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People's United Financial Inc (PBCT) Q2 2019 Earnings Call Transcript

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People's United Financial Inc (NASDAQ: PBCT)
Q2 2019 Earnings Call
Jul 18, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the People's United Financial Inc. Second Quarter 2019 Earnings Conference Call.

My name is Gigi [Phonetic] and I'll be your coordinator for today. [Operator Instructions] I would now like to turn the presentation over to Mr. Andrew Hersom, Senior Vice President of Investor Relations for People's United Financial Inc. Please proceed, sir.

Andrew S. Hersom -- Senior Vice President-Investor Relations

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

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

John P. Barnes -- Chairman and Chief Executive Officer

Thank you, Andrew. Good afternoon. We appreciate everyone joining us today. Let's begin by turning to the second quarter overview on Slide two. We are pleased with our second quarter performance. Operating earnings of $135 million increased 24% from a year ago and operating return on average tangible common equity of 14.6% improved 40 basis points. On a per common share basis, operating earnings were $0.34, up $0.02 year-over-year.

These strong results reflect continued success of our strategy. Balancing organic growth with thoughtful M&A. Higher revenues and our continued emphasis on controlling costs generated a second quarter efficiency ratio of 55.8%, an improvement of 260 basis points from the prior year quarter and 150 basis points linked quarter.

Total revenues of $454 million grew 15% from a year ago due to increases in both net interest income and non-interest income. We experienced particularly strong non-interest income results highlighted by a record quarter for customer interest rate swap income.

The net interest margin of 3.12% improved 2 basis points from a year ago, but declined 8 basis points from the first quarter. While new business yields remain higher than the total loan portfolio yield, the margin contracted primarily due to increased deposit costs and the acquisition of Belmont.

Period-end loans and deposits increased 9% and 7% respectively from March 31st, driven by the addition of Belmont and organic growth. Excluding Belmont, loan and deposit balances increased 1% and 2% respectively.

Our organic loan growth continued to highlight the importance of our diversified business mix. Strong production in mortgage warehouse lending, core middle market C&I, healthcare and equipment finance more than offset the continued headwinds in commercial real estate and planned reductions in residential mortgage balances.

We continue to see good levels of business activity across our markets and remain optimistic about the growth opportunities in the second half of the year. We are also encouraged by our continued success gathering deposits. Results this quarter benefited from higher than expected municipal balances and in large short term deposits from the commercial customer.

Despite observing some recent modest easing in deposit pricing, we still view the market as highly competitive. As we have previously indicated, we expected deposit cost increases to continue for two to four quarters following the end of the Fed tightening. As such, our deposit costs were up 10 basis points for the quarter.

However, we remain focused on controlling pricing and recently made our second move in the last two months to lower CD deposit cost. As I'm sure you all know, earlier this week we announced the acquisition of United Financial Bancorp, a holding company for United Bank. We are excited about this financially attractive transaction that further deepens the bank's presence in Connecticut, our largest and most profitable market, and also enhances our franchise in Western Massachusetts. We look forward to working closely with the United team to integrate the companies to best serve our combined customer bases.

With the closing of the Belmont acquisition in April, we begin to leverage our expanded customer and employee base to build upon our strong organic growth in Massachusetts, particularly in the Greater Boston area. We are specially pleased with Belmont's commercial real estate team, which is generating good production. Integration continues to go extremely well. The core system conversion will take place later this month and we remain confident in achieving the transactions attractive returns.

Adding to the momentum our franchise is generating in the Greater Boston area. We opened the new branch in the Seaport District of the city earlier this week. We are excited to have a location in this vibrant and growing part of Boston to serve our customers. We're also pleased to announce Board of Directors approved the repurchase of up to 20 million common shares, which reflects our strong capital position and commitment to returning capital to shareholders.

It is important to note the share repurchases will be made at the discretion of the company following the close of the United acquisition. With that, here's David.

David Rosato -- Senior Executive Vice President and Chief Financial Officer

Thank you, Jack. Turning to Slide 3, net interest income of $340.1 million was up, -- 13, was up $15.3 million or 5% from the first quarter. The loan portfolio contributed $30.8 million of the increase to net interest income and benefited from higher yields on new business.

Net interest income also benefit $2.1 million from an additional calendar day in the second quarter. The primary offsets to these increases were higher deposit costs, which reduced net interest income by $14.4 million. In addition, lower balances in the securities portfolio and increased borrowing costs, lowered net interest income by $1.8 million and $1.4 million respectively.

As displayed on Slide 4, net interest margin of 3.12% declined 8 basis points linked quarter. The loan portfolio had a 6 basis point favorable impact on the margin as new business yields remained higher than the total portfolio yield.

However, increased deposit costs caused the margin to contract 14 basis points. Consistent with the projection we provided in April, the addition of Belmont negatively affected the margin by six basis points for the quarter before purchase accounting adjustments. However, the net effect of Belmont purchase accounting adjustments served to offset this impact by approximately 4 basis points.

Turning to loans on Slide 5, Average balance is $38.2 billion, an increase by $3.2 billion or 9% from the first quarter. On a period-end basis, loans ended the quarter at $38.6 billion, up $3 billion or 9% from March 31st. These increases were driven by the addition of Belmont and organic growth. Excluding the acquisition average end period end balances increased $490 million and $383 million respectively were 1% on each basis.

Organic growth was primarily driven by mortgage warehouse lending. Middle Market, C&I across the franchise and equipment finance. Mortgage warehouse balance ended the quarter at $1.2 billion, up $340 million linked quarter. CNI growth also benefited from good results in our healthcare vertical and equipment finance continue to experience strong production by [Indecipherable].

The largest offsets to these increases were lower balances, excluding the addition of Belmont in commercial real estate and residential mortgage. Commercial real estate continued to be impacted by the headwinds, we have discussed previously, including elevated competition and continued higher payoffs. The reduction in residential mortgage balances was planned as we remix the balance sheet given recent acquisitions having a higher percentage of lower yielding residential mortgages than our stand-alone portfolio.

Balances in the transactional portion of the New York multi-family portfolio, which is in run off mode, ended the quarter at $881 million, down $59 million from March 31st. The portfolio has run off less than anticipated as balances have only declined $86 million since year-end. As such, we now expect the runoff to be $200 million to $300 million for the full year. A decrease from our expectation in January of $400 million to $500 million.

Moving onto deposits on Slide 6, average balances of $39.2 billion increase $2.8 billion or 8% linked quarter while period end balances of $39.5 billion were up $2.6 billion or 7%. These results were driven by both the addition of Belmont and organic growth. Excluding the acquisition average and period end balances increased $713 million and $600 million respectively, or 2% on each basis. Deposits benefited from higher than expected municipal balances and a $500 million short term deposit from a commercial customer. Our interest bearing deposit data is 37% since the beginning of the current cycle of increasing interest rates, up 5% points from 32% at the end of the first quarter. In comparison, our loan yield data is 41% during the same period, a decline of 1 percentage point linked-quarter from 42%.

Looking at Slide 7, non-interest income had a very strong quarter at $106.3 million, an increase of nearly $12 million or 12% on a linked-quarter basis. The result was primarily driven by a record quarter of customer interest rate swap income, which increased non-interest income by $4.6 million. $2.4 million in higher commercial banking lending fees, reflecting higher prepayment income and loan syndication fees.

A $1.2 million increase in bank service charges primarily resulting from an additional calendar day in the second quarter. And higher investment management and cash management fees, which collectively improve non-interest income by $1 million. Conversely, insurance revenue was down $1.8 million in the quarter, reflecting the seasonality of commercial insurance renewals.

On Slide 8, non-interest expense, $278.4 million increased $1.2 million linked quarter. Included in the second quarter were $6.5 million of merger related costs in the following categories. $4.7 million in professional and outside services, $1.5 million in compensation and benefits, and the remaining $300,000 in occupancy and equipment and other.

In comparison, the first quarter incurred $15 million of merger related costs with nearly $12 million in other non-interest expense, primarily reflecting the cost at 15 branch closures associated with the Farmington Bank acquisition.

Excluding merger related cost, non-interest expenses of $271.9 million were up $9.7 million or 4% linked quarter. The largest drivers of the increase was $5.9 million and higher compensation and benefit costs, primarily reflecting the addition of Belmont and $1.4 million an increase professional and outside expenses. Overall, Belmont added approximately $7.2 million to operating expenses in the quarter.

Turning to Slide 9, the efficiency ratio of 55.8% improved 150 basis points from the first quarter and 260 basis points from a year ago. We are very pleased with the significant progress we have made and remain focused on seeking ways to improve operating leverage.

Asset quality was once again exceptional across each of our portfolios, as demonstrated on slide 10. Originated non-performing assets as a percentage of originated loans and REO at 56 basis points were up modestly linked quarter, but remain below our peer group and top 50 banks.

A single C&I account drove the increase in non-performing assets for the quarter. Net charge-offs of 5 basis points improved from an already low level and continued to reflect the minimal loss content in our non-performing assets.

As we have previously said, sustaining excellent asset quality is an important lever in building long term value and a hallmark of People's United. As such, even though the credit environment continues to be benign and has for an extended period, we remain committed to our conservative and well-defined underwriting process that has served us well for so many years.

Briefly, on Slide 11 and 12, return on average assets improve 8 basis points linked-quarter to 104 basis points while return on average tangible common equity increase 110 basis points, the 14.1%. On an operating basis, return on average assets was 106 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 the call up for questions, I want to draw your attention to slide 13 as we have provided an update to our full year 2019 goals.

As a reminder, the goals updated in April simply reflected the addition of Belmont as People's United stand-alone goals were unchanged. Given the current interest rate environment and the expectation of monetary policy easing by the Federal Reserve. We have adjusted our full year goals for net interest income and net interest margin. Please note this goals do not include United Financial. Our updated full-year 2019 goals are as follows. That interest margin is expected to be in the range of 3.05% to 3.15% compared to the previous range of 3.10% to 3.20%. Embedded in this expectation is the assumption of two 25 basis point decreases in the Fed funds rate.

Our prior assumption was for no change in the Fed funds rate during the year. As a result of our lower NIM expectation, we anticipate net interest income growth to be in the range of 11% to 13%, down from 13% to 15%. Importantly, the full-year goals, loans, deposit, non-interest income, non-interest expense, provision, effective tax rate and capital remain unchanged.

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

Questions and Answers:

Operator

Ladies and gentlemen, we are ready to open the lines up for your questions. [Operator Instructions] Your first question comes from Casey Haire from Jefferies. Your line is now open.

Casey Haire -- Jefferies & Company, Inc. -- Analyst

Thanks. Good evening guys. A question for you on the NIM guide, the two cuts is that July, September. And then what does that assume you guys are able to do on the deposit side to offset the asset yield pressure?

David Rosato -- Senior Executive Vice President and Chief Financial Officer

What -- wait -- what the guidance is based on is July and December cuts, Casey.

Casey Haire -- Jefferies & Company, Inc. -- Analyst

Okay. So very limited in -- OK, and so effectively one as it relates to '19. And then what is it -- what can you guys do on the deposit side or liability side to offset that pressure?

David Rosato -- Senior Executive Vice President and Chief Financial Officer

Sure. So, we thought a couple things. Jack referenced a little bit. Within the last week, we brought down some of our promotional money market rates getting ahead of what we expect from the Fed. So we're down about 20 basis points in money market in a couple of our larger markets. The -- in the -- in our CD book, we've actually made two separate moves in the last two months. So cumulatively, our six-month CDs, special that we're running down 30 basis points and, are 11 months is down 60 basis points cumulatively. And we actually have an inversion in our CD rates now. It'll take a little bit of time for that to roll through. But with those moves and more that we expect post the Fed actually moving on July 31st. We'll do our best to offset as much of the NIM pressure as we can.

Casey Haire -- Jefferies & Company, Inc. -- Analyst

Okay, great. Just switching to a long growth guide, the 10 to 12. I'm doing my math right that implies it, a pretty decent range of about $700 million, a little less $700 million between the low and high points. How our pipeline shaping up? I know -- you had a very nice mortgage warehouse quarter and that can be seasonal. Just trying to get a finer point on the loan growth guidance based on pipelines.

John P. Barnes -- Chairman and Chief Executive Officer

Casey, this is Jack. I'll let Jeff answer that. He'll give you some color on what's going on in the different business lines and markets.

Jeffrey J. Tengel -- Senior Executive Vice President, Commercial Banking

Hi, Casey, this is Jeff Tengle. We think the pipelines are -- they're still pretty healthy that we haven't seen a material decline or decrease in the pipelines from what we've been moving through during the first half of the year. So our expectations are that the second half all being equal will look pretty similar to the first half kind of setting aside that, oftentimes we'll see the second half have a little bit of a increase as we move through in December. In particular, the equipment finance businesses tend to have a very strong end of the year. We haven't seen any signs of slowdown in any of the businesses that we've been highlighting here, acknowledging the headwinds in commercial real estate. But apart from that, everything seems to be in pretty good shape.

Casey Haire -- Jefferies & Company, Inc. -- Analyst

Ok, great. And just last for me. The other income line and obviously the swaps were very strong this quarter, but the fee guide does imply a pretty, pretty decent step down 91 [Phonetic], 95 [Phonetic] in the back half of the quarter if I'm doing the math right is that -- with what you guys are thinking?

John P. Barnes -- Chairman and Chief Executive Officer

So Casey, we think the income is running better than we expected and we really had a great second quarter. There is some volatility as you know, and some of those line item. So, the way I think about it is that if that strong momentum continues, we're going to be on the high end or maybe even above the guidance. But we didn't change it just because of the volatility of some of those line items.

Casey Haire -- Jefferies & Company, Inc. -- Analyst

Got you. Thank you.

John P. Barnes -- Chairman and Chief Executive Officer

Thank you.

David Rosato -- Senior Executive Vice President and Chief Financial Officer

Thank you.

Operator

Thank you. Your next question comes from Ken Zerbe from Morgan Stanley. Your line is now open.

Ken Zerbe -- Morgan Stanley -- Analyst

Great. Thanks. Good evening.

John P. Barnes -- Chairman and Chief Executive Officer

Hi Ken.

Ken Zerbe -- Morgan Stanley -- Analyst

I was hoping you guys could talk about the 20 million shares that you had authorization for, I understand it needs to wait until you guys closed, but, if you talk about thereafter like how quickly would you like to purchase or try to finish the 20 million shares?

John P. Barnes -- Chairman and Chief Executive Officer

The way I would think about it Ken is, its -- we -- it's important to have that in place. We are looking at that at this point in time as an opportunistically. So, we're not putting out a timeframe and an expectation that all those shares will be bought immediately. It's really subject to market conditions post the close of the United transaction.

Ken Zerbe -- Morgan Stanley -- Analyst

Got you, OK. So it could be anywhere from a couple quarters to a few years?

John P. Barnes -- Chairman and Chief Executive Officer

Yes.

Ken Zerbe -- Morgan Stanley -- Analyst

Okay.

John P. Barnes -- Chairman and Chief Executive Officer

That's a reasonable expectation we said here today.

Ken Zerbe -- Morgan Stanley -- Analyst

Understood. I guess along the same lines when I think about your capital ratios and using the 20 million shares, and it real looks -- my calculations, it looks like it reduces your capital ratios. If you did it all one chunk by 90, 100 basis points on a CE Tier 1, is there a capital level or capital ratio that you're targeting that you don't want to go below? That might be the most restrictive, help us think about the timing of the buybacks?

John P. Barnes -- Chairman and Chief Executive Officer

There is what I would say is you, your number is directionally correct. We could buy all those shares back in a relatively short period of time and still be find from our capital target.

Ken Zerbe -- Morgan Stanley -- Analyst

Okay. That helps. And then, switching gears a little bit. Other fee income looks like it was one of the biggest. I understand your guidance is for a lower fee income going forward, but so what was the other fee lines, because the $4.3 million in your slide?

John P. Barnes -- Chairman and Chief Executive Officer

There was a bunch of odds and ends. Well, one of the main drivers was you'll see on the balance sheet that we have equity securities. We have one equity security position, which has to be mark-to-market through the income statement. That was about $800,000. We also had a little over $400,000 of all the income in the quarter. And after that, it's pretty much odds and ends.

Ken Zerbe -- Morgan Stanley -- Analyst

Got you. Okay. And then one last question, if I could. In terms of the transactional in your city multi-family portfolio, just trying to reconcile, obviously, and I heard your comments that the paths are slower. At the same time kind of you and many other banks talk about payoffs in their normal theory portfolio being much faster. Is there anything unusual about this portfolio? Like, why wouldn't the payoffs affect this portfolio? Or is this more -- little more multi type rent stabilized stuff that might. Still [Phonetic] your books are lot longer?

John P. Barnes -- Chairman and Chief Executive Officer

Yes. This is a New York Broker originated multi-family. It is certainly not all brand controlled, but there is some portion of that portfolio that does have rent controlled properties in it. See, we had a high level of maturities in that portfolio last year and then refinancings away from us out of that portfolio. The actual maturities this year are -- came down quite a bit, but when we gave original guidance, we were expecting the level of refinancing to remain elevated. And I think what we've all learned now, through the first six-months of this year is the activity levels in that mark, best segment of the market have really slowed down. And that led to quite a bit of a much larger portfolio at this point in the year than we originally expected.

Ken Zerbe -- Morgan Stanley -- Analyst

All right. Thank you very much.

Operator

Thank you. Your next question comes from Jared Shaw from Wells Fargo Securities. Your line is now open.

Jared Shaw -- Wells Fargo Securities -- Analyst

Hi, guys. Good evening.

John P. Barnes -- Chairman and Chief Executive Officer

Hi Jared.

Jared Shaw -- Wells Fargo Securities -- Analyst

Just so, first question on the United deal and with their exposure to DC solar. They took a $9 million write down this quarter, is that in addition to the write down that you provided us on Monday, or is that part of the evaluation that you put on their?

David Rosato -- Senior Executive Vice President and Chief Financial Officer

That are, already 1.7. It was the full amount of the balance sheet exposure plus prior tax credits received. United's number is a subset of what we had conservatively model.

Jared Shaw -- Wells Fargo Securities -- Analyst

Okay. So these aren't -- these are -- that $9 million is, I guess, the way I look at its coming out of that or part of that $41.7 million total exposure?

David Rosato -- Senior Executive Vice President and Chief Financial Officer

Correct.

Jared Shaw -- Wells Fargo Securities -- Analyst

Not. Not any addition. Good.

David Rosato -- Senior Executive Vice President and Chief Financial Officer

Yes.

Jared Shaw -- Wells Fargo Securities -- Analyst

Okay. And then what's the anticipated total goodwill from the United Deal?

David Rosato -- Senior Executive Vice President and Chief Financial Officer

The -- I don't have that number in hand -- handy right now. Give me a sec. And it's, it's subject to quite a bit of change as Marks [Phonetic] moved.

Jared Shaw -- Wells Fargo Securities -- Analyst

Sure. Yes. We can follow up afterwards.

David Rosato -- Senior Executive Vice President and Chief Financial Officer

Yes.

Jared Shaw -- Wells Fargo Securities -- Analyst

That's easier.

John P. Barnes -- Chairman and Chief Executive Officer

I'd appreciate it.

Jared Shaw -- Wells Fargo Securities -- Analyst

Okay, sure. And then just -- following up on Ken's question on the multi-family. When you're saying that the pace of refi's. So, are you also seeing exactly driven by the pace of just sale, secondary market sales of those properties slowing?

David Rosato -- Senior Executive Vice President and Chief Financial Officer

Yes.

Jared Shaw -- Wells Fargo Securities -- Analyst

And we're in the past, OK. So it's not that people are holding onto their loans past that reset day. It's just more that the year anticipated sales schedules has slowed down.

John P. Barnes -- Chairman and Chief Executive Officer

Yeah. And just the transaction activity in that market has slowed down. As people react to the new legislation.

Jared Shaw -- Wells Fargo Securities -- Analyst

Okay, got it. Those were, those were the questions I was looking for. Thanks a lot.

John P. Barnes -- Chairman and Chief Executive Officer

Thank you.

Operator

Thank you. Your next question comes from Brock Vandervliet from UBS. Your line is now open.

Brock Vandervliet -- UBS Equity Research -- Analyst

Just following up on that last question on multi-family. Would you consider selling that portfolio since it now looks like it may be around for much longer than we thought it would be?

John P. Barnes -- Chairman and Chief Executive Officer

We thought about it from time-to-time and we certainly could. But today, as rates go down and it's hanging around a little longer, that's a good thing from our perspective. So, yeah, I would never say never, but I would guess we will not wind up selling those assets.

Brock Vandervliet -- UBS Equity Research -- Analyst

Okay, fair enough. And what's your sense of your rate sensitivity. Now, relative to the shortcut results we saw in the Q given Belmont? Has it changed? Has that changed materially?

John P. Barnes -- Chairman and Chief Executive Officer

No, its -- Belmont was slightly liability sensitive, but once they were aggregated into us, remember, they are only up roughly 5% of our assets size. They had a very modest impact overall.

Brock Vandervliet -- UBS Equity Research -- Analyst

Okay. And do you appear to be using the forward curve. As you look into next year where the curve implies several more cuts? Are you comfortable with your rate positioning or/are there things you would look to do in addition to hedge that out? I guess, United will help you in that regard because it is more liability sensitive.

John P. Barnes -- Chairman and Chief Executive Officer

Yes, United will have a small positive impact -- small reduction in our asset sensitivity. The -- I think the fund -- the real question now, we spend our time on, is feeling pretty good about the assets side of our balance sheet. From a rate sensitivity perspective, credit spreads have held up, have been steady. The -- our securities portfolio it's a longer duration and it provides a nice hedge there. The hedging at where we are today is a pretty bullish statement because any 10 year swap is immediately negative to carry perspective versus one month LIBOR or three-month LIBOR. So, we haven't rushed out to hedge any -- anything in the derivatives market right now.

If we get substantially more constructive on rates going down and the curve steeping, our outlook then it will continue to evaluate that. But as we said here today, we're modestly asset sensitive and we're -- we're comfortable with that turning off.

David Rosato -- Senior Executive Vice President and Chief Financial Officer

And as we told you, we're actively moving now to manage our deposit costs and we'll continue to look at that if the forward curve is right and what's going to happen with short rates.

Brock Vandervliet -- UBS Equity Research -- Analyst

All right. Thank you. Great color.

Operator

Thank you. Your next question comes from Collyn Gilbert from KBW. Your line is now open.

Collyn Gilbert -- Keefe, Bruyette & Woods -- Analyst

Thanks. Good evening, guys.

John P. Barnes -- Chairman and Chief Executive Officer

Hi Coll.

Collyn Gilbert -- Keefe, Bruyette & Woods -- Analyst

Maybe if we could just start, David, with some margin. The margin guidance that you guys gave the 3.05% to 3.15%. I know you touched on some of this, but just thinking about it in terms of, that the waterfall chart that you guys put in the slide deck and, on slide four, just further, the impact this quarter, if we could maybe -- if you could kind of walk through how that would look in your guidance.

I know you talked about a little bit on the deposit side and where you're seeing, -- you're reducing some promotional rates. So that's helpful. But just also just thinking about the loan, maybe how in the scenario you're thinking about loan yields. I guess that's really the big thing on the loan yields. Now, on the borrowing side, too.

David Rosato -- Senior Executive Vice President and Chief Financial Officer

Sure. The -- what I would say, is just looking at slide four, the big number their is the 14 basis points around deposits and what I would say is in the second quarter, what we were able to do to lower deposit costs was very modest. Right. And the moves that I talked about a few minutes ago were later in the quarter and didn't impact the quarter. When I think about the assets size -- side, we have about 43% of our loans are prime of one month LIBOR. So that's where the headwind is. And I think that, those loans will continue to reprice down as one month LIBOR moves down. Just before the curve is correct, we have a nice offset in our securities portfolio and our other -- in our equipment finance business, which is very nice yields, great cash flow and it's all fixed rate. The -- as I think about the back half of the year with the Fed moving its deposit management, that is where the work has to be done. And just generally speaking, I think it's been hard for banks to be too aggressive in lowering deposit costs until we get the cover up the Fed making that first move. And I think we all collectively think that's right around the quarter.

So our margin guidance of 3.05% to 3.15% is looking, is assuming a step down in margin of approximately 3 basis points a quarter as kind of how I would term it, position it today.

Collyn Gilbert -- Keefe, Bruyette & Woods -- Analyst

Okay, OK. That's helpful. And then if we take that. But if we just transition, sorry, for a minute to UBNK. So I believe you guys had said in your deal metrics that you were using consensus estimates for 2020, I think of a $1.09.

It looks as if now having digested UBNK's case quarter and speaking with them, that achieving that is going to be a big challenge. How does that come into play with your outlook in terms of your EPS accretion targets and the like?

John P. Barnes -- Chairman and Chief Executive Officer

The UBNK for 2019 it's not going to have a big impact on us just because of the closing of the deal. It's the way we think about that is, more how we what we do once we take, once we merge with them and some of the balance sheet changes that we make at that point. That obviously going to be dependent on time of closing and how we feel and where interest rates are at that time.

Collyn Gilbert -- Keefe, Bruyette & Woods -- Analyst

Okay. It's really more the 2020 number that I'm honing in on. Like if it shapes out to be a $1 versus a $1.09. How -- you think, you still, is what you're saying, you still think you've enough sort of balance sheet optionality there to recover that whatever lost earnings may happen for the company between now and when you close the deal or now and when you integrate the deal?

David Rosato -- Senior Executive Vice President and Chief Financial Officer

Yeah. That's our position.

Collyn Gilbert -- Keefe, Bruyette & Woods -- Analyst

Okay. And then just on the buyback. I'm sorry. I think you said it, David. So your -- if we look at your capital targets in that Tier 1, the 10 to 10.5 range. And you're -- did you -- did I hear you correctly in saying that you, even if you did execute on this buyback pro forma with UBNK you still would have, still be within those targeted capital ranges?

David Rosato -- Senior Executive Vice President and Chief Financial Officer

Yes. Our operating target for CET 1, would allow us to buy that stock back in a relatively quick period of time, a quarter or two, and still be above our operating targets.

Collyn Gilbert -- Keefe, Bruyette & Woods -- Analyst

Okay. All right. I guess, I'm trying to figure that out. We can maybe talk offline, I guess just thinking conceptually, UBNK is going to lower your capital levels. You're not really going to be generating much capital just given the probably the direction of earnings, but you're saying you well, you're still optimistic?

David Rosato -- Senior Executive Vice President and Chief Financial Officer

Yes, but we are also the first thing we said on the first question that came around about the buyback was we are positioning that as it's nice to have it in place. We've lowered our dividend payout ratio quite a bit over the last couple of years. It's down around 50% today. It's are -- so we have another capital management tool, but we did position it as opportunistically. So, we are not saying we'll definitely buy all those shares back in a predetermined amount of time.

Collyn Gilbert -- Keefe, Bruyette & Woods -- Analyst

Okay, OK. And then just finally tying this all together with kind of a NIM guide. If we kind of assume that full year range, that would mean in the fourth quarter. You could theoretically perhaps have a NIM as low as, say, 295 or so, you're going into 2020 with a 295 NIM with continued pressure kind of assumed to still be coming in the first quarter just because of that December rate cut that would be factored in. That it just that's a -- how are you thinking about that and just in the totality of still wanting to generate, you know, EPS growth or will 2020 be a year that maybe you don't generate EPS growth or you don't hit your financial targets? I'm just trying to tie it all together. It just seems like it's going to be a meaningful drop in earnings per share in 2020 with this NIM.

Jeff Tengel -- President

Collyn, hi, it's Jeff. I think that as we described on lowering the NIM guidance where we're looking at the high potential of the Fed lowering rate. Right, and that's the primary driver of that change in the guidance. And as we go into through the rest of the year and into 2020, there is a lot of levers, right, to use to so kind of fight that headwind. We -- what we've described the work that we continue to do on remixing the assets on the balance sheet and improving yields and changing the makeup of percentage of portfolios. We continue to work on growing DDAs and we continue to work on our deposit costs. So there's a lot of different ways that we can fight the pressure on rates coming down with the Fed. None of us know where that's going to go, really. And I think our challenge and our job is to react to what is going on in the market externally and then manage what we can manage. So, again, if you would just assume that the December rate decline is going to kick in and then maybe there is another one that's a isolation and that doesn't give us any credit for taking actions that bite that off.

Collyn Gilbert -- Keefe, Bruyette & Woods -- Analyst

Got it. Okay.

Jeffrey J. Tengel -- Senior Executive Vice President, Commercial Banking

I would just add to -- that 295 NIM that you quoted feels very aggressive to me. As much lower than what I think will wind up being -- and --

Collyn Gilbert -- Keefe, Bruyette & Woods -- Analyst

You know -- Jeff, sorry. You know, David might that also I have UBNK already in my model. So that includes UBNK and next year does not. But any way, I didn't mean that continue.

Jeffrey J. Tengel -- Senior Executive Vice President, Commercial Banking

Well, OK. I would, so I was just going to say, if the interest rate environment gets crystal clear that we are going to substantially lower rates, there's going -- we are going to have to take substantial action, to protect our NIM. That's both on hedging, on the asset composition side, as well as the liability side.

Collyn Gilbert -- Keefe, Bruyette & Woods -- Analyst

Okay, OK. I will leave it there. Thanks, guys.

David Rosato -- Senior Executive Vice President and Chief Financial Officer

Thank you.

Jeffrey J. Tengel -- Senior Executive Vice President, Commercial Banking

Thanks Collyn.

Operator

Thank you. [Operator Instructions] Your next question comes from Matthew Breese from Jaffrey. Your line is now open.

Matthew Breese -- Piper Jaffray -- Analyst

Good evening, everybody.

John P. Barnes -- Chairman and Chief Executive Officer

Hi Matt.

Matthew Breese -- Piper Jaffray -- Analyst

I just want to continue the NIM discussion hop on the NIM pick pile, sort to speak. Just curious, is there any other drivers of compression? And maybe you could just, give us a sense for what a credible yield amount to this quarter for the NIM and where you expect it to go by the end of the year? In terms of a headwind?

John P. Barnes -- Chairman and Chief Executive Officer

Really not much of a factor in the quarter. The real driver, the positive around our NIM is we still have a nice differential between the new business that's hitting the books and our current loan portfolio yield. That's been going on for quite a few quarters now. There's benchmark interest rates are moving down, but spreads are staying constant. And I think that metric will continue in the back half of the year as well.

Matthew Breese -- Piper Jaffray -- Analyst

And what is the difference now between the incremental new loan and what's on the books?

John P. Barnes -- Chairman and Chief Executive Officer

That's a little over 50 basis points.

Matthew Breese -- Piper Jaffray -- Analyst

Okay. And then is the -- I know you mentioned you had a rather large $500 million commercial deposit sounds short term in nature with the expectation that was off the balance sheet. Is that a driver of NIM compression as well? And if so, how much?

John P. Barnes -- Chairman and Chief Executive Officer

It was a modest driver of NIM compression in the second quarter. It won't be here for too much of the third quarter and it was on the balance sheet for about half of the second quarter.

Matthew Breese -- Piper Jaffray -- Analyst

Okay.

John P. Barnes -- Chairman and Chief Executive Officer

We just caught it out or because it was large and it came and that will be done.

Matthew Breese -- Piper Jaffray -- Analyst

Okay. And then you mentioned that some of the growth this quarter came from the healthcare space. Could you just give us a sense for what your exposure is to the segment, what types of loans you're providing there and geographically where it's some, where it's centered?

Jeffrey J. Tengel -- Senior Executive Vice President, Commercial Banking

Sure. Hi, this is Jeff again. The healthcare -- our healthcare business is mostly senior housing. Seniors, if you think about us and it's mostly in our footprint, so we're providing financing for the sense of delivering skilled nursing facilities as we'll also do. There's not much in the way of, if you think about hospitals because so many in the hospitals have consolidated in the Northeast. So there's probably a bigger concentration in the senior housing and some of the not for profit agencies.

Matthew Breese -- Piper Jaffray -- Analyst

And what's the size of that portfolio? How much should they grow this quarter?

David Rosato -- Senior Executive Vice President and Chief Financial Officer

This quarter they grew $100 million, little over $100 million.

Matthew Breese -- Piper Jaffray -- Analyst

Okay, on a balance off?

John P. Barnes -- Chairman and Chief Executive Officer

About $750 million-ish.

Matthew Breese -- Piper Jaffray -- Analyst

Okay. And then my last question just in regards to [Indecipherable], we're getting pretty close to the deadline here and just curious if there's any sort of additional commentary or expectations for day one and then go forward provision.

John P. Barnes -- Chairman and Chief Executive Officer

We're not prepared to talk about putting any numbers out there. Our expectation will be doing that in early October on our third quarter conference call, as well as putting an additional disclosure in the queue. Comments are very similar to last quarter, which is where we have a cross-functional team across the bank has been working on [Indecipherable] for over a year now. We have develop all of our models. We're just about ready to start parallel testing on the back half of the year and we'll provide more, more clarity in three months.

Matthew Breese -- Piper Jaffray -- Analyst

Understood. All right. That's all I had. Thanks for taking my questions.

John P. Barnes -- Chairman and Chief Executive Officer

Sure, Matt.

Operator

Thank you. Your next question comes from Brock Vandervliet from UBS. Your line is now open.

Brock Vandervliet -- UBS Equity Research -- Analyst

Thanks for the follow up. Just an accounting, net purchase -- purchase accretion for Q2. Do you have that number?

John P. Barnes -- Chairman and Chief Executive Officer

I don't off the top of my head. It was similar to, somewhat similar to the last quarter, I can follow up with what the exact number was.

Brock Vandervliet -- UBS Equity Research -- Analyst

Okay, I think, I was about $6 million last quarter. Great. I'll follow up offline.

John P. Barnes -- Chairman and Chief Executive Officer

Okay, thanks.

Brock Vandervliet -- UBS Equity Research -- Analyst

Thank you.

Operator

Thank you. 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 -- Chairman and Chief Executive Officer

Thank you. In closing, we are pleased with our strong second quarter performance, which was highlighted by a 24% increase in operating earnings from a year ago, 260 basis point improvement year-over-year in the efficiency ratio, reflecting higher revenues. Particularly strong non-interest income growth and well controlled expenses, solid organic loan and deposit growth, new business yields remaining higher than the total loan portfolio yield and sustained exceptional asset quality. Thank you for your interest in People's United. Have a good night.

Operator

[Operator Closing Remarks].

Duration: 51 minutes

Call participants:

Andrew S. Hersom -- Senior Vice President-Investor Relations

John P. Barnes -- Chairman and Chief Executive Officer

David Rosato -- Senior Executive Vice President and Chief Financial Officer

Jeffrey J. Tengel -- Senior Executive Vice President, Commercial Banking

Jeff Tengel -- President

Casey Haire -- Jefferies & Company, Inc. -- Analyst

Ken Zerbe -- Morgan Stanley -- Analyst

Jared Shaw -- Wells Fargo Securities -- Analyst

Brock Vandervliet -- UBS Equity Research -- Analyst

Collyn Gilbert -- Keefe, Bruyette & Woods -- Analyst

Matthew Breese -- Piper Jaffray -- Analyst

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