Q3 2020 People's United Financial Inc Earnings Call
Following the prepared remarks, there will be a question and answer session. If you would like to participate in this portion of the call. Please press star followed by one at any time during the conference.
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I would now like to turn the presentation over to Mr. Andrew.
There are some senior.
Senior Vice President of Investor Relations for People's United Financial Inc. Please proceed sir.
Good afternoon, and thank you for joining us today.
On the call to review our third quarter 2020 results are Jack Barnes Chairman.
Chairman and Chief Executive Officer.
David Risotto, Chief Financial Officer Kurt.
Kirk Walters corporate development and strategic planning.
Tangle, President and Jeff Wade Chief Accounting Officer. Please.
Please remember to refer to our forward looking statement.
And one of this presentation, which is posted on the Investor Relations website.
W.W. dot people dot com backslash investors with that I'll turn the call over to Jack Thanks.
Thank you Andrew.
No [laughter] appreciate everyone joining us today and hope you and your loved ones are remaining safe and healthy.
Before discussing the results I want to take a moment to thank our employees, who have successfully adapted to the pandemic driven environment and its many challenges.
This has enabled them to effectively meet customer needs successfully entered as always checking our new Threed digital identity protection service and for.
And further advance strategic initiatives.
Very proud of the dedication our employees have displayed creative ways that they have supported customers and each other during these uncertain times.
This is a reflection of the deeply ingrained culture peoples, United has which has been built over many years and differentiates the company and the markets we serve.
Let's begin by turning to slide two.
[laughter], we're pleased with our third quarter financial and operating performance.
Which is the result of strong execution across the franchise.
Operating earnings of $144.7 million increased 43% linked quarter and 7% from a year ago.
On a per common share basis operating earnings were 34 cents up 10 cents from the previous quarter.
And in line with the prior year.
These results benefited from solid fee income well maintain expenses reduced provision linked quarter and a lower effective tax rate.
Partially offsetting these favorable items or net interest margin compression.
Our continued thoughtful approach to expense management and the realization of projected cost savings from acquisitions drove a 300 basis point improvement year over year in the third quarter efficiency ratio to 53.8%.
We are particularly pleased with our ability to successfully control cost and strengthen operating leverage.
Led to significant enhancement and the efficiency ratio in recent years.
A full year efficiency ratio has improved annually since 2013.
We reported a ratio of 62.3%.
By 2019, the ratio was down to 55.8% and we expect this improving trend will continue and 2020.
As of the year to date efficiency ratio stands at 53.8% [laughter] Importantly, we remain focused on expense management discipline. We also steadfast in our commitment to investing strategically in the business such.
Such investments include further enhancing digital capabilities, delivering innovative products and services and strengthening leadership and talent.
The third quarter.
I wasn't definitive this commitment.
We announced the formation of our business transformation office.
In August this specialized team will lead the company's efforts related to digitization process automation and fintech relationships.
We are excited about the enhancements and efficiencies this team will deliver moving forward.
During the quarter.
Our focus on expanding digital capabilities, what's evident and Treasury management as we bolstered their suite of technology and.
In partnership with multiple Fintech firms, we implemented integrated.
[laughter] payables and invoices pay solutions as well as an electronic billing and payment offering.
These additions deliver simple secure digital capabilities, well commercial banking customers.
In July we introduced always checking the premium digital identity protection service, which we are providing free to all personal checking account customers.
This offering build on our core value proposition of service and protection. We are confident that it will further attract and retain customers.
And in August we expanded the regional leadership team and our wealth management business People's United Advisors with the addition of senior executives and New York and Massachusetts. The addition.
The addition of these two seasoned industry veterans will further benefit customer retention and drive profitable growth in their respective regions.
Moving onto the balance sheet.
Period end loans and deposits each declined 1% linked quarter, leaving the loan to deposit ratio unchanged at 91%.
[laughter] commercial period end loans grew $422 million from June Thirtyth.
Due to rapid mortgage warehouse balances and the solid.
And the solid growth by lease within our equipment Finance segment.
Conversely, the retail period end loans decreased $643 million, mostly due to our planned reduction of residential mortgages as we further remix the balance sheet with a focus on higher yielding portfolios.
The modest decline in period end [laughter] deposits resulted from run off of higher cost wholesale funding and lower municipal balances, partially offset by strong commercial deposit growth.
It is evident.
And then it has significantly affected the economy demand within our commercial real estate and middle market, because the United businesses has been limited due to the reduced economic activity.
Funding provided by P.P.P. loans.
Well, where demand is particularly demonstrated by Cnine line utilization rates, which declined for the second consecutive quarter and I'll below their historical quarterly averages.
Similar to the second quarter, we did experience some areas of growth [laughter] in particular mortgage warehouse continues to benefit from robust origination activity in both the purchase and refinance segments as well as from a solid growth and new customer relationships.
In addition leaves has continued to perform well primarily due to increased customer demand for technology hardware and software.
This trend is attributable to the strong growth from a number of significant long standing vendor relationships with Lee and var technologies, which leave acquired last year.
[laughter] the total impact of the pandemic on a long term economy is unknown, however improvements in economic activity during the quarter provided us a level of cautious optimism as we look ahead.
Another positive indicator it wasn't a significant reduction in the number of our customers needing relief as the total loan deferrals.
Were approximately $1.6 billion or 3.5% of total loans at September Thirtyth.
Now for more than $7.1 billion or 15.8% of total loans at the end of June.
Additionally, deferrals have continued to decline since the close of the third quarter.
These results are consistent with the expectations, we provided on our second quarter earnings call. We believe this improvement is a testament to our long held conservative underwriting approach and reflects the strong capital and liquidity profile of our customers.
The forbearance level.
Iran was comprised of almost 1.4 billion of second deferrals and 217 million of loans still in their first deferral period.
Notably our relationship managers continue to maintain high level contact with customers to closely evaluating their financial condition and help them navigate their specific situation.
As expected the large largest concentration of second to pearls, where in our $1.1 billion hospitality portfolio, which includes hotels.
Total deferrals in this portfolio were approximately $670 million at quarter end, which includes $640 million.
Second the pearls.
In comparison total deferrals at the close of the second quarter were $876 million. The hotel industry has been significantly impacted by the pen down so there.
The severity of the impact varies by property.
Influenced by many factors, including hotel pipe primary customer base and location.
The challenges faced by this industry will likely extend into next year.
As such we expect to offer modifications to most of our hotel customers after their deferral period ends.
Our strong relationship with these customers has facilitated ongoing conversations which provided granular views of their current operations and financial resources. This.
This has driven a constructive and collaborative process to determine appropriate terms to continuous support.
Importantly, our hotel portfolio is well diversified, particularly by geography.
No only 6% or approximately $55 million of our hotel loans are collateralized by properties in New York City.
We have confidence that the strength and experience of our hotel owner operators.
Our originated portfolio should enable them to successfully emerged from a pandemic driven industry slowdown.
[noise] two other portfolios, we have previously called out as significantly affected by the pandemic commercial <unk> retail.
And restaurants have performed well and experienced a substantial decline in deferrals.
Our $3.5 billion Cree retail portfolio has seen deferrals improved from $1.5 billion at the end of the second quarter to $138 million [laughter] at the close of September.
As a reminder, this portfolio does not have material exposure to enclosed malls and essential tenants such as grocery stores pharmacies and big box home improvement locations comprised roughly roughly half of the portfolio.
Similarly, deferrals in the restaurant portfolio, which has approximately $500 million loan balances have declined from $290 million at June 32.
To $45 million at the end of the third quarter the pool.
The portfolio is mostly and well known national quick service franchises, which have established experienced a lesser degree of disruption, especially where drive-thru traffic remains strong.
[noise] deferrals have continued to improve since the close of the quarter and notably our franchise finance business no longer has any deferrals and its restaurant book.
Finally, we announced the sale of People's United Insurance Agency to assured partners well $120 million in cash.
[laughter] transaction allows us to simplify our operating model and monetize the company's long term investments in this business at an attractive multiple of 3.7 times trailing 12 month revenues.
It also enables us to focus additional resources on delivering core banking products and services and further enhance digital offerings.
Which will generate superior returns for shareholders over time.
The transaction is projected to close in the fourth quarter subject to customary closing conditions.
We expect to realize a pretax net gain of approximately $75 million to $80 million, which will improve the C. T. One ratio by 15 basis points.
Before turning the call over to David to discuss the third quarter in more detail I want to thank our colleagues peoples, United Insurance agency, well, they're meaningful contributions to people's United over the years.
With that I'm trying to get there.
Right there [laughter].
Thank you Jack I.
I will begin on slide three we are pleased with our strong third quarter financial performance, which was highlighted by pre provision net revenue of $198.9 million.
Increase of 4% linked quarter, and 15% kind of a year ago.
On an operating basis P. piano, our 203.5 million was down 3% compared to the previous quarter due to a modest increase in expenses.
Marked an improvement of 14% year over year.
Provision for credit losses on loans of 27.1 million decreased 53.7 million from the second quarter and further strengthen the allowance for credit losses to total loans by three basis points to 94 basis points or 99 basis points excluding PDP.
The loans.
The provision was comprised of 17.3 million of net charge offs, which were up 18.8 million linked quarter and an increase of 9.8 million in the allowance for credit losses down from an increase of 72.3 million in the second quarter.
As you can see on slide three we break down the allowance for credit losses by loan portfolio segment. The total allowance at September Thirtyth of nearly $424 million up from $414 million at the end of the second quarter provide significant coverage as it represents.
More than six times, our annualized third quarter net charge offs at 138% of nonperforming loans.
The allowance at quarter end reflects consideration of a baseline economic forecast as well as a more adverse scenario each prepared as of late September.
The baseline scenario reflects modest improvement in most key economic variables compared to the baseline scenario employed at the end of the second quarter.
The more adverse scenario includes continued on continued uncertainty associated with the status and extent of further economic stimulus and the upcoming election.
The cumulative year to year to date allowance build is approximately $177 million, which increased the allowance to total loans ratio by 37 basis points since year end 2019, or 42 basis points, excluding PPP balances.
Moving to slide four net interest income of 391.4 million decreased 14.2 million or 4% from the second quarter, primarily due to a smaller average balance sheet and lower margin.
The loan portfolio unfavorably impacted net interest income by $21.6 million in.
In addition, lower average balances in the securities portfolio reduced net interest income by 2.2 million.
These headwinds were partially offset by lower deposit costs and an additional calendar day in the third quarter, which benefited net interest income by 5.7 million and $2.5 million respectively.
And reduction in borrowings also favorably impacted net interest income by 1.4 ammonia as average balances decreased 1.6 billion from the second quarter.
Year to date, we have reduced borrowings nearly $4 billion on a period end basis as a result of $6 billion of deposit growth since the beginning of the year.
Of note net interest income benefited $14.7 million from PPP during the quarter, which reflects $9.9 million and related fees and 4.8 million and net interest income.
[laughter] as displayed on slide five net interest margin of 297 was eight basis points lower than the second quarter.
The loan portfolio unfavorably impacted the margin by 15 basis points, primarily driven by new business yields remaining lower than the total portfolio yield and downward repricing of floating rate loans.
The largest offset to this negative effect was our continued continued disciplined managing deposit pricing, which benefited the margin by four basis points average deposit costs were 29 basis points in the third quarter compared to 34 basis points in the second quarter, marking the fifth concern.
During the quarter of lower deposit costs.
In addition, one more calendar day in the third quarter and reduced borrowing benefited the margin by a collective three basis points.
PPP had a three basis point unfavorable impact on the margin in the third quarter.
As you will recall the impact in the second quarter was negligible as the loans were not all.
For the full three months.
Turning to loans on slide six average balances were down $300 million or 1% from the second quarter, while period end loans decreased 221 million or 1%.
Both average and period end loans benefited from record mortgage warehouse balances and solid growth by leaf.
Mortgage warehouse period end balances closed the quarter at $3.8 billion up 768 million from June Thirtyth.
Strong results continued to be driven by robust mortgage origination activity and the addition of new customer relationships lead.
Leaves average and period end balances grew 3% and 5% respectively. In the second quarter, primarily driven by customer demand for technology hardware and software.
These favorable results were more than offset by lower retail balances and continued low loan demand in our commercial real estate and middle market Cnine businesses due to subdued economic activity and funding provided by PPP loans.
$643 million decrease and retail period end loans was mostly attributable to our planned reduction in residential mortgages, which drove balances down 528 million from the close of the second quarter.
[laughter] balances in the transactional portion of the New York multifamily portfolio, which is in runoff mode ended the quarter at $559 million down 62 million linked quarter and 178 million year to date.
In addition, the period end balances for the United loans, we have chosen to run off was 905 million.
The decline of 57 million from June Thirtyth, and 208 million since year end.
Our expectation for each of these portfolios to run off between $200 million to $300 million for the full year is unchanged.
Finally quarter end PPP balances up 2.6 billion were up modestly from 2.5 billion at June Thirtyth.
On an average basis.
Pp loans were 2.5 billion up approximately 700 million linked quarter as these loans were not on the books for the full three months of Q2.
Moving onto deposits on slide seven average balances were up 1.1 billion or 2% from the second quarter.
While period end balances declined $298 million or 1%.
The modest decline in period end deposits resulted from the run off of higher cost wholesale funding and lower municipal balances, partially offset by strong commercial deposit growth, particularly in mortgage warehouse.
Both average and period end balances grew across all deposit categories with the exception of time.
Average time balances decreased nearly 1.4 billion from the second quarter, while pureed, while on a period end basis balances were down more than 1.2 billion the deal.
The decrease in time deposits is a reflection of customer preference for liquidity during this uncertain economic and low interest rate environment.
Notably period end non interest bearing deposits increased for the sixth consecutive quarter.
Balances were up $445 million from the end of the second quarter to 14.1 billion.
Noninterest bearing deposits now account for more than 28% of total period end balances up from 22% at year end.
Looking at slide eight noninterest income rebounded in the third quarter to 101.1 million up 11, and a half million or 13% from the second quarter and reflected improved results across most business as well.
The largest increase was bank service charges, which grew 4.2 million due to higher levels of customer activity.
Commercial banking lending fees were up 2.1 million, primarily driven by increased cnine lower prepayment fees.
Higher investment management, and cash management fees collectively benefited noninterest income by 2.1 million.
Insurance revenues increased $700000, while operating lease income grew 600000.
In addition, other noninterest income was up 3.3 million. The primary driver of the increase was $1.5 million and higher gains on the sale of residential mortgage loans.
The largest offset to these increases was a one and a half million dollar reduction in customer interest rate swap income, which continues to be unfavorably impacted by subdued demand for commercial real estate loans.
[noise] on slide nine noninterest expense of $293.6 million decreased $10.4 million or 3% linked quarter. The third quarter included 4.6 million of non operating costs a reduction of 13.
9 million compared to the second quarter and we're in the following categories.
$2 million in other non interest expense.
1.4 million in professional and outside services 900000 in occupancy and equipment.
And 300000 and compensation and benefits.
Excluding non operating costs noninterest expense of $289 million increase three and a half million or 1% compared to the previous quarter.
The modest increase was primarily attributable to 2.9 million and higher other expenses.
800000, and higher professional and outside service costs 500000 in additional operating lease expenses.
The largest offset to these increases was $600000 and lower compensation and benefit.
Briefly on Slide 10, you can clearly see the 300 basis point improvement year over year in the efficiency ratio.
As Jack referenced earlier, the 53.8% efficiency ratio is a product of our ability to generate positive operating leverage and in particular realized projected cost savings from acquisitions, we were.
We will remain very diligent in our management of expenses.
We continue to be focused on enhancing operational leverage as we move forward in the current low interest rate environment.
Our asset quality remains excellent as displayed on slide 11.
Nonperforming assets as a percentage of loans and Oreo of 71 basis points was up slightly from 69 basis points in the second quarter, but remains below well below our peer group and top 50 banks.
Net loan charge offs to average total loans of 15 basis points, we're up seven basis points linked quarter Dan.
The increase was primarily driven by two accounts one represented a C.N.I. account, which was experiencing difficulties prior to the pandemic and the other what's an acquired free loan.
Turning to slide 12, the 43% increase in operating earnings linked quarter generating generated a significant improvement in returns for the third quarter.
Operating return on average assets 94 basis point increase 36 basis points from the second quarter, while operating return on average tangible common equity of 13.4% was up 530 basis points.
Finally on slide 13, we remain comfortable with our capital structure and balance sheet strength.
Capital ratios continue to be strong given our diversified business mix and long history of exceptional risk management.
It is again important to note adjusting for PPP loans, the pro forma tier one leverage ratio at quarter end is 8.6% for the holding company compared to 8.2% and 9.1% for the bank compared to 8.7.
Additionally, the TC ratio, excluding PPP is approximately 7.9% versus the reported 7.5%.
This concludes our prepared remarks, we'll be happy to answer any questions you may have operator.
Operator, we're ready for questions.
Ladies and gentlemen, we are ready to open the lines up for your questions. If you wish to ask a question. Please press star followed by one on your Touchtone telephone. If your question has been answered or you wish to withdraw your question press. The pound again, Please press star one to ask a question.
Please stand by for your first question.
Your first question comes from Mark Fitzgibbon from Piper Sandler Your line is now open.
Good evening, everyone, it's actually Jon Abiola on for Mark.
If I could one as well.
Hey, John.
I was wondering if we could just start on the expense outlook, obviously, you've you've been able to drive your efficiency ratio down over the past couple of quarters.
Where do you think this can go.
Over the next couple of years do you have do you have a target.
[noise].
We don't have a target that we're going to share publicly for the next couple of years.
What I would I would say is.
Both Jack and I talked about it in the prepared remarks, well we've been highly focused for for many years at this point on operational improvements and decrease in the efficiency ratio and we think we have a very strong and record.
That we also think we will be able to continue to work.
Down from from here.
It's in this.
In this environment, it's tougher to do as as you know.
But.
The at this point.
In the year.
There wont be sharing any targets come January one.
We're talking about year end, we hope to be back into the business.
Providing targets and guidance.
Okay I appreciate the color there on maybe just switching over to the margin I know there are a lot of moving parts.
And could you maybe share your outlook for that for the remainder of the year and maybe into 2021.
Again, you know.
I would go back to.
A question on the last quarter call about the margin from a long term perspective, so it really wasn't it yeah. The back half to 20 or 21, but just if we stayed in this interest rate environment for an extremely extended period of time, what we shared was weak.
Could conceive of the margin going down to two ways either to 90 I wouldnt.
Back away from that.
Okay, but again thats not spin.
Specific to any timeframe, most notably 2021, just if we stay here for multiple multiple years.
I think that can happen or what I would do is I.
I look at what we've been doing to pay.
To protect the margin in the.
In this environment this year and.
I think we've had a pretty good track record year to date at being able to move deposit cost down Deane April.
Being able to make.
Maintain yields in our securities portfolio, and then Oh.
The offset as much as possible the.
Floating rate loans that are on the balance sheet, which is about 45% of that book I would also add that as we call. It out in the script about nice performance low growth in our equipment finance.
Our equipment finance businesses.
Our great generators of short term fixed rate assets and the remixing of the balance sheet has been a real positive for us in the last couple of years protecting the margin.
That's very helpful. I appreciate it.
Dave Correct me, if I'm wrong I believe you mentioned that TPP balances did tick up a little bit quarter over quarter, where it was.
It was up primarily due to new customers or existing customers could you maybe provide a little bit of color on that.
Sure on an ending balance basis, they were only up a $100 million on the ground, but on an average balance basis. They were up 700 million that was more jobs.
Jobs.
The volume that went on in the second quarter was you know it's the thing up on role was was more backend loaded. So we had a more modest average balance in Q2, but we did do PPP loans right up until the end, but frankly, the volumes really trailed off as the program.
Got extended.
And we did we did make CPP loans to both.
Existing customers and new customers as well.
[noise], that's all I had thank you everybody.
Thank you thanks.
Thank you. Our next question comes from the line of Ken Zerbe from Morgan Stanley. Your line is now open.
Great. Thanks.
Some of the banks that we've heard from this quarter have been adding let's say qualitative reserves based.
True above and beyond the Moody's baseline just given the uncertainty over whether or not fiscal or federal stimulus actually gets passed.
Can you just talk about like how you balance and where you are in terms of your reserve.
Between the baseline and more adverse scenario and have you did.
I work towards the outburst recently thanks.
Yeah, Hi, John.
Yes. So this as you know baseline economic scenarios were more favorable in Q3, and then Q2.
And the two parts the two answers to your questions. So we did wait the more adverse scenario more highly in Q3 versus Q2, two condensate in some respects to to what you're alluding to we also it each quarter.
Sure have a qualitative overlays that are part of a.
The c., so process and those.
Those reflect management judgments about.
Lots of different things level deferrals.
No upgrades and downgrades in the loan portfolio as well as economic uncertainty and so we did we did.
Increased qualitative overlays this quarter as well.
All right Great and then just as a follow up in terms of your.
In terms of your higher cost borrowings obviously.
Thank God awful lot are running off a lot of those how much more.
It's like what percentage or how much in terms of dollars.
Still sort of those less desirable higher cost funding.
My seen run off.
Good good question Ken.
What I would say I I'd point you to the.
Under the remarks that we said we have really significantly been able you know about $4 billion wholesale borrowings came off a year to date.
Yeah, because we had little over $6 billion.
Deposit funding be.
A couple of points because most of those borrowings were relatively short the we were able we didnt really have a balance sheet that got that loomed right a little different than some of the peers that we've seen we were able to just as the deposits came in have the balances come off.
The.
If you look at the margin page in.
In the press release, what you will see the drop in balances, but what you also see the cost in the.
In the quarter of the wholesale borrowing lines has gone up a little bit that's kind of the remaining.
Term debt that's outstanding it's on a very low balance at this point, but that's.
That's going to be with us and so there's there's fairly marginal room to bring that piece of our funding cost down where the real opportunity is is what we've been doing the last couple of quarters, which is the continued downward repricing of our.
Our CD book and getting more and more surgical on deposit cross cost across retail commercial and our municipal business.
All right great. Thank you.
You're welcome.
Thank you. Our next question comes from the line of Dave Rochester from farm to point. Your line is now open.
Hey, good afternoon guys.
Hey, Dave.
Just wanted to start with your expectations on the loan trends going forward definitely appreciate your update on you know the one off book and then the New York City multifamily book sounds like he did not change the outlook there at all but you got your revenue running down as well.
Maybe 500 million Eclipse last couple of quarters. He just curious what's your outlook is.
Uh huh.
From that portfolio's perspective, and then.
If you expect to see potentially see and I start to bottom here and maybe grow a little bit going forward.
Thoughts on any of that would be great.
It was the first part on the multifamily Oh, Yeah, just on the rise.
On the resi on the resi piece coming down right Oh, sorry.
Yeah. So we.
We do expect the resi portfolio will continue to go down.
Go down modestly overtime.
And obviously.
Obviously heavily dependent on.
Pipelines have been very busy and then very active.
Of late but how long you know that continues is.
An uncertain right now.
Regarding see an eye.
My take is that.
Basically what I see with commercial customers and then.
In the middle market businesses, then and consumers actually is a push.
A pretty cautious approach to.
Kind of what the uncertainty is it's out there from the pandemic and it and its showing itself in kind of a de leveraging.
And.
No not any kind of pushed too you know.
Expand or take on the next project. So I think this though there's some caution right now generally help there.
You know in taking on the next new thing until people have a better sense of where things are going you know from the economy and their customers right. So I think thats why our line utilization is down a little bit I think you see it in some of the National Consumer report.
Reports, you know about general demand, so I don't know what it needs to get.
To get to a point, where we have a vaccine, but it definitely has turned a corner in terms of more.
More comfort with you know how things are going well economically and from a health perspective.
Okay, Great and then I guess just on the resi piece is there a target you have in mind for concentration.
20% of loans now and then maybe if I could ask a question about the warehouse as well you've got the great growth. There. It is large as its Ben can you hold this year with market share gains you expect a little bit of a downtick there potentially as we go into the slower month.
I did what your targets are for for that as well.
Yeah Yeah.
So Dave on the residential mortgage the if you will.
If you'll recall the the bell.
The Belmont the Farmington transactions those banks had over 50% of their loan books were in residential first mortgages. So we.
We had almost 25% of the loan book post those acquisitions.
Yeah, it's in residential mortgage is not quite as.
United concentration, what's more like ours as you just referenced we're down to about 20% right now that's.
Getting in the ballpark.
Where it's been historically historically, we call it 18% to 20%. So as Jack said I think we'll still see that portfolio come down modestly going forward, but the pace of decline of half a billion or so each quarter should start to moderate which is.
What Jack was saying.
On the mortgage warehouse I'll, just turn it over to John Yeah sure. So if you think of the mortgage warehouse business its really grown.
Due to three factors increased line utilization with our existing customers, we've been providing incremental credit to our existing customers and we've had a lot of new customers.
Particularly over the last three to six months and so as we sit here today I think it's likely I'm not ready to say is at its peak, but it's getting pretty close.
[laughter], if you think about how much further can rates go down to continue the refi market centric and that we've been experiencing that's really what they've been.
Writing to some extent so.
I think a lot of it will depend on rates, but line utilization is pretty high by historical standards and so I wouldn't I don't think it's going to go down dramatically between now and year end, but I think as you look out over the course of 2021 2022, that's likely to drift lower.
Okay, and maybe just one last quick one on the margin I just noticed that the yield on the securities book.
It's pretty stable quarter over quarter to 65, I know you bought some securities at quarter end.
Just curious what the overall yield was on those purchases and then how you're thinking about managing that book going forward, if you're going to.
Allow me to potentially run off here, a little bit if you have to reinvest at lower rate.
Just curious what your thoughts are on that.
Sure Dave.
The.
What I would say is the reason that the portfolio yield has held up so well this year, it's mostly about before.
Portfolio strategy and composition of the existing portfolio. So as you remember we have a.
[laughter], we've historically run a longer duration municipal bond portfolio. So it had a very strong call protection into over the last couple of years, we've been moving our mortgage back holdings from M.B.S. pass throughs to CMBS again too.
Achieve call protection kind of a lesson learned from 10 years ago.
And then in the mortgage backed space, we've always only bought 10 and 15 year mortgage backs. So our portfolio has held up because of the long duration and where we're not getting those bonds called away from us for the most part but that.
But then.
Secondly, because we have very little premium in the pass throughs. So we're not suffering high levels of up premium write off each quarter.
It was only up modestly for us just slightly over a million dollars linked quarter.
You're right that.
Buying bonds at at these levels are dilutive to the portfolio yield our average purchases in the quarter were about.
1.5%, we were able to achieve that because of the mix of communities relative to mortgage backs.
Our strategy going forward.
It has been and is.
To.
Reinvest cash flows we've.
We've been doing that not.
Each month, but kinda periodically as rates.
As we get opportunities I think that we'll continue to do that and then probably in the next year and we'll have more clarity.
January but I think we'll yeah, we'll see some modest growth in that portfolio as well what would drive that is more asset liability management right. If you look in the appendix you've seen our asset sensitivity move up because of all the deposits that have flown into into the back. So I think will offset a little bit.
Of that liquidity in the securities portfolio overtime.
Okay, great. Thanks for all the color I appreciate it.
You are welcome.
Thank you. Our next question comes from the line of Chris Mcgratty from KBW. Your line is now open.
Great good afternoon.
Hi, Chris.
Quick question on fee income seems it seems like you would like most.
Oh, that's good the activity levels were depressed in the second quarter any.
Anything that you're seeing unusual in terms of that hasn't rebounded yet maybe expectations for.
Back end of the year.
Yeah, you know the the big driver has been interest rate swap income for us.
Yes, it's that business is really tied for the most part to to new loan originations and then those.
Mostly commercial real estate loan volumes. There is some amount because that book is so seasoned some amount of two way flow as loans come off but it's really an origination business you [noise].
We had swap income of over $8 million fourth quarter up 19 first quarter 20.
It was only a million to this quarter. So that's a a very large change for us the 8 million.
Waters, we're probably a little inflated.
But because they weren't record quarters and the 1.2 is.
Quite a headwind right now but away from that one line item, we really experienced.
Pretty nice fee income and it was broad based it was in cash management. There was in bank service charges those at our investment management business.
As well.
[laughter].
Great and if I could ask one more.
It's a popular topic is obviously tax rates.
Could you Jimmy Kimmel comments on whether you expect the same proportional change in your tax rate. If we if we do get the Biden plan that you saw on the way down after the 16 Alexa. Thanks.
[laughter] most likely we.
We haven't we haven't really spent a lot of time.
[noise] thinking I'm thinking about you know under the buyback plan.
You know the impact and quantify that but it's pretty simple exercise once we know what the ultimate tax rates are but theres not anything really on the tax item that I think would materially that's materially different now from when we benefited from the drop.
So it should be proportional would be.
It would be our expectation.
Great. Thank you very much.
You're welcome.
Thank you. Our next question comes from the line of Steven Dome from RBC Capital. Your line is now open.
Hi, good afternoon guys.
And I apologize I got cut off the floor. So this is a repeat question, but just on the loan yields your threeforty nine what do you.
Originating.
Our.
Well so there is.
Differential between new business going on.
And the total portfolio yield that's approximately.
25 basis points to 25 call. It the 30 basis points. So you know a little over 3% to three of five it's probably the aggregate.
Ill in the quarter.
I would say loan spreads.
Held up nicely for us.
In the quarter, but benchmark interest rates came down a bit as you know.
Right right and just historically or loan spreads in line.
Well with where are you guys.
Or are they still.
Stretched.
No I would say loan spreads have been proved yeah.
You know, especially in the third quarter part of that is.
I mean, the bad news in that is we're just not doing enough love. It's right the ones that were doing more getting better spreads on and.
You know a call out to our commercial our hands weve been able in this environment to embed floors in a larger portion of our loans then we let's say year over year, our ability stronger now so that's.
So that's helped a bit as well.
Great.
And then just on the liability side your CD book, where do you think that could ultimately get down to as far as the cosco.
[noise] Yeah, that's a that's a difficult question you know what.
You know what I, what I would say is yes.
They average.
City blocks for most banks. That's included run about 11 to 12 months. So you really have to hear your turn the thing over.
The.
The.
She was just going to be where.
Your pricing those.
Those roles, we have very successfully this year each month, each quarter been able to bring CD costs.
Cost down there's more to go there but.
I've said this last quarter, it's the move and lower deposit cost is getting more surgical and broad based at this point I mean, we're already down at 29 basis points.
[noise] right right.
Appreciate the color. Thank you.
You're welcome.
Thank you. Our next question comes from the line of Brock Vandervliet from your <unk>. Your line is now open.
[noise]. Thanks.
Just.
Turning to slide.
Slide three.
The.
Ties back to an earlier question on reserving and provision methodology. It gets.
It gets.
You look at the.
You know the reserved and appeals for a couple of these categories.
Again on.
<unk> percent.
How should we think about it.
How should we think about that.
You know a number of your peers or are well above that.
[noise].
<unk>.
True, but we.
Were below almost every one of those peers and historical net charge offs and you can go back and look at that for you know over a decade and you will see that so that they may be adequately reserved at those high levels, but we would say we're adequately reserved at our level.
[noise] would you.
Would you be comfortable letting those ratios go under 100%.
Oh, it's the.
If the you know if our entire cease all process, which means.
Which means.
Economic environment Man.
Management judgment qualitative overlays et cetera, warranted that yeah.
Okay.
And in it.
Deferrals goes it was the $1.6 billion appreciated the color in your prepared remarks.
What do you think is the end game there.
Finally, deferrals kind of roll off between now and.
Year end do you.
You know get most of those back to performing and modify the rest with the little little breakage, how does that how do you think that shakes out.
Yeah. So we are definitely.
Definitely feeling good about the.
[noise] conversations that we described in my prepared remarks with the customers on.
No Bob.
[noise] circumstance around all the business, including the hospitality.
The hospitality pieces that are left the the individual owner operators and based.
Based on conversations we have had which which is.
Great bulk of of all those borrowers we've already kind of reached agreement framework to to look at how we do go forward and and we're feeling really good about about it including our part of helping them get to the other side of this.
[noise] got it okay.
Appreciate the color.
You're welcome.
Thank you. Our next question comes from the line of Matthew Breese from Stephens, Inc. Your line is now open [noise] Goodies.
Good evening.
Hi, Matt.
Just curious on the insurance agency shell whats the impact to go forward fees and expenses as we think about the cell itself was that driven more from a.
From a capital management standpoint, with the gain or was that more from a you know was that more done to optimize the pms PNM and simplify.
So.
Well, let's talk for a second about the EPS impact yeah. It's it's an incredibly moderates that yeah.
While the revenue was about $32 million a year it was.
It was it was profitable cost base was about $26 million to $28 million a year.
And so we saw [noise].
Very strong agency or long term in nature.
A lot of long term.
Producers in the business and and very well respected the the industry's been going through a pretty aggressive consolidation.
For a number of years now.
And the valuation Oh is very solid.
Solid and there was an opportunity for us as you suggested to to realize on that long term investment that we've made and and.
You know put that capital to work elsewhere [laughter] grow the business.
Understood. Okay, and then just turning to the reserve and really the provision I mean from on from all the commentary it sounds like you feel really good about the where deferrals are in and the conversation with the borrowers there is it fair to assume that the reserve built at this point is largely over.
Iran and that provisioning should reflect more reserves maintenance.
At this point.
Well, it's going to get back to what David just described in terms of the components of Cecil process and you know in order to kind of say that you'd have to be able to predict what the economic you know a and the modeling is going to produce a in the periods you know going forward and then what.
We certainly are not in a position to do that we.
Oh, that's way too much uncertainty right now.
You know where those economic.
Uh huh.
Core cast will come as we roll forward.
I think it's still Anybodys guess I mean, I know, we said we were cautiously optimistic by some of the progress I think we are cautiously optimistic, but we're not ready by any means.
Let's say that a you know the pandemic is.
No no.
Leave us with a tremendous amount of uncertainty across our businesses.
[noise] understood. Okay, and then I know, we have a number of for a few different portfolios in run off mode, but just considering how much has changed in the slow down in firemen. The economy you know.
Could we see a change in the thought process around running those books, often and maintain you know you are.
The earning assets that you have there.
[laughter] I I would say so they so we've been running it off the New York multifamily portfolio for a couple of years now that the transaction all New York multifamily very good asset yields three and three quarters percent or so that's why we haven't sold it because we're comfortable with it.
And we I can't see us changing our thought process around the United loans at this point there loans from the get go.
Were purchased that Didnt fit our business model. So it's hard to think we're going to wake up one day and said yeah, we want to.
We want to grow that those those types of portfolios.
Understood. Okay. That's all I had thanks for taking my questions.
Hey, Good luck mountain.
Thank you, ladies and gentlemen, since there are no further questions in the queue I'd now like to turn the call were to Mr. Barnes for closing remarks.
Thank you [laughter], we're pleased with the company's third quarter financial and operating performance, which is reflected in the strong execution throughout the franchise and the resilience of our workforce. We continue to be focused on generating positive operating leverage and making further strategic investments, particularly.
In our digital capabilities. These investments will continue to move the company forward.
The rapidly evolving banking landscape and deliver value to shareholders [laughter] clearly the impact of the pandemic on the long term Ami is unknown. However.
However, we remain confident that our.
Our long held conservative underwriting philosophy approach to supporting customers and diversified loan portfolio will once again differentiate people's United throughout these uncertain times. Thank.
Thank you all stay healthy and have a good evening.
[noise]. Thank you for your participation in today's conference. This concludes the presentation you may now disconnect good day.