U.S. Markets open in 1 hr 36 mins

Edited Transcript of PBCT earnings conference call or presentation 17-Oct-19 9:00pm GMT

Q3 2019 People's United Financial Inc Earnings Call

BRIDGEPORT Oct 31, 2019 (Thomson StreetEvents) -- Edited Transcript of People's United Financial Inc earnings conference call or presentation Thursday, October 17, 2019 at 9:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Andrew S. Hersom

People's United Financial, Inc. - SVP, IR

* Jeffrey J. Tengel

People's United Financial, Inc. - President

* John P. Barnes

People's United Financial, Inc. - Chairman of the Board & CEO

* R. David Rosato

People's United Financial, Inc. - Senior EVP & CFO

================================================================================

Conference Call Participants

================================================================================

* Brocker Clinton Vandervliet

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

* Casey Haire

Jefferies LLC, Research Division - VP and Equity Analyst

* Collyn Bement Gilbert

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

* David Jason Bishop

D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst

* Jared David Wesley Shaw

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

* Kenneth Allen Zerbe

Morgan Stanley, Research Division - Executive Director

* Steven A. Alexopoulos

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

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day, ladies and gentlemen, and welcome to the People's United Financial, Inc. Third Quarter 2019 Earnings Conference Call. My name is Liz, and I will be your coordinator for today. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

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

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

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

Please remember to refer to our forward-looking statements on Slide 1 of this presentation, which is posted on our website, peoples.com, under Investor Relations. With that, I'll turn the call over to Jack.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Andrew, and good afternoon. We appreciate everyone joining us today. Let's begin by turning to the third quarter overview on Slide 2.

Our third quarter performance, which reflects another quarter of record earnings, further demonstrates our success in strengthening the earnings power of the company while continuing to build the franchise for the long-term. As such, we are pleased to report operating earnings of $135.5 million, an increase of 19% from a year ago, and an operating return on average tangible common equity of 14.4%. On a per common share basis, operating earnings were $0.34.

Third quarter results were highlighted by a net interest margin of 3.12%, which was unchanged from the second quarter despite declining interest rates.

The margin benefited from our proactive management of deposit cost and new business yields remaining higher than the total portfolio yield.

The margin through 9 months is 3.14%, well within our full year outlook range of 3.05% to 3.15%.

Total revenues of $454.7 million increased both linked quarter and year-over-year and continued to benefit from strong noninterest income.

Modestly higher expenses, compared to the second quarter, drove 100 basis point increase in the efficiency ratio to 56.8%. Our ability to enhance operating leverage is evidenced by a year-to-date efficiency ratio of 56.6%, an improvement of 160 basis points compared to the prior year period.

Our thoughtful approach to expense management has enabled us to control costs while continuing to make important investments in our digital capabilities. We have launched several mobile device and online-driven offerings this year, some of which we have discussed previously, including a residential mortgage and home equity lending portal, an enhanced deposit account opening solution, a direct-to-client investment platform and a more advanced peoples.com website.

Our latest offering is a digital small business solution for loans of $250,000 or less, which will roll out this quarter.

Looking forward, we will continue to partner with fintech companies to bring greater efficiency, ease of use and scale to our suite of digital products and services to meet the evolving needs of our customers.

Moving on to loans. Period-end balances increased $224 million or 1% from the end of the second quarter, driven by solid commercial loan growth, partially offset by a planned reduction in residential mortgages as we continue to remix the balance sheet with a focus on higher yielding portfolios.

The growth in the commercial portfolio was primarily due to mortgage warehouse lending, equipment finance and Boston commercial real estate.

Period-end deposits declined $893 million or 2%, partially due to a second quarter ending balance, including a $500 million short-term commercial deposit, which was withdrawn in July as expected.

On an average basis, deposits were down 1%, primarily driven by lower savings and time balances, partially offset by increased noninterest bearing deposits. Despite the decline in balances, we continue to be pleased with our ability to gather deposits. Recent FDIC data confirm we maintain strong market share in each state in which we operate and continue to hold the #1 position in Fairfield County Connecticut and the state of Vermont.

We are particularly pleased. Our market share in Massachusetts is now in the top 10. Driven by the addition of Belmont, along with organic growth, we moved up 4 spots, to number 9.

The acquisition of United Financial is on track to close in the fourth quarter, and we remain confident in achieving the transaction's attractive financial returns. The integration process is underway, progressing well as we execute on our time-tested acquisition approach.

The addition of United bolsters our already significant share of retail, households and commercial clients across Central Connecticut and Western Massachusetts.

We are excited for their long tenured well-established customer base to join People's United and benefit from our broader array of products, services and technology offerings.

Before I pass the call over to David to discuss the quarter's results in more detail, I wanted to share some thoughts on the operating environment.

Looking ahead, our view is, customers continue to manage their businesses thoughtfully and are looking to take advantage of opportunities to grow. We continue to see areas of meaningful growth, particularly in Boston and metro New York as well as in our equipment finance and specialty businesses.

However, uncertainty about the economy whether trade-related or recessionary fears is concerning the marketplace. Additionally, a heightened competition remains, notably in commercial real estate. And our expectation is this will not abate in the coming year.

Despite these economic and competitive uncertainties, we are cautiously optimistic about loan growth. We have broadened the capabilities of the franchise through strategic investments in talent and enhanced digital offerings, while also adding retail households and commercial clients through thoughtful acquisitions.

While we have grown in size, we remain true to our roots as a bank with significant local knowledge and the ability to provide tailored solutions to meet the individual needs of our customers. This solutions-oriented approach to banking differentiates People's United and positions us well to take advantage of growth opportunities in any environment.

It's also evident margin compression will be a headwind in 2020 by the extent -- but the extent to which we'll largely be dependent on potential changes in the federal reserve monetary policy. However, we remain focused on managing what we can control to offset the effects of declining interest rates.

These levers include continuing to remix the asset side of the balance sheet by reducing lower-yielding residential mortgages; growing our higher-yielding commercial loan portfolios; managing deposit costs proactively; continuing to build our fee income businesses; capturing revenue and expense synergies of recent acquisitions; and sustaining excellent asset quality.

Our long-term approach to managing the business has and will further enable us to generate value for shareholders and customers regardless of the uncertainties in the operating environment. With that, here is David.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Jack. Third quarter financial results were highlighted by a stable net interest margin, continued strong noninterest income, well-maintained expenses and a lower effective tax rate.

Turning to Slide 3. Net interest income of $348.7 million was up $600,000 from the second quarter. Net interest income benefited $5.4 million due to improved deposit pricing and lower balances as well as $2 million from an additional calendar day in the third quarter.

Conversely, the loan portfolio reduced net interest income by $3.7 million due to the downward repricing of floating rate loans. In addition, increased borrowings and lowered yields in the securities portfolio negatively impacted net interest income by $1.7 million and $1.4 million, respectively.

As displayed on Slide 4, net interest margin of 3.12% was unchanged from the second quarter despite declining interest rates. As Jack referenced in his comments, the margin benefited from our proactive management of deposit costs, new business yields remaining higher than the total loan portfolio yield.

Improved deposit pricing favorably impacted net interest margin by 5 basis points, while the additional calendar day added 2 basis points.

The largest offset to these increases were lower yields in the existing loan portfolio, which reduced net interest margin by 4 basis points. Increased borrowings and lower security yields unfavorably impacted the margin by 2 basis points and 1 basis point, respectively.

Turning to loans on Slide 5. Average balances of $38.3 billion increased by $88 million or less than 1% from the second quarter.

On a period-end basis, loans ended the quarter at $38.8 billion, up $224 million or 1% from June 30. Commercial period-end loans grew $505 million or 2%, primarily driven by mortgage warehouse lending, equipment finance and Boston commercial real estate, partially offset by $89 million of runoff in the New York multi-family portfolio.

Conversely, retail period-end loans declined $281 million or 2%, mostly due to our planned reduction of residential mortgages as we continue to remix the balance sheet with the focus on higher-yielding portfolios.

Mortgage warehouse lending benefited from the decline in the interest rates, which increased refinance and mortgage purchase activity. Balances ended the quarter at nearly $1.7 billion, up $429 million from the end of the second quarter.

Equipment finance grew $125 million, primarily reflecting further strong production by LEAF. Furthermore, our commercial real estate business in Boston continue to benefit from the momentum generated by the addition of the Belmont team.

Moving on to deposits. Period-end balances declined $893 million or 2%, partially due to second quarter ending deposits including a $500 million short-term commercial deposit, which was withdrawn in July as expected.

On an average basis, as displayed on Slide 6, deposits decreased $554 million or 1% linked quarter, primarily driven by a reduction in savings of $304 million and time balances of $142 million, partially offset by an increase in noninterest-bearing deposits of $171 million.

Interest-bearing checking and money market balances declined $279 million, of which approximately $250 million is related to the withdrawal of the large short-term commercial deposit. It's important to note that noninterest-bearing deposits as a percentage of total deposits improved from -- to approximately 24% from 22% at the end of the second quarter.

We remain focused on controlling pricing as evidenced by a 4 basis point reduction in deposit cost during the quarter, which marked the first quarterly decline since the third quarter of 2016.

As we mentioned on our second quarter call, we proactively lowered CD deposit cost 2 times in the 2 months, leading up to the Fed's July 31st rate cut, and then we subsequently lowered money market rates twice in the quarter.

Noninterest income of $106 million marked another strong quarter. Although down $300,000 linked quarter, the results are up $13.7 million or 15% year-over-year. Year-to-date, noninterest income of $307 million is up nearly 11% compared to the prior year period. On Slide 7, the components of the linked-quarter variance are displayed.

Noninterest income in the third quarter benefited from $1.6 million in higher commercial banking lending fees, driven by increased commercial real estate prepayment income.

$1.6 million in higher insurance revenues reflecting the seasonality of commercial insurance renewals. A $600,000 increase in bank service charges primarily resulting from an additional calendar day in the third quarter and higher operating lease income and investment management fees, which collectively improved noninterest income by $500,000.

The largest driver offsetting these increases was lower customer interest rate swap income, which was down $2 million from a record second quarter.

Noninterest income was also unfavorably impacted by a $2.6 million decrease in other fee income, which is primarily driven by the mark-to-market of one equity security position and normalized BOLI income.

On Slide 8, noninterest expense of $281.4 million increased $3 million linked quarter. Included in the third quarter were $5 million of merger-related cost in the following categories: $3.7 million in professional and outside services; $800,000 in compensation and benefits; and the remaining $500,000 in occupancy and equipment and other.

In comparison, the second quarter incurred $6.5 million of merger-related costs. Excluding merger-related costs, noninterest expense of $276.4 million was up $4.5 million or 2% linked quarter.

The largest component of the increase was $8 million in higher other expenses, driven by several items, most notably, certain legal and other onetime operational costs. The primary offsets to these increases was a $2.5 million reduction in compensation and benefits, resulting primarily from lower payroll cost and $1.2 million improvement in regulatory assessments attributable to an FDIC credit.

Turning to Slide 9, the efficiency ratio of 56.8% increased 100 basis points from the second quarter due to a modest increase in expenses.

Year-over-year, the efficiency ratio was up only 10 basis points. Despite the increase in the third quarter, we are very pleased with the significant progress we have made enhancing operating leverage as evidenced by the year-to-date efficiency ratio of 56.6%, which improved 160 basis points from the prior year period.

Asset quality was once again exceptional across each of our portfolios as demonstrated on Slide 10. Originated, nonperforming assets as a percentage of originated loans and REO at 56 basis points was unchanged from the second quarter and remained below our peer group and top 50 banks.

Net charge-offs of 6 basis points increased slightly from an already low level and continue to reflect the minimal loss content in our nonperforming assets.

Briefly on slide 11 and 12. Return on average assets improved the basis point linked quarter to 105 basis points, while return on average tangible common equity decreased 10 basis points to 14%. On an operating basis, return on average assets was also 105 basis points, while return on average tangible common equity was 14.4%.

As you can see on Slide 12, capital ratios remain strong, given our diversified business mix and long history of exceptional risk management.

Before opening up the call for questions, I wanted to make a few comments on CECL. Our implementation efforts are progressing according to plan as we prepared for adoption on January 1, 2020.

Based on current forecasted economic conditions and portfolio balances at the end of the third quarter, the impact of CECL upon implementation could result in an increase of as much as 15% to 25% or approximately $40 million to $60 million to existing reserves. This increase is driven primarily by higher reserve requirements associated with the company's longer duration retail portfolio, partially offset by shorter duration commercial portfolios and our low historical loss experience.

As a result, the current estimated impact on capital ratios for both the bank and the holding company is a decrease of approximately 10 to 15 basis points.

It is important to note these estimates, which are subject to further refinement and any potential change in economic outlook before year-end, do not include the impact of the United acquisition.

Now we'll be happy to answer any questions you may have. Operator, we're ready for questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Your first question comes from Steven Alexopoulos with JPMorgan.

--------------------------------------------------------------------------------

Steven A. Alexopoulos, JP Morgan Chase & Co, Research Division - MD and Head of Mid-Cap & Small-Cap Banks [2]

--------------------------------------------------------------------------------

So you clearly did a nice job of lowering deposit rates in the third quarter. How much further do you think you could reduce deposit rates here in 4Q? And tied to that, what's the outlook for the NIM here in near term?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

The -- I'll start with the latter part of that question, Steve. The -- our experience has been that a 25 basis point move in either the Fed funds rate or 1-month LIBOR equates to 3 to 4 basis points of NIM compression.

The -- we appreciate your comment on being proactive on deposit cost management. The -- if there's another move in the end of this month, we would expect to be able to move deposit costs in both CDs as well as money markets down, commensurate with what we did in the prior 2 moves. That's not a full 25 basis points, but that's in the range of about 15 basis points, give or take.

--------------------------------------------------------------------------------

Steven A. Alexopoulos, JP Morgan Chase & Co, Research Division - MD and Head of Mid-Cap & Small-Cap Banks [4]

--------------------------------------------------------------------------------

Okay. That's helpful. And then on the loan side, given the remixing you're doing, when does this headwind move behind you? And when should we start to see stronger reported loan growth?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

That's going to take a while, Steve. So we -- first of all, we do have the headwind of New York multi-family, right, which we guided last quarter to $200 million to $300 million for the year.

It's been a $175 million year-to-date. Every 1% decrease in that residential mortgage portfolio is just about $400 million. So the full remixing of our existing portfolio today or at the end of the third quarter is probably a few-year event. However, that doesn't mean there's not going to be loan growth over that time period.

--------------------------------------------------------------------------------

John P. Barnes, People's United Financial, Inc. - Chairman of the Board & CEO [6]

--------------------------------------------------------------------------------

Yes. So I mean obviously, building the commercial portfolios is going to be very market-opportunity dependent. Some of them are growing nicely, have a good steady pace, but others are facing headwinds we talked about, especially real estate, the biggest one.

--------------------------------------------------------------------------------

Steven A. Alexopoulos, JP Morgan Chase & Co, Research Division - MD and Head of Mid-Cap & Small-Cap Banks [7]

--------------------------------------------------------------------------------

And then just a big-picture question on M&A. So guys have done several nice M&A deals, they've been in market, cost saves are strong, earn-back are short. With that said, the market's not responding M&A the way it used to, right? Even for your deals. Do you guys start to think differently about M&A as a tool to create shareholder value given the dynamics around it?

--------------------------------------------------------------------------------

John P. Barnes, People's United Financial, Inc. - Chairman of the Board & CEO [8]

--------------------------------------------------------------------------------

I would say, no. The decline in interest rates is something we're paying a lot of attention to in terms of our thoughts around M&A, pricing, et cetera. But if you just look at the M&A we have done with the metrics that you described, and then think about building deposit households in those markets where we have presence and gaining market share and gaining the opportunity to deepen those relationships. We think that's all been very valuable and will continue to pay dividends for us.

--------------------------------------------------------------------------------

Operator [9]

--------------------------------------------------------------------------------

Your next question comes from Ken Zerbe with Morgan Stanley.

--------------------------------------------------------------------------------

Kenneth Allen Zerbe, Morgan Stanley, Research Division - Executive Director [10]

--------------------------------------------------------------------------------

So I guess maybe starting off in terms of fee income. I noticed you guys didn't include your outlook slide for the year in your slide deck. But -- so any comments on why pulled that, that'd be helpful. But the question in terms of fee income, I think your guidance was up couple of percentage points but it seems that the $106 million level that you're posting is kind of meaningfully above that sort of 2% to 4% growth that you had previously outlined in your slide deck. Is $106 million the right level for fees? Or there are still unusual items in there?

--------------------------------------------------------------------------------

R. David Rosato, People's United Financial, Inc. - Senior EVP & CFO [11]

--------------------------------------------------------------------------------

Sure, Ken. So I go back to our -- we had a little discussion on the call last quarter, where we said that we had a strong second quarter at $106.3 million we decided not to raise guidance just because of the variability of some of those drivers. But we did say that we would likely be at the high end of guidance or maybe even over.

Now with another quarter at $106 million I would say, yes, we will definitely be over the original guidance. I wouldn't go so far as to say $106 million is a sustainable run rate just because of the volatility of some of the capital markets' activities. But away from that, we continue to be highly focused, as Jack said in his comments, on growing our insurance business, our capital management business, our wealth management business, which are much more steady performers. And then we'll have some good capital markets' waters as well.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Got you, okay. That's helpful. And then just second question. In terms of CECL, I really appreciate the additional clarity you provided in terms of the impact of CECL, but not sure how to phrase this exactly, but what's the ultimate impact? I mean I get it's 10 to 50 basis points of capital, presumably there is a 3-year phase in on -- from a regulatory standpoint. I mean does it matter that you are going to increase reserves $40 million to $60 million? Is there any negative impact from whether it's rating agencies or anything else that I can possibly think of that is -- that we should -- as to serve the sell and buy side community be paying attention to.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. It's a good question. It's a question we talk about internally here as well. So CECL is an accounting exercise, right? It's not a reflect -- that $40 million to $60 million, in our opinion, is not a reflection of additional risk within that portfolio.

It's a different way that we are now required to model and provision in a new accounting regime. And I would say, it makes it harder for all of us. You guys, investors as well as us.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. Okay. But it doesn't change any way whether you're thinking of buybacks or loan growth or anything, there's no impact to that. It's -- other than on the balance sheet, of course.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Right. We will not operate our bank any differently or think about credit any differently than we do today.

--------------------------------------------------------------------------------

Operator [16]

--------------------------------------------------------------------------------

Your next question comes from Jared Shaw with Wells Fargo.

--------------------------------------------------------------------------------

Jared David Wesley Shaw, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [17]

--------------------------------------------------------------------------------

I guess not to beat dead horse, but sticking to CECL for a minute here. When you look at the UBNK deal, was that structured with CECL in mind? Or is there going to be an incremental mark in excess of that, the 1.8% mark you put on there because of sort of a double counting? Will that impact UBNK? Or will that impact the sort of economics of the deal?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

So I will -- we're partially answer that question. We -- obviously when we worked on that deal, we were very thoughtful of the impact. We -- that would eventually have to account for that transaction under CECL methodology.

But with that said, and an expectation that we will close it year, we're really not going to comment, and none -- and the estimates I -- we just gave were exclusive of United. Inclusive of Belmont because were all on the books at the end of the quarter, but we're not going to make any comment on CECL relative to United.

--------------------------------------------------------------------------------

Jared David Wesley Shaw, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [19]

--------------------------------------------------------------------------------

Okay. I guess does CECL now being out there changed the way you're viewing M&A as a strategy in and of itself, does that make it harder to make a deal work in your mind? Or again, sort of like with putting loans on that book. It doesn't fundamentally change the way you look at M&A.

--------------------------------------------------------------------------------

R. David Rosato, People's United Financial, Inc. - Senior EVP & CFO [20]

--------------------------------------------------------------------------------

Yes. I would say, the answer is no, and I would go back and reference what Jack said about the thoughtful M&A we're doing is a long-term perspective about gaining market share, getting and growing new customer basis.

And so an accounting -- new accounting regime will change the recorded deal metrics in the short-term but it's not going to change that strategy. And really, CECL is very transaction -- bank-transaction-deals specific.

--------------------------------------------------------------------------------

John P. Barnes, People's United Financial, Inc. - Chairman of the Board & CEO [21]

--------------------------------------------------------------------------------

And Jared, it's Jack. I would say one common view I've heard in the industry discussions is that CECL and the requirements for longer duration -- greater reserves for longer duration portfolios is likely over time to discourage banks from holding residential real estate loans on their books, for instance. And that would seem to be logical, and it makes you then wonder whether the economics change and maybe rate expectations, spread expectations change on certain types of lending because of that, which seems very counter to the idea that a change in accounting approach would drive one of the less -- least risky businesses to hire reserves but that's what it's doing.

--------------------------------------------------------------------------------

Jared David Wesley Shaw, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [22]

--------------------------------------------------------------------------------

Okay. And then just finally from me. You had mentioned there could be broader market concern, I guess, around the economy. How does that -- how do you view growing the equipment finance and some of the other -- I guess, specifically equipment finance lending in light of that? Do you feel that you want to slow that down if you think they're coming to the belly of the cycle or the beginning of the end of the cycle? Or is that -- you're still expecting to see good growth in that over the next year?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Well, right now, we are expecting the economic activity to remain somewhat in the -- at the levels and in the zone it's in, if you will. So there's nothing in the data that's telling us that GDP is going to slow or that unemployment is going to increase and the consumer's going to slow spending. There is a piece of information like the manufacturing data, for instance, once in a while, but generally we feel that we're not on the verge of a recession.

And we're certainly not changing our approach to any of the businesses, including equipment finance. We have studied and know that the equipment finance portfolio we expect will do well when challenged in a recessionary environment, but the growth will slow as small businesses slow their borrowing in those environments.

--------------------------------------------------------------------------------

Operator [24]

--------------------------------------------------------------------------------

Your next question comes from Casey Haire with Jefferies.

--------------------------------------------------------------------------------

Casey Haire, Jefferies LLC, Research Division - VP and Equity Analyst [25]

--------------------------------------------------------------------------------

Wanted to follow up on the NIM. I think we're all kind of impressed by the loan yields holding up. Was wondering, was there a pickup in purchase accounting on the quarter?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Very modest, about $2.5 million linked quarter and on around may be a basis point to the NIM but was not a driver.

--------------------------------------------------------------------------------

Casey Haire, Jefferies LLC, Research Division - VP and Equity Analyst [27]

--------------------------------------------------------------------------------

Got you. Okay. And then -- so the resi mortgage reduction, is there -- is that -- did you get the low-hanging fruit? Or is there more opportunities to do that? Or any other balance sheet restructurings to help to fend the NIM going forward?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

What really happened in the residential mortgage portfolio has been our strategy for the last 3 quarters, which is really to be less aggressive on origination rate, so working for wider spreads.

The reduction was larger in the third quarter just because the level of interest rates dropped and refi activity picked up so much. So we had substantially greater number of loans pay off, and we just slowed the flow of replacement. But that working for wider spreads was -- is definitely the objective. That's how we will manage the pace of the remixing.

--------------------------------------------------------------------------------

Casey Haire, Jefferies LLC, Research Division - VP and Equity Analyst [29]

--------------------------------------------------------------------------------

Okay. And just following up on the deposit side. You guys obviously did a good job in being proactive. The loan-to-deposit ratio did tick up over 100%. I know you had that big deposit kind of walk out the door, but what -- can you just give us some thoughts on your ability to be -- to continue to be proactive with the loan-to-deposit ratio above 100%?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. We -- if you put the clock back 3, 4 years ago, we were -- we had quite a few -- quite a long period of time we were 100%, and we talked about how hard we were working to grow deposits. In this quarter, I would -- besides the $500 million commercial customer that out flowed, the loan-to-deposit ratio was impacted by the growth in our mortgage warehouse, which hit a record level of almost $1.7 billion. That will subside and take up a bit of that pressure off over time. We're -- obviously, we manage on a week-to-week basis the commercial retail and government banking deposits relative to the cost and the volumes. So we will only strive to keep that number below 100%, most -- almost every quarter we do. It's up 1% this quarter.

--------------------------------------------------------------------------------

Casey Haire, Jefferies LLC, Research Division - VP and Equity Analyst [31]

--------------------------------------------------------------------------------

Okay. Great. And just last one for me, just -- you mentioned the loan yield's coming in above existing, the mortgage warehouse obviously a big contributor to the loan growth this year -- this quarter? What are the yields there? And then equipment finance the new money yields there, and is that the VAR staff that's being accretive to the yield?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Sure. A couple of things. The first I would say, and I -- we said this on the last quarter, the differential between new business yields last quarter and the portfolio yield was 50 -- about 50 basis points. That did contract this quarter. This quarter was about 30 basis points. They're still positive and nicely positive but not quite as positive, it had to do with the drop in 1-month LIBOR which was about 25, 26 basis points linked quarter. The mortgage warehouse spreads came in bit in the quarter but are a little north of 200 -- 2%, 200 basis points.

--------------------------------------------------------------------------------

Operator [33]

--------------------------------------------------------------------------------

Your next question comes from David Bishop with D.A. Davidson.

--------------------------------------------------------------------------------

David Jason Bishop, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [34]

--------------------------------------------------------------------------------

Heading back to deposits. On one of your competitors, their conference call this morning I know plotted about an 8-point differential between peak deposit cost and current rates you're out there paying. Just curious, if you have like a similar number where you've seen the overall cost of deposits, I guess, peak to currently?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

I'm not sure we heard everything you said. But you were asking about our current existing deposit cost relative to new business that's going on?

--------------------------------------------------------------------------------

David Jason Bishop, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [36]

--------------------------------------------------------------------------------

Yes, new business and maybe how it compares to where you were at the, I guess, the peak maybe at the summer. How far you've sort of come off the peak of average deposit costs?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Well, as you saw, average deposit costs came down 4 basis points in the quarter. The way we really think about it is where we're trying to specifically raise deposits either in retail CDs or in money markets and kind of what those specials are, so to speak.

And what I said in my comments is prior to the end of the second quarter, we lowered CD, promotional CD rates twice. And then in the third quarter, we lowered money markets twice. The -- for example today, we have a -- we're raising 6 months CD about a $180 million across our franchise.

We would be expecting that to come down as right now we have a little over 80% chance, as what the market pricing is. There are -- the Fed move at the end of the month. So we will be bringing our CD special rates down, and then also our money market promos down as we get a little closer to that day. But if I think about the -- those rates today relative to deposit costs, that relationship is not fundamentally different than where it was 3 months ago.

--------------------------------------------------------------------------------

David Jason Bishop, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [38]

--------------------------------------------------------------------------------

Got it. I think in the preamble, you noted that, it was in the other operating expense category, there was a number of I guess quasi, unusual onetime items. Just curious, in totality, how much flowed through the other expense category this quarter.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. It was $8 million.

--------------------------------------------------------------------------------

David Jason Bishop, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [40]

--------------------------------------------------------------------------------

And that feels more as unusual onetime type -- I think you mentioned some legal type expenses. So review those...

--------------------------------------------------------------------------------

R. David Rosato, People's United Financial, Inc. - Senior EVP & CFO [41]

--------------------------------------------------------------------------------

Definitely onetime. Not in the run rate.

--------------------------------------------------------------------------------

David Jason Bishop, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [42]

--------------------------------------------------------------------------------

Okay. And in terms of the effective tax rate, looked like that was a little bit lower than the first couple of quarters. Is there anything unusual there? May be some guidance into the filed quarter (inaudible) in 2020.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

No. That was just -- in the quarter, we filed our 2018 taxes, and we have a fairly large low-income housing tax portfolio and favorable impact on the tax rate. So a little bit of catch up once all the K-1s came in from those investments. We haven't followed up for too many years, but it's a normal third or fourth quarter of that for us.

--------------------------------------------------------------------------------

David Jason Bishop, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [44]

--------------------------------------------------------------------------------

Got it. Got it. And then just one final question. Just looking through the slide deck, clearly capital levels remain well below the -- well above the well capitalized rate. But total risk-based capital, is that sort of the governor here in terms of the growth profile there. I'm just curious in terms of where you see that, I guess the narrowest margin above the well capitalized range and how you think about that.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. We're a company that -- usually the capital constrained for us is total risk-based capital just because of the large commercial lending book that we have. Always easily addressed when that time is right with sub debt issuance. But at 12% it's on the low end historically but we're very comfortable with it sitting there today with the risk in our business mix.

--------------------------------------------------------------------------------

Operator [46]

--------------------------------------------------------------------------------

Your next question comes from Collyn Gilbert with KBW.

--------------------------------------------------------------------------------

Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [47]

--------------------------------------------------------------------------------

Most of my questions have been asked, and I think Casey hit on a handful of them. But just back to the loan yield, and again, I think just trying to reconcile your comments, David, about a 25 basis point cut in rates would imply 2 to 3 basis point compression in NIM. You didn't see it this quarter obviously it fared better. So just dissecting that a little bit more, the mix here is relevant.

And then also on what you did on the deposit side because I think you had guided to or you had indicated last quarter that you were thinking maybe deposit costs would still tick up this quarter but then drop in the fourth quarter. So just trying to piece this all together. So if we -- on the loan yield side, so you mentioned what the warehouse loan yields were, 200 basis points over. Just curious what the yields were -- new origination yields were on the equipment finance and then just more of your traditional C&I loans.

--------------------------------------------------------------------------------

R. David Rosato, People's United Financial, Inc. - Senior EVP & CFO [48]

--------------------------------------------------------------------------------

A couple of things there, Collyn. Hopefully, I get them all. I -- Not 2 to 3 basis points, I thought I said 3 to 4. I would also -- I probably should have mentioned, I would say, because of the lateness of the second move by the Fed there's probably a little bit of repricing left from that move in our home equity portfolio, as the cycle for a full month have all those prime-based loans priced. I don't have a number for you on that but it's a small number, but it's out there.

On the -- and actually I don't remember us saying that we thought deposit costs would tick up in the third quarter. I'm pretty sure we said the opposite, or were silent to that.

The -- and then lastly, just across the -- we really have -- we have 3 equipment platforms that are all -- that are quite different in nature, as you know, with the lowest yielding doing the larger transactions, our original PCLC. Coupons in that business run from about 4.25. Our highest yielding is the old financial federal People's United equipment finance, where we can run yields from 6.5% to 7% on average across that business. And then we -- as we talked about many times before, can run 7%, 7.5% type range on that portfolio.

--------------------------------------------------------------------------------

Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [49]

--------------------------------------------------------------------------------

Okay. So you're not seeing -- or you're not seeing much compression then on new origination yields within that segment? It just doesn't seem like there's a lot of variation, I don't think, from what you have indicated in the past.

--------------------------------------------------------------------------------

R. David Rosato, People's United Financial, Inc. - Senior EVP & CFO [50]

--------------------------------------------------------------------------------

Well, I would say, there's pricing pressure extended mostly in the largest one PCLC. But I would say, across those 3 businesses, the managers fight that every day and do an exceptionally good job. There's -- across -- we talk many times about how diversified all of our lending businesses are. We are seeing pressure in our large corporate. We talked about mortgage warehouse, PCLC. Commercial real estate is relatively steady. LEAF has been steady and somewhat -- we've actually, in the quarter, had some businesses where we were able to widen spreads.

--------------------------------------------------------------------------------

Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [51]

--------------------------------------------------------------------------------

Okay. Okay. That's great. Just then just shifting to loan growth. So I'm pretty sure, although maybe it's wrong again. But on the loan growth guide, I thought you guys were thinking before UBNK you were 10% to 12% for the year, is that correct? Is that what your prior guidance was?

--------------------------------------------------------------------------------

R. David Rosato, People's United Financial, Inc. - Senior EVP & CFO [52]

--------------------------------------------------------------------------------

Yes, correct.

--------------------------------------------------------------------------------

Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [53]

--------------------------------------------------------------------------------

Okay. Okay. So you're there more or less year-to-date. So just trying to think about -- and Jack, I appreciate your comments kind of broadly and how you're seeing your customer behavior and such, but just curious -- and mortgage warehouse obviously was elevated this quarter maybe some flow through in the fourth quarter but just sort of -- how you sort of see some of the pipeline's trending as you go into the fourth quarter as it relates to loan growth?

--------------------------------------------------------------------------------

Jeffrey J. Tengel, People's United Financial, Inc. - President [54]

--------------------------------------------------------------------------------

Collyn, this is Jeff Tengel. We see the fourth quarter, the pipelines are still -- I would characterize them as being in good shape, pretty consistent with where we saw them coming into the third quarter. There's obviously some variables there, the mortgage warehouse lending business being a big one. Some of that's offset by the fourth quarter, historically being a pretty strong quarter for our equipment finance businesses.

So we still feel pretty good about the health of the pipeline going into the fourth quarter. We saw an elevated level of payoffs in the third quarter in a number of our businesses, which -- if that does not occur in the fourth quarter, would be a benefit. A lot of M&A activity, a lot of capital markets activity that impacted some of our businesses that we're hopeful won't occur in the fourth quarter.

--------------------------------------------------------------------------------

Operator [55]

--------------------------------------------------------------------------------

(Operator Instructions) Your next question comes from Brock Vandervliet with UBS.

--------------------------------------------------------------------------------

Brocker Clinton Vandervliet, UBS Investment Bank, Research Division - Executive Director & Senior Banks Analyst of Mid Cap [56]

--------------------------------------------------------------------------------

Just going back to a couple of these comments that touched on CECL and the loan-to-deposit ratio. It would seem like in the growth headwind that you referenced, could you accelerate some of that process by potentially selling down some of the resi exposure dilutive to your asset yield somewhat pejorative under CECL, as you mentioned. You'd create some more shelf space for the LD ratio? Why not do that?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

We could. Last quarter, we were asked about, could we do that in New York multi-family? And we said, yes, we could. And they're -- both are profitable portfolios. So we think and talk about it. Our ALCO discusses strategies like that from time to time.

But we usually get back to -- we're comfortable with the credit risk, we have the capital to support it. They're making money for us, and it gives us more time to remix the balance sheet. We don't feel we need to accelerate the remix of the balance sheet because we don't call those things, I mentioned, none of them are overly concerning to us.

--------------------------------------------------------------------------------

Brocker Clinton Vandervliet, UBS Investment Bank, Research Division - Executive Director & Senior Banks Analyst of Mid Cap [58]

--------------------------------------------------------------------------------

Got it. Okay. And separately, on the funding side. Is there anything you'd call out in terms of the cadence of CD or FHLB repricing in the fourth quarter that would -- or first quarter next year that would allow you to now step down those rates more quickly?

--------------------------------------------------------------------------------

R. David Rosato, People's United Financial, Inc. - Senior EVP & CFO [59]

--------------------------------------------------------------------------------

I guess I'd say 2 things. One is the wholesale borrowings that we do in the markets are from the home loan step-down, those costs step-down nicely because they are much more market sensitive. So they will pretty much move with 1-month LIBOR.

On the customer funding side, we're obviously subject to what our competitors are doing across their portfolios, retail, commercial, et cetera.

The good news in that is the industry is being quite disciplined. As we talked about on this call, we were a little early in some of those moves, but we've seen more -- we've seen other banks be aggressive as well, which is a great thing.

--------------------------------------------------------------------------------

John P. Barnes, People's United Financial, Inc. - Chairman of the Board & CEO [60]

--------------------------------------------------------------------------------

And there is a lot of turn in the CD book. So if you think about -- into the future quarters, if rates drop and the market lowers rates, we'll be able to benefit from that as CDs mature and reprice.

--------------------------------------------------------------------------------

Operator [61]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

John P. Barnes, People's United Financial, Inc. - Chairman of the Board & CEO [62]

--------------------------------------------------------------------------------

Thank you. In closing, we're pleased with the strong third quarter performance, which was highlighted by another quarter of record earnings, stable net interest margin, lower deposit costs, continued strong fee income, well-maintained expenses and sustained excellent asset quality. Thank you for your interest in People's United. Have a good night.

--------------------------------------------------------------------------------

Operator [63]

--------------------------------------------------------------------------------

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