Q3 2020 Peoples Bancorp Inc Earnings Call

[music].

Good day, ladies and gentlemen, and welcome to the peoples United Financial Inc. third quarter 2020 earnings Conference call. My name is GG and I will be your coordinator for today at this time all participants are in a listen only mode. Following the prepared remarks, there will be a question and answer session. If you would like to participate.

This portion of the call. Please press star followed by one at any time during the conference.

If assistance is needed any time during the call. Please press star followed by zero and a coordinator will be happy to assist you. As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to Mr., Andrew Hi.

There are some 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 just our chairman and Chief Executive Officer David.

David Risotto, Chief Financial Officer Kurt.

Third Walters corporate development and strategic planning.

Tangle, President and Jeff Wade Chief Accounting Officer.

Please remember to refer to our forward looking statements.

Slide one of this presentation, which is posted on the Investor Relations website.

W.W. Dot People's Dotcom backslash investors with that I'll turn the call over to Jack Thank you.

Thank you Andrew and good afternoon [noise].

Appreciate everyone joining us today and hope you and your loved ones are remain 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 free digital identity protection service and for.

And further advance strategic initiatives.

Very proud of the dedication our employees have displayed in the creative ways. 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.

We are 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.

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 was 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 has led to significant enhancements and the efficiency ratio in recent years.

For the full year efficiency ratio has improved annually since 2013.

When we reported a ratio of 62.3%.

By 2019, the ratio was down to 55.8% and we expect this improving trend will continue in 2020.

As for the year to date efficiency ratio stands at 53.8%.

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.

Well is indicative of 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 was evident in Treasury management as we bolstered their suite of technology and.

In partnership with multiple Fintech firms, we implemented an integrated.

[laughter] payables and invoices to pay solutions as well as an electronic billing and payment offering.

These additions deliver simple secure digital capabilities for 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 builds 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 regional leadership team and our wealth management business People's United Advisors with the addition of senior executives in New York and Massachusetts. The addition.

The addition of these two seasoned industry veterans, who will further benefit customer retentions 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%.

Commercial period end loans grew $422 million from June Thirtyth.

Due to record mortgage warehouse balances and a solid growth by leases 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 remixed the balance sheet with a focus on higher yielding portfolios.

The modest decline in period end.

Deposits resulted from run off of higher cost wholesale funding and lower municipal balances, partially offset by strong commercial deposit growth.

It is evident the pandemic has significantly affected the economy demand within our commercial real estate and middle market see Eni businesses has been limited due to the reduced economic activity and funding provided by PPP loans.

Well, where demand is particularly demonstrated by Cnine line utilization rates, which declined for the second consecutive quarter and up below their historical quarterly averages.

Similar to the second quarter, we did experience.

Some areas of growth.

In particular mortgage warehouse continues to benefit from robust origination activity in both the purchase and refinance segments as well as from the solid growth in 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 leaf and var technologies, which Leif acquired last year.

The total impact of the pandemic on the 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 in the K that wasn't a significant reduction in the number of our customers needing relief.

Total loan deferrals.

Were approximately $1.6 billion or 3.5% of total loans at September thirtyth down from 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 levels.

At quarter end.

Was comprised of almost 1.4 billion seconds deferrals and $217 million of loans still in their first deferral period.

Notably our relationship managers continue to maintain high levels of contact with customers to closely evaluate their financial condition and help them navigate their specific situation.

As expected the large the largest concentration though second deferrals.

We're in a $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 deferrals.

In comparison total deferrals at the close of the second quarter were $876 million.

The hotel industry has been significantly impacted by the pandemic.

The severity of the impact varies by property.

Influenced by many factors, including hotel type 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 end.

Our strong relationship with these customers has facilitated ongoing conversations which provided granular views of their current operations and financial resources. This has.

This has driven a constructive and collaborative process to determine appropriate terms to continue support.

Importantly, our hotel portfolio is well diversified, particularly by geography.

No the 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.

In our originated portfolio should enable them to successfully emerged from a pandemic driven industry slowdown.

Two other portfolios, we have previously called out as significantly affected by the pandemic commercial retail.

And restaurants have performed well and experienced a substantial decline in deferrals.

$3.5 billion Cree retail portfolio has seen deferrals improved from $1.5 billion at the end of the second quarter to $138 million.

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 Russell roughly half of the portfolio.

Similarly, deferrals in the restaurant portfolio, which has approximately $500 million of loan balances have declined from $290 million at June 30.

To $45 million at the end of the third quarter the port.

The portfolio is mostly in well known National quick service franchises, which have established experienced a lesser degree of disruption, especially where drive-thru traffic remained strong.

Deferrals have continued to improve since the close of the quarter and notably our franchise finance business no longer has any deferrals in its restaurant book.

Finally, we announced the sale of People's United Insurance Agency to assured partners were $120 million in cash.

The 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.

And we expect to realize a pretax net gain of approximately $75 million to $80 million, which will improve the CE tier 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 at People's United Insurance agencies, while they're meaningful contributions to people's United over the years.

With that Im Chris Davis.

Thank you Jack.

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, an increase of 4% linked quarter and 15% from a year ago.

On an operating basis, PPNR 203.5 million was down 3% compared to the previous quarter due to a modest increase in expenses, but 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 20 basis points to 94 basis points or 99 basis points excluding FTTP.

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 portfolios 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 right.

Represents more than six times, our annualized third quarter net charge offs at a 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.

Okay.

Moving to slide four net interest income of 391.4 billion 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.

A reduction in borrowings also favorably impacted net interest income by $1.4 million 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 in related fees and 4.8 million in net interest income.

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 on.

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 at least.

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.

Leaf 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 in 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.

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 it.

In addition, the period end balances for the United loans, we have chosen to run off with 905 million.

The decline of $57 million from June Thirtyth, and $208 million since year end.

Our expectation for each of these portfolios to write off between $200 million to $300 million for the full year is unchanged.

Finally quarter end PPP balances of 2.6 billion were up modestly from $2.5 billion at June Thirtyth.

On an average basis.

Pp loans were 2.5 billion 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 mine.

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 and.

Average time balances decreased nearly $1.4 billion from the second quarter, while a period, 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 comes.

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 in 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.

On slide nine non interest 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 30.

Teen point $9 million compared to the second quarter and we're in the following categories too.

$2 million in other non interest expenses $1.4 million in professional and outside services 900000 in occupancy and equipment and 300000 and compensation and benefits.

Excluding non operating costs non interest expense of $289 million increased three and a half million or 1% compared to the previous quarter.

The modest increase was primarily attributable to $2.9 million in higher other expenses fix.

600000, and higher professional and outside service costs.

500000 in additional operating lease expenses.

Arduous offset to these increases was $600000 in 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.

As Jack referenced earlier, the 53.8% efficiency ratio is a product of our ability to generate positive operating leverage and in particular realize projected cost savings from acquisitions.

We will remain very diligent in our management of expenses and 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 non.

Nonperforming assets as a percentage of loans in 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. The increase was primarily driven by two accounts. One represented a CN I account, which was experiencing difficulties prior to the pandemic.

And the other Watson acquired Cree loan.

Turning to slide 12 of the 43% increase in operating earnings linked quarter generated it generated a significant improvement in returns for the third quarter operating return on average assets of 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 a 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 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 its actually John Mattio long on for Mark.

Maybe 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 a target.

We don't have a target that we're going to share publicly but for the next couple of years.

What I would say is.

Both Jack and I talked about it in the prepared remarks.

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 record.

That we also think we will be able to continue to work.

Down from from here.

It's.

In this environment, it's tougher to do as as you know.

But.

The at this point.

In the year.

Won't be sharing any targets.

Come January.

What we're talking about year end, we hope to be back into the business provide.

Providing targets and guidance.

Okay I appreciate the color there.

Maybe just switching over to the margin I know there are a lot of moving parts.

Right.

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 the.

The back half of 20 or 21, but just if we stayed in this interest rate environment for an extremely extended period of time. We shared was we could conceive of the margin going down to two weighted to 90 I wouldnt.

Back away from that.

Outlook, but again thats not.

Specific to any timeframe, most notably 2021, just if we stay here for multiple multiple years.

I think that can happen and what I would do is I.

I look at what we've been doing to protect the margin.

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.

Being able to.

Maintain yields in our securities portfolio, and then to ups to 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 fine.

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 of protecting the margin.

Thats very helpful. I appreciate it.

Correct me, if I'm wrong I believe you mentioned that TPP balances did tick up a little bit quarter over quarter.

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 rationalmed, but on an average balance basis. They were up $700 million that was more.

Jobs.

The volume that went on in the second quarter was.

The thing up gold was was more back end loaded so we had a.

More about us average balance in Q2, but we did two ppt loans right up until the end, but frankly, the volumes really trailed off as the program got expenses.

And we did we did make CPP loans to both.

Existing customers and new customers as well.

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 been adding I might say qualitative reserve space.

Above and beyond the Moody's baseline just given the uncertainty over whether or not this goal or federal stimulus actually gets passed.

You just talked about like how you balance.

Where you are in terms of your reserves.

Between the baseline and more adverse scenario and have you.

And were towards the adverse recently thanks.

Yes, Hi, Ted.

Yes. So this as you know.

Baseline economic scenarios were more favorable in Q3, and then Q2.

And the two parts to two answers to your questions. So we did wait the more adverse scenario more highly in Q3 versus Q2 to compensate in some respects to to what you're alluding to.

We also.

Each quarter have a qualitative overlays that are part of.

The c. so process and.

Those reflect management judgments about.

Lots of different things level deferrals.

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.

Some of your higher cost borrowings, obviously UK Hank awful lot are running off a lot of those how much more room do you have like what percentage or how much in terms of dollars are still sort of those less desirable higher cost funding.

Seeing run off.

Good question, Ken what I would say I'd point you to.

Kind of the remarks that we said we have really significantly been able about $4 billion of wholesale borrowings came off.

Year to date.

Because we had no over $6 billion of.

Deposits funding the.

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 the loan.

It's a little different than some of the peers that we've seen we are able to join us as the deposits can you mid half the balances come off the.

If you look at the margin page in the press.

In the press release, what you will see the drop in balances of what you'll also see is 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 and sort of 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 costs 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 CD book and getting more and more surgical on deposit costs costs across retail commercial at our municipal business.

All right great. Thank you.

You're welcome.

Thank you. Our next question comes from the line of Dave Rochester from Pontus point. Your line is now open.

Hey, good afternoon guys.

Hey, Dave.

Let's start with your.

Start with your expectations on the loan trends going forward definitely appreciate your update on yes.

Book, and then the New York City multifamily book.

Sounds like you did not change the outlook there at all that you've got your resi running down as well.

Maybe 500 million Eclipse last couple of quarters, just curious what's your outlook is.

Yes.

From a portfolio perspective.

And then.

We expect to see potentially see an eye towards the bottom here and maybe grow a little bit going forward any thoughts on any of that would be great.

It was the first part on the multifamily yes just.

On the resi on the resi piece coming down, but it's all sorry.

Yes, so we.

We do expect that the resi portfolio will continue to.

Go down modestly over time.

And obviously have.

Obviously heavily dependent on.

Pipelines have been very busy and then very active.

Of late but how long that continues is.

And the uncertain right now.

Regarding see an eye.

My take is that.

Basically what I see with commercial customers.

It'll market businesses and consumers actually is.

Pretty cautious approach to.

Kind of what the uncertainty is out there from the pandemic and and it's showing itself in kind of a de leveraging.

And.

Yes.

Not any kind of pushed too.

Expand or take on the next project. So I think that so theres some caution right now generally out there.

In taking on the next new thing.

Until people have a better sense of where things are going 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.

Because.

Ill about general demand, so I don't know if it needs.

To get to a point, where we have a vaccine, but it definitely has turned a corner in terms of.

More comfort with you know how things are going 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 where it is 20% of loans now and maybe if I could ask a question about the warehouse as well that's a great growth there it is largely to spend.

The whole this here with market share gains you expect a little bit of a down tick there potentially as we go into the slower month.

Good what your targets are for that as well.

Yes, so Dave on the residential mortgage the.

If you'll recall the.

The Belmont the Farmington transactions those banks had over 50% of their loan books were and residential first mortgages. So we.

We had almost 25% of the loan book post those acquisitions.

It's in residential mortgage is not quite as much as.

United's concentration was more like ours as you just referenced we're down to about 20% right now that's good.

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 go.

Going forward, but the pace of decline.

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 Jeff Yes, 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.

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 not ready to say is at its peak, but it's getting pretty close.

If you think about how much further can rates go down to continue the refi market that we've been experiencing that's really what they have been.

Writing to some extent so.

I think part of it will depend on rates, but line utilization is pretty high by historical standards. So I Wouldnt I don't think its going to go down dramatically between now and year end, but I think as you look out over the course of 2021 2022, despite what it to drift lower.

Okay, and maybe just one last quick one on the margin.

The yield on the Securities book.

Were pretty stable quarter over quarter around to 65, I know youve bought some securities at quarter end.

Sure you know what the overall yield was on the purchases and then how you're thinking about managing it look going forward, if youre going to allow it to potentially run off here a little bit if you have to reinvest at lower rate.

Just curious what your thoughts are on that show.

Sure Dave.

What I would say is the reason the portfolio yield has held up so well this year, it's mostly about the portfolio strategy and composition of the existing portfolio. So as you remember we have a.

We've historically right.

Longer duration municipal bond portfolio. So it had a very strong call protection in it over the last couple of years, we've been moving our mortgage back holdings from MBS pass throughs to CMBS again to 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.

We're not getting those bonds called away from us for the most part.

But then.

Secondly, because we have very little premium.

In the pass throughs, so we're not suffering high levels of.

Premium write off each quarter.

It was only up modestly for us just slightly over $1 million linked quarter.

You're right that.

Buying bonds 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 new knees relative to mortgage backs.

Our strategy going forward and has been is.

Two.

Reinvest cash flows.

Doing that not each month, the kind of 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 will.

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 bank. 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're 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.

It seems like you would like most.

Our next with the activity levels were depressed in the second quarter anything.

Anything.

What you are seeing unusual in terms of that hasn't rebounded yet maybe expectations for.

Back end of the year.

Yes.

The big driver has been interest rate swap income for us.

You know it's that business is really tied for the most part 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 bet.

We had swap income of over $8 million fourth quarter up 19 first quarter 20.

It was only a million to this quarter. So thats a a very large change for us the 8 million.

Quarters were probably a little inflated.

But because they were a 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 it within our investment management business.

Well.

Great and if I could ask one more.

The 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 to by plan, but you saw on the way.

On the way down after the 16 election. Thanks.

[laughter] most likely we.

We haven't we haven't really spent a lot of time.

[music].

The thinking thinking about you know under the buyback plan.

Yes, 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.

It would be our expectation.

Great. Thank you very much.

You're welcome.

Thank you. Our next question comes from the line of Steven Jones from RBC Capital. Your line is now open.

Hi, good afternoon guys.

I apologize I got cut off before so this is a repeat question, but just on the loan yields your 349, what are you originating.

Originating.

Our.

Well so there is.

Differential between new business going on.

And the total portfolio yield that's approximately.

25 basis points 25 call. It the 30 basis points. So you know a little.

The little over 3% to three of five thats, probably the aggregate yield in the quarter.

I would say loan spreads.

I've held up nicely for us.

In the quarter, but benchmark interest rates came down a bit as you know.

Right right.

And just because historically our loan spreads.

In line with.

With where you guys have had them or are they still although stretched.

No I would say loan spreads have improved.

You know, especially in the third quarter part of that is [laughter] I mean, the bad news and that is we're just not doing enough love. It's right. The ones that we are doing we are getting better spreads on and.

You know a call out to our commercial RMS 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.

So thats helped a bit as well.

Great.

And then just on the liability side.

Yes.

CD book.

I think that could ultimately getting down to as far as the cosco.

Yeah, that's a that's a difficult question.

You know what I, what I would say is that.

They average sea.

CD books for most banks US included run about 11 to 12 months. So you really in a year you have turned the thing over.

The.

The issue.

Issues, just going to be where.

Your pricing those roles, we have very successfully this year.

Each month, each quarter been able to bring CD.

Cost down there's more to go there but.

I said this last quarter is the move and lower deposit cost is getting more surgical than broad based at this point I mean, we're already down at 29 basis points.

Right right.

I appreciate the color. Thank you.

You're welcome.

Thank you. Our next question comes from the line of Brock Vandervliet from you'd be at your line is now open.

Thanks.

Just.

Turning to slide three.

The it ties back to.

Ties back to an earlier question on reserving in provision methodology. It gets.

It gets.

You look at the the reserves to Npls for a couple of these category share issue and I kind of closing in on.

<unk> percent.

Yes, hi, how should we think about.

How should we think about that.

You know a number of your peers or are well above that.

True, but we're well almost every one of those peers and historical net charge offs and you can go back and look at that for over a decade and you will see that so that they may be adequately reserved at those higher levels, but we would say we're adequately.

Reserves at our level.

Would you.

Would you be comfortable letting those ratios go under 100%.

Oh.

If the.

If our entire C store process.

Which means economic environment manner.

Management judgment qualitative, though delays et cetera warranted that yeah.

Okay.

And as far as the.

Deferrals goes over 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.

At year end do you.

You know get most of those back to performing and modify the rest with little little breakage, how does that how do you think that shakes out.

Yes, so we are definitely feeling good about the.

Conversations that we described in the prepared remarks with the customers and.

No.

Circumstance around all the business, including the.

The hospitality pieces that are left the the individual owner operators and.

Based on conversations we have had which which is built great bulk of.

Of all of those borrowers we've already kind of reached agreement framework to to look at how we do go forward and and were feeling really good about about and including our part of helping them get to the other side of this.

Got it okay.

I 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 greedy.

Good evening.

Hi, Matt.

Just curious on the insurance agency shell whats the impact to go forward fees and expenses and you 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, yes, it's incredibly model that.

The revenue was about $32 million a year.

It was it was profitable cost base was about $26 million to $28 million a year.

And so we saw.

Very strong age.

Agency.

Long term in nature.

Lot of long term.

[noise] producers in the business and and very well respected that the industry has been going through a pretty aggressive consolidation.

For a number of years now.

And the valuation.

Very solid and it was an opportunity for us as you suggested to to realize on that long term investments that we've made and and.

Put that capital to work elsewhere and grow the business.

Understood. Okay, and then just turning to the reserves and really the provision I mean from a small 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.

Her in 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 seasonal process then.

Well in order to kind of say that.

Say that you'd have to be able to predict what the economic.

And the modeling is gone produce in the periods going forward and we certainly are not in a position to do that we.

This way too much uncertainty right now.

You know where those economic up.

Forecast will come as we roll forward.

I think it's still Anybodys guess I mean I.

We said we are cautiously optimistic by some of the progress I think we are.

Certainly optimistic but were not ready by any means.

Let's say that the you know the pandemic is.

As you know.

Doesn't leave us with a tremendous amount of uncertainty across our businesses.

Understood. Okay, and then I know, we have a number of or a few different portfolios in run off mode, but just considering how much has changed in the slowdown in firemen the economy.

Could we see a change in the thought process around running those books often and maintain.

Earning assets that you have there.

I I would say so the so we've been running off the New York multifamily portfolio for a couple of years now that the transaction will do you.

Our 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 knows at this point there loans from the get go that were purchased that Didnt fit our business model. So it's hard to think we're going to wake up one day and said yes.

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.

Thanks, Matt.

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. lines for closing remarks.

Thank you.

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 in a rapidly evolving banking landscape and deliver value to shareholders.

Clearly the impact of the pandemic on the long term it 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.

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

[music].

[music].

[music].

Good day, ladies and gentlemen, and welcome to the peoples United Financial Inc. third quarter 2020 earnings Conference call. My name is changing and I will be your coordinator for today at this time.

All participants are in a listen only mode. Following the prepared remarks, there will be a question and answer session. If you would like to participate in this portion of the call. Please press star followed by one at any time during the conference.

This does it need at any time during the call. Please press star followed by zero and a coordinator will be happy to assist you.

As a reminder, this conference is being recorded for replay purposes, I would now like to turn the presentation over to Mr. Andrew Harrison.

There are some 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 and Chief Executive Officer.

David Ricardo Chief Financial Officer, Kirk Walters, corporate development and strategic planning.

Jeff Tangle present.

Jeff White, Chief Accounting Officer.

Please remember to refer to our forward looking statements on slide one of this presentation, which is posted on the Investor Relations website www.

W.W. dot people dot com backlash investors with that I will 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 cousin environment and its many challenges.

This has enabled them to effectively meet customer needs successfully entered as always check out are now free digital identity protection service [laughter].

And further advance strategic initiatives.

Very proud of the dedication our employees have displayed in the creative ways. They have supported customers and each other during these uncertain times.

This is a reflection of the deeply ingrained culture peoples United has a chance then built over many years and differentiates the company and the markets. We serve [laughter], 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 Hopper.

Operating earnings of $144.7 million increased 43% linked quarter and 7% from a year ago [laughter] common share basis operating earnings were 34 cents up 10 cents from the previous quarter and.

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.

[laughter] continued thoughtful approach to expense management and the realization of projected cost savings from acquisitions.

All the 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 strengthening operating leverage has led to a significant enhancement and the efficiency ratio in recent years.

Full year efficiency ratio has improved annually since 2013, when we recorded a ratio of 62.3%.

By 2019 ratio was down to 55.8% and we expect this improving trend will continue in 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 as.

Such investments include further enhancing digital capabilities, delivering innovative products and services and strengthening leadership and talent.

Third quarter.

I was indicative of 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 was evident and Treasury management as we bolstered their suite of technology.

Partnership with multiples and 10 firms we implemented an integrated.

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 a premium digital identity protection service, which we are providing free to all personal checking account customers.

Software and builds on our core value proposition of service protection, we are confident they 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 of these twosies industry veterans will further benefit customer retention and drive profitable growth and their respective regions.

Moving onto the balance sheet.

Great and loans and deposits each declined 1% linked quarter, leaving the loan to deposit ratio unchanged at 91%.

Commercial period end loans grew $422 million from June Thirtyth.

So to wrap it mortgage warehouse balances and the solid growth by at least 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 remixed the balance sheet with a focus on higher yielding portfolios.

A modest decline in period end.

Deposits resulted from run off of higher cost wholesale funding and lower municipal balances, partially offset by strong commercial deposit growth.

It is evident the pandemic has significantly affected the economy demand within our commercial real estate and middle market business has been.

Has been limited due to the reduced economic activity and funding provided by PPP.

Well, where demand is particularly demonstrated by Cnine line utilization rates, which declined for the second consecutive quarter and are below their historical quarterly averages.

Similar to the second quarter, we did experience some.

Some areas of growth.

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 lead 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 Leif acquired last year.

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 in the K there wasn't a significant reduction in the number of our customers needing really.

Total loan deferrals.

Were approximately $1.6 million or 3.5% of total loans at September thirtyth down from 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.

At quarter end.

One is comprised of almost 1.4 billion seconds deferrals and $217 million of loans still in their first deferral period.

Notably our relationship managers continue to maintain high levels of contact with customers to closely evaluating their financial condition and help them navigate their specific situation.

As expected the large the largest concentration of second deferrals.

In a $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.

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 end.

Our strong relationship with these customers has facilitated ongoing conversations which provided granular views of their current operations and financial resources.

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.

Note, 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.

Two other portfolio, we have previously called out as significantly affected by the pandemic commercial retail.

And restaurants have performed well and experienced a substantial decline in deferrals.

3.5 billion dollar Cree retail portfolio has seen the portals improved from $1.5 billion at the end of the second quarter to $138 million.

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 adds approximately $500 million loan balances have declined from $290 million at June 30.

$45 million at the end of the third quarter the port.

The portfolio is mostly and well known National quick service franchises, which have established experienced a lesser degree of disruption, especially where drive through traffic remains strong.

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.

The transaction allowed us to simplify our operating model and monetize the company's long term investments and 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 enhancing our 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.

And we expect to realize a pretax net gain of approximately $75 million to $80 million, which will improve the CE tier 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 okay. There.

Thank you Jack.

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, an increase of 4% linked quarter and 15% a year ago.

On an operating basis, PPNR 203.5 million was down 3% compared to the previous quarter due to a modest increase in expenses.

Smart and improvement of 14% year over year.

Provision for credit losses on loans of 27.1 million decrease $53.7 million from the second quarter and further strengthen the allowance for credit losses to total loans by 20 basis points to 94 basis points or 99 basis points excluding WGP.

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 portfolios 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 that.

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 extend 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 three.

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 addition, lower average balances in the securities portfolio reduce 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 benefit at $14.7 million from PPP during the quarter, which reflects $9.9 million and related fees and $4.8 million in net interest income.

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.

That 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 consecutive 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.

The full three months.

Turning the 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 slightly.

Mortgage warehouse period end balances closed the quarter at $3.8 billion up 768 million from June Thirtyth. That's.

Strong results continued to be driven by robust mortgage origination activity and the addition of new customer relationships.

Average and period end balances grew 3% and 5% respectively in the second quarter.

Barely 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.

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 and.

In addition, the period end balance for the United loans, we have chosen to run off with 905 million.

The decline of 57 million from June Thirtyth, and 208 million since year end.

Our expectations for each of these portfolios to write 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.

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 a period, 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.

Okay.

Hi.

On slide nine non interest expenses 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 three.

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.

600000, and higher professional and outside service costs.

600000 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.

As Jack referenced earlier, the 53.8% efficiency ratio is a product of our ability to generate positive operating leverage and in particular realize projected cost savings from acquisitions.

We will remain very diligent in our management of expenses and 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 non.

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 or up seven basis points linked quarter. The increase was primarily driven by two accounts. One represented a CN I account, which was experiencing difficulties prior to the pandemic.

And the other Watson acquired free loan.

Turning to slide 12 of the 43% increase in operating earnings linked quarter generated generated a significant improvement in returns for the third quarter operating return on average assets 94 basis points 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, but 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 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 its actually Jamul viola on for Mark.

Maybe one as well.

Hey, John.

I was wondering if we could just start on the expense outlook, obviously, 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 a do you have a target.

We don't have a target that we're going to share publicly but for the next couple of years.

What I would say is.

Both Jack and I talked about it in the prepared remarks.

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 record.

That we also think we will be able to continue to work.

Down from from here.

It's.

In this environment, it's tougher to do as as you know.

But.

The at this point.

In the year.

Won't be sharing any targets.

Come January.

What we're talking about year end, we hope to be back into the business.

Providing targets and guidance.

Okay I appreciate the color there maybe.

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.

Back half of 20 or 21, but just if we stayed in this interest rate environment for an extremely extended period of time, what we shared was we could conceive of the margin going down to two weighted 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 and what I would do is I.

I would look at what we've been doing.

Protect the margin.

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.

Being able to maintain yields in our securities portfolio, and then up to 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 targets.

Our equipment finance businesses.

Our great generators of short term fixed rate assets and the re mixing up the balance sheet has been a real positive for us in the last couple of years of protecting the margin.

Thats very helpful. I appreciate it.

Correct me, if I'm wrong I believe you mentioned that TPP balances did tick up a little bit quarter over quarter were.

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 REIT held but on an average balance basis. They were up $700 million that was more.

Jobs.

The volume that went on in the second quarter was you know it's the thing up a goal was those more backend loaded so we had a.

More about us 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.

When we did we did make BPP loans to both.

Existing customers and new customers as well.

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 I might say qualitative reserves based.

Above and beyond the Moody's baseline just given the uncertainty over whether or not this goal or federal stimulus actually gets passed.

You just talked about like how you balance.

Where you are in terms of your reserve.

Between the baseline and more adverse scenario and how do you get.

I work towards the adverse recently thanks.

Yes, Hi, Ted.

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.

Each quarter have a qualitative overlays that are part of.

The c. so process and.

Those reflect management judgments about.

Lots of different things level deferrals.

Yes 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.

Your higher cost borrowings, obviously, you've been paying off a lot of running off a lot of those how much more room do you have like what percentage or how much in terms of dollars are still sort of those less desirable higher cost funding they should when might seem runoff.

Good question, Ken what I would say I'd point you to.

Kind of the remarks that we said we had really significantly been able about $4 billion of wholesale borrowings came off.

Year to date.

Yes, because we had well over $6 billion.

Deposit funding the.

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 loan right a little different than some of the peers that we've seen we are able to just as the deposits came in.

The balances come off the if.

If you look at the margin page in the.

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 and sort of 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 costs down.

The real opportunity is is what we've been doing the last couple of quarters, which is the continued downward repricing of our CD book and get.

Getting more and more surgical on deposit costs 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 Quanta point. Your line is now open.

Hey, good afternoon guys.

Hey, Dave.

Let's start with your expectations on the loan trends going forward definitely appreciate your update on the run off book and then the New York City multifamily book.

Sounds like you did not change the outlook there at all but you got your resi running down as well.

500 million to clip the last couple of quarters, just curious what's your outlook is.

From a portfolio perspective.

And then.

Do you expect to see potentially see and I start to bottom here and maybe grow a little bit going forward.

Awesome.

Would be great.

It was the first part on the multifamily.

Just on.

On the resi on the resi piece coming down, but it's all sorry.

Yes, so we.

We do expect the resi portfolio will continue to.

Go down modestly overtime.

And obviously.

Obviously heavily dependent on.

Pipelines have been very busy and then very active.

Of late but how long that continues is.

I think the uncertain right now.

Regarding see an eye.

My take is that.

Basically what I see with commercial customers.

Markets businesses and and consumers actually is.

Pretty cautious approach to.

Kind of what the uncertainty in its out there from depend on that end and it's showing itself in kind of a de leveraging.

And.

Yes.

Not any kind of pushed too.

Expand or take on the next project. So I think that so theres some caution right now generally out there.

In taking on the next new thing.

Until people have a better sense of where things are going 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.

Claude.

No about general demand, so I don't know if it needs to get to.

To get to a point, where we have.

Vaccine, but it definitely has turned a corner in terms of.

More comfort with you know how things are going 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 were at 20% of loans now and maybe if I could ask a question about the warehouse as well that's a great growth there is large it's Ben.

Can you hold this here 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.

Yes, so Dave on the residential mortgage the.

If you'll recall the.

The Belmont the Farmington transactions those banks had over 50% of their loan books were and residential first mortgages. So we.

We had almost 25% of the loan book post those acquisitions.

Yes, it's in residential mortgage is not quite as much as.

United concentration was more like ours as you just referenced we're down to about 20% right now that's.

Adding in the ballpark.

Where it's been historically historically, we call it 18% to 20% so as Jack.

As Jack said, I think we'll still see that portfolio come down modestly going.

Going forward, but the pace of decline.

Half a billion or so each quarter should start to moderate which is what Jack was saying.

On the mortgage warehouse.

Turn it over to Jeff, Yes, 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.

On a new customers.

Particularly over the last three to six months and so as we sit here today I think it's likely not ready to say is added piece, but it's getting pretty close.

If you think about how much further can rates go down to continue the refi market sense that we've.

Been experiencing that's really what they have been.

Writing to some extent so.

I think part of it will depend on rates, but.

And utilization is pretty high by historical standards. So I Wouldnt I don't think its 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.

The yield on the Securities book.

Pretty stable quarter over quarter around to 65, I know you bought some securities at quarter end.

Curious what the overall yield was on their purchases and then how you're thinking about managing that book going forward, if youre going to allow it 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 the portfolio yield has held up so well this year, it's mostly about the portfolio strategy and composition of the existing portfolio. So as you remember we have a.

We've historically right.

Longer duration municipal bond portfolio. So it had a very strong call protection in it over the last couple of years, we've been moving our mortgage back holdings from MBS pass throughs to CMBS again to 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 backed so our portfolio has held up because of the long duration.

We're not getting those bonds called away from us for the most part but.

But then.

Secondly, because we have very little premium.

In the pass throughs, so we're not suffering high levels of.

Premium write off each quarter.

It was only up modestly for up just slightly over $1 million linked quarter.

You're right that.

Buying bonds 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 said has been and is.

Two.

Reinvest cash flows.

We've been doing that not each month, but kind of periodically as rates.

As we get opportunities I think that we'll continue to do that and then probably into next year and we'll have more clarity.

January but I think we will.

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 moved up because of all the deposits that have flowed into into the back. So I think will offset a little bit about liquidity in the securities portfolio over.

Uh huh.

Okay, great. Thanks for all the color appreciate it.

You're 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.

It seems like you would like most.

Okay. Good the activity levels were depressed in the second quarter anyway.

Anything or.

What you are seeing unusual in terms of that hasn't rebounded yet.

Expectations for.

Back end of the year.

Yes.

The big driver has been interest rate swap income for us.

Yes, it's that business is really tied for the most part 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.

Yes.

We had swap income of over $8 million fourth quarter of 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 were a 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, there was that our investment management business.

As well.

[laughter].

Great and if I could ask one more.

A popular topic is obviously tax rates.

Could you.

Mcconnell 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.

On the way down after the 16 election. Thanks.

[laughter] most.

Most likely we have.

We haven't we haven't really spent a lot of time.

The thinking thinking about you know under the Biden plan.

Yes, the impact and quantify that but it's pretty simple exercise once we know what the offer.

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.

It would be our expectation.

Great. Thank you very much.

You're welcome.

Thank you. Our next question comes from the line of Steven Jones from RBC Capital. Your line is now open.

Hi, good afternoon guys.

I apologize I got cut off before so this is a VP question, but just on the loan yields your 349, what do you.

Did you dating.

Our.

Well so there is.

Differential between new business going on.

And the total portfolio yield that's approximately.

25 basis points 25 call. It the 30 basis points, so, yes, a little while.

A little over 3% to three of five is probably the aggregate yield in the quarter.

I would say loan spreads.

Have held up nicely for us.

In the quarter, but benchmark interest rates came down a bit as you know.

Right right.

And just historically our loan spreads in.

In line.

Well with where you guys have had them or are they still although stretched.

No I would say loan spreads have improved.

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 well right. The ones that we are doing more getting better spreads on and.

You know a call out to our commercial RMS weve been able in this environment to embed floors.

A larger portion of our loans, then we let's say year over year, our ability stronger now.

So thats helped a bit as well.

Great and then.

And then just on the liability side.

Sure.

He book, where do you think that could.

Ultimately getting down to as far as the Cosco.

Yeah, that's a that's a difficult question.

You know what I, what I would say is.

Yes.

They average ceiling.

CD books for most banks US included run about 11 to 12 months. So you really in a year you turn that thing over.

The.

The issue.

Issues, just going to be where.

Your pricing those roles, we have very successfully this year.

Each month, each quarter been able to bring CD.

Cost out there's more to go there but.

I said this last quarter is the move and lower deposit cost is getting more surgical than broad based at this point I mean, we're already down at 29 basis points.

Right right.

I appreciate the color. Thank you.

You're welcome.

Thank you. Our next question comes from the line of Brock Vandervliet from you'd be at your line is now open.

Thanks.

Just.

Turning to slide.

Slide three.

The <unk>.

Ties back to an earlier question on reserving and provision methodology. It gets.

It gets.

You look at the the reserved and appeals for a couple of these categories Sherry, she and I kind of closing in on 100%.

How should we think about it.

How should we think about that.

A number of your peers or are well above that.

True, but were below almost every one of those peers and historical net charge offs and you can go back and look at that for over a decade and you will see that so that they may be adequately reserved at those higher levels, but we would say we're adequately.

Reserve at our level.

[noise] would you.

[noise] you'd be comfortable letting those ratios go under a 100%.

Oh.

If the you know if our entire C store process.

Which means economic environment.

Management judgment qualitative overlays et cetera, warranted that yeah.

Okay.

Good.

Deferrals go the $1.6 billion appreciated the color in your prepared remarks.

Yes.

Do you think is the end game there.

Finally, deferrals kind of roll off between now and year end do you.

Get most of those back to performing and modify the rest with little little breakage.

How does that how do you think that shakes out.

Yes, so we are definitely feeling good about the.

Conversations that we described in the prepared remarks with the customers and now.

No.

Circumstance around all the business, including the.

The hospitality pieces that are left the the individual owner operators and.

Based on conversations we have had which which is great.

Great bulk of of all of those borrowers we've already kind of reached agreement framework to.

To look at how we do go forward and and were feeling really good about about it including our part of helping them get to the other side of this.

Got it okay.

Great color.

You're welcome.

Thank you. Our next question comes from the line of Matthew Breese from Stephens, Inc. Your line is now open.

Good evening.

Mm Hmm, Okay, just curious.

Just curious on the insurance agency shell whats the impact to go forward fees and expenses and you think about the sale itself was that driven more from a.

From a capital management standpoint, with the gain or was that more from a was that more done to optimize the pms PNM and simplify.

So.

Well, let's talk for a second about the EPS impact, yes, it's incredibly modest but the.

Revenue was about $32 million a year.

It was it was profitable cost base was about $26 million to $28 million a year.

And so we saw.

Very strong.

Agency.

Long term in nature.

A lot of long term.

[noise] producers in the business and and very well respected that the industry has been going through a pretty aggressive consolidation.

For a number of years now.

And as the valuation as Barry.

Solid and there was an opportunity for us as you suggested to realize on that long term investment that we've made and and.

You know put that capital to work elsewhere and grow the business.

Understood. Okay, and then just turning to the reserves and really the provision I mean from on 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 build at this point is largely over.

And that provisioning should reflect more reserved maintenance.

At this point.

Well, it's kind of get back to what David just described in terms of the components of seasonal process then.

In order to kind of say that.

Say that you'd have to be able to predict what the economic.

And the modeling is going to produce in the periods going forward and we certainly are not in a position to do that we.

Way too much uncertainty right now.

You know where those economics.

Uh huh.

Forecast will come as we roll forward.

I think it's still Anybodys guess I mean, I know, we said we are cautiously optimistic by some of the progress I think we are fine.

Certainly optimistic but were not ready by any means.

Let's say that you know the pandemic is.

No.

Leave us with a tremendous amount of uncertainty across our businesses.

Understood. Okay, and then I know, we have a number of or a few different portfolios in run off mode, but just considering how much has changed in the slow down in firemen the economy.

Could we see a change in the thought process around running those books often and maintain.

Earning assets that you have there.

[noise] I would say no. They so we've been running it off the New York multifamily portfolio for a couple years now the transactional 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.

The and we I can't see us changing our thought process around the United knows at this point there loans from the get go that were purchased.

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.

You're welcome Matt.

[noise]. 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.

Thank you.

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.

Rapidly evolving banking landscape and deliver value to shareholders.

Clearly the impact of the pandemic on the long term. It bottoming is unknown. However, we remain confident that 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 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.