it was, it was premium – just accelerating speed, which caused us to report a lower yield rate, and that lower yield is a function of higher premium amortization. One, we would not expect it to accelerate anymore, and, in fact, if we were projecting it, we would expect prepayments to slow just given the fact that these programs are mostly behind us from a repurchase standpoint.

So there could be some –some improvement in the yield on a go forward basis not only. My only caution there is that we are getting so much cash flow into the portfolio that we are reinvesting it at current rates. And given where we think rates might head, we might choose to go even shorter and record lower yields on the portfolio as we reinvest the dollar.

So I don't want to just look at it in a vacuum, a lot of cash coming in. I expect the existing portfolios yield to get better, but the new dollars we have coming in, we might elect at the time we do that reinvesting to invest in something which will lower yield just to keep the portfolio positioned, make sure we have gotten cash flow to rotate back into loan demand as that materializes, which it is as you can see, there is a lot of loan demand, and we want to support that.

Tom Alonso – Macquarie

Okay. Understood. I got you. Thanks very much. And then just one other one in terms of pushing your shopping cart up and down the aisle, are you still looking, sort of, the same size deals, or has your appetite for a deal increased? Given that it is a much larger balance sheet now, you would look for something larger that would potentially move the needle, or are you still happy with doing 2, $300 million deals?

John Koelmel

I think, Tom, over time it will be a combination of all of the above. We have been very open that we see rollup opportunities that are inherently smaller. Since the deal flow, our presumption is we will start to see a trickle of that over the next couple of years. In terms of our capacity to fold in a larger organization, we are very comfortable in exploring those types of situations as well.

So it will be all of the above. We don't target one versus the other because of size, strategic and other considerations, but bigger deals could certainly have a meaningful strategic opportunity, and we are certainly not going to shy away from anything like that that we think makes good strategic sense.

The flipside is there is just a ready flow of smaller opportunities, and that is why, frankly, we have built out our capacity in that whole arena to handle multiple opportunities and multiple transactions.

Tom Alonso – Macquarie

Okay. Fair enough, thanks very much guys.


Gentlemen, I'm showing we have no further questions at this time. I will turn the floor back over to management for closing comments.

John Koelmel

Thank you very much, Claudia. We, as always, appreciate your participation and interests. Thanks for the opportunity to further our story. Have a great day, and we will be back at 90 days from now. Enjoy.


Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time, and we thank you for your participation

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