People's United Financial, Inc.
Q3 2018 Earnings Call Transcript

Published: 19 Oct 2018

[Operator:]

Good day, ladies and gentlemen, and welcome to the People's United Financial, Inc. Third Quarter 2018 Earnings Conference Call. My name is Gege, 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. [Operator Instructions] I would now like to turn the presentation over to Mr. Andrew Hersom, Senior Vice President of Investor Relations for People's United Financial, Inc. Please proceed, sir.

[Andrew Hersom:]

Good afternoon and thank you for joining us today. Here with me to review our third quarter 2018 results are Jack Barnes, Chairman and Chief Executive Officer; David Rosato, Chief Financial Officer; Kirk Walters, Corporate Development and Strategic Planning; Jeff Tengel, President; and Jeff Hoyt, Chief Accounting Officer. Please remember to refer to our forward-looking statements on slide 1 of this presentation, which is posted on our website, peoples.com, under Investor Relations. With that, I'll turn the call over to Jack.

[Jack Barnes:]

Thank you, Andrew. Good afternoon. Appreciate everyone joining us today. Let's begin by turning to the third quarter overview on slide two. The results this quarter reflect our consistent focus on improving relationship profitability across the company's diverse business mix. We reported another quarter of record earnings and generated a return on average tangible common equity of 14.5%, an improvement of 270 basis points from a year ago. Net income of $117 million was up 29% year-over-year, while earnings per common share of $0.33 increased $0.07. These results benefited from higher revenues, well controlled expenses, sustained exceptional asset quality and the lower effective tax rate. Total revenues increased 7% from a year ago and 1% compared to the second quarter. This growth was primarily driven by higher net interest income, reflecting continued net interest margin expansion. The margin improved 11 basis points year-over-year as well as 5 basis points linked quarter and benefited from an increase in loan yields that continued to outpace the rise in deposit costs. As expected, deposits rebounded in the third quarter with average balances growing $522 million or 2% from the second quarter. While our deposit costs were up 11 basis points for the quarter, we continued to focus on controlling pricing, as demonstrated by an interest bearing deposit beta of 24% since the beginning of the current cycle of increasing interest rates. In comparison, our loan yield beta is 37% during the same period. As we stated last quarter, we remain competitive gathering deposits in order to protect market share and client relationships, however, we will remain disciplined and not lead the market in crisis. Moving on to loans, average balances were flat compared to the second quarter, while the period end balances were down $313 million or 1%. The decrease in the period end loans is attributable to a $201 million decline in mortgage warehouse lending balances, and a run-off of $128 million in the transactional portion of the New York multi-family portfolio. Year-to-date, loan growth has been below our expectations, primarily due to heightened competition, driven by both bank and non-bank lenders, lower demands and above average payoffs. Looking forward, acknowledging the impact of these headwinds, particularly in our commercial real estate portfolio as well as the industry wide slowdown in the home equity market, we will not reach our 2018 loan growth goal of 3% to 5% at year and. However, it is important to note that this shortfall in loan growth does not impact our original full year earnings expectations, as we are tracking in line with our other disclosed full year goals. Additionally, the fourth quarter historically has been our strongest quarter in terms of loan originations. Pipelines at the end of the third quarter are at solid levels and we expect continuation of positive results across many of our businesses that have performed well this year, including equipment financing and middle market C&I. We're very pleased with the performance of lease, as it continues to drive excellent growth at yields that are meaningfully higher than the rest of our total portfolio. The addition [indiscernible] to this business at the end of the second quarter has also enhanced these already strong results. In this environment, we continue to emphasize the importance of improving operating leverage, as evidenced by a third quarter efficiency ratio of 56.7%, an improvement of 170 basis points on a linked quarter basis. We remain focused on growing net interest income and non-interest income as well as tightly managing expenses. We are particularly pleased with our ability to control costs, especially as we further invest in revenue producing talent and enhance technology. As the financial needs of our clients evolve, they require bankers who understand their complex challenges and serve as advisors to help them achieve sustainable growth. As such, we recently bolstered our commercial banking capabilities with the establishment of three verticals, franchise finance, technology and not-for-profit and we concurrently hired three Boston based senior bankers to lead each vertical. We are pleased to have these leaders join People's United, as their in-depth industry knowledge and expertise will deepen our current relationships and attract new ones. In addition to investing in revenue producing talent, we continue to make investments to enhance our technological capabilities. Given that the consumer shift to digital channel is evident, we have been tactically driving various digital initiatives and building a foundation to address opportunities. For example, we are actively engaged with multiple fintech companies to establish digital origination channels for deposits, consumer and small business lending and wealth management. We have also invested in a multi-channel digital marketing strategy to engage our clients and prospects generate qualified leads, build relationships and increase sales productivity. Over the past year, we have shaped our marketing strategies to embrace our digital and mobile audiences with new technologies, which allow the bank to deliver personalized digital experiences to clients. The acquisition of Farmington Bank was completed on October 1 and we're pleased with the regulatory process as well as the speed in which we were able to close the transaction. We are excited about executing in the market as one team and deepening our well established presence in central Connecticut and western Massachusetts. Integration has progressed well and the core system conversion will take place in January. Experienced teams at both companies have worked closely together to ensure a seamless transition for clients who will benefit from our full suite of products and services as well as enhanced digital capabilities. The addition of Farmington Bank further strengthens the franchise's earnings power, as we are confident in achieving the transaction's attractive financial returns. We believe the combination of these two customer focused organizations with similar cultures and complementary commercial and retail capabilities will create significant value for our customers and shareholders. With that, I'll pass it to David to discuss the third quarter in more detail.

[David Rosato:]

Thank you, Jack. Turning to slide 3, net interest income of $306.4 million increased 5.2 million or 2% on a linked quarter basis. The loan portfolio contributed 10.7 million of the increase to net interest income due to higher yields on new business and the continued upward repricing of floating rate loans. Net interest income also benefited 1.9 million from an additional calendar day, 1.2 million from higher yields and balances in the securities portfolio as well as $500,000 in lower borrowing costs. The largest offset to these increases was a $9.1 million reduction in net interest income, due to higher deposit costs. Year-to-date, net interest income is 903.4 million, up 95.3 million or 12% from a year ago and in line with our full year growth goal of 10% to 12%. Net interest margin of 315 expanded 5 basis points for the second consecutive quarter, highlighting the asset sensitivity of our balance sheet. As displayed on slide 4, the 5 basis point expansion from the second quarter was primarily driven by the loan portfolio, which favorably impacted the margin by 10 basis points, as new business yields continue to increase and remain higher than the total portfolio yield. Net interest margin also benefited 2 basis points from the additional calendar day, while higher yields in the securities portfolio and lower borrowing costs, each added a basis point. Conversely, higher deposit costs lowered the margin by 9 basis points. Year-to-date, the net interest margin is 3.10%, up 16 basis points from a year ago and in the middle of our full year goal range of 3.05% to 3.15%. Looking at loans on slide 5, average balances of 32.2 billion were flat compared to the second quarter. Highlighting the importance of our diversified business mix, growth in average balances for equipment financing, residential mortgage and C&I offset continued declines in commercial real estate and home equity balances. On a period end basis, loans ended the quarter at 32.2 billion, a decrease of 313 million or 1% from June 30, driven by lower mortgage warehouse lending balances and the ongoing write-off in the transactional portion of our New York multi-family portfolio. Balances in the mortgage warehouse lending portfolio ended the quarter at 882 million, down 201 million from the close of the second quarter. Importantly, average balances for this portfolio declined only $24 million linked quarter. Since the end of the second quarter, runoff in the transactional portion of our New York multi-family portfolio lowered period end balances by 128 million, bringing the year-to-date impact to 356 million. As such, we now expect runoff in our transactional New York multi-family portfolio for the full year to be higher than the upper end of our previous expectation of 350 million to 400 million. Moving on to deposits. As expected, growth rebounded in the third quarter as average balances of 33.1 billion were up 522 million or 2% linked quarter. As you can see on slide 6, time and non-interest bearing deposits collectively grew by $711 million, while savings and interest bearing checking and money market average balances declined $157 million and $32 million respectively, in anticipation of the Farmington Bank acquisition closing. And given their elevated loan to deposit ratio, we ran various bank wide CD promotions during the quarter, which successfully eliminated their loan to deposit shortfall. On a period end basis, deposit balances of 32.2 billion increased 742 million or 2% from the end of the second quarter. It is important to note the loan to deposit ratio ended the quarter at 97%, an improvement from 100% at June 30. As Jack referenced earlier, we continue to focus on controlling pricing, as demonstrated by an interest bearing deposit beta of 24% since the beginning of the current cycle of increasing interest rates. In comparison, our loan yield beta is 37% during the same period. Specifically, for the third quarter, our interest bearing deposit beta was 57%, while the loan yield beta was 64%. Looking at slide 7, non-interest income of 92.4 million decreased 2.6 million or 3% on a linked quarter basis. However, on a year-over-year basis, these results increased $3 million or 3%. The linked quarter decline in non-interest income was primarily attributable to fee income tied to lending volumes. Commercial banking lending fees were $1.5 million lower compared to the second quarter and customer interest rate swap income was down 1.2 million. The largest offsets to these increases were $1.5 million increase in insurance revenues, reflecting the seasonality of commercial insurance renewals, which are higher in the first and third quarters of the year and $600,000 and higher bank service charges, primarily driven by the additional calendar day in the third quarter. As a reminder, included in other non-interest income for the second quarter were $2 million of gains related to certain legacy investments. Year-to-date, non-interest income is $277.6 million, an increase of 12 million or 4.5% compared to a year ago and in line with our full year growth goal of 3% to 5%. On slide 8, non-interest expense of $241.3 million improved 7.3 million or 3% linked quarter. Included in the third quarter were $500,000 of merger related costs with 400,000 in professional and outside services, and the remainder in other non-interest expenses. Second quarter merger related costs were 2.9 million, of which 2.1 million were included in professional and outside services and 800,000 within other. Excluding merger related costs, non-interest expenses improved 4.9 million or 2%. As a reminder, included in second quarter operating expenses within the other expense line in the earnings release was 4.1 million of costs associated with 10 People's Bank branch closures. For the third quarter, we did not have any branch closures or related costs. Non-interest expenses in the third quarter also benefited from $1.9 million in lower professional and outside services costs, primarily due to the timing of projects. The largest offsets to these improvements were an $800,000 increase in occupancy and equipment costs as well as 700,000 in higher compensation and benefits, primarily reflecting additional employees residing from the Vend Lease acquisition. Year-to-date, non-interest expenses, excluding merger related costs, are $730 million and tracking in line with our full year goal range of 975 million to 985 million. We continue to enhance operating leverage as evidenced by improvement in the efficiency ratio on both a linked quarter and year-over-year basis as displayed on slide 9. Higher revenues and well controlled expenses generated a third quarter efficiency ratio of 56.7%, an improvement of 170 basis points linked quarter. Compared to the third quarter of 2017, the efficiency ratio improved 60 basis points, a particularly strong result as beginning with the first quarter of 2018, the metric includes the unfavorable impact of tax reform, which results in lower FTE adjustments to net interest income. We will continue to emphasize improving operating leverage through revenue growth and controlling costs. We remain diligent in maintaining exceptional asset quality, which is the result of our conservative and well defined approach to underwriting. As demonstrated on slide 10, originated non-performing assets, as a percentage of originated loans and REO at 57 basis points improved 5 basis points linked quarter and 7 basis points from a year ago. Net charge-offs of 9 basis points were up modestly from very low levels in recent quarter and continue to reflect the minimal loss content in our non-performing assets. Moving to returns on slide 11, return on average assets of 106 basis points and return on average tangible common equity of 14.5%, each increased 6 basis points from the second quarter. Year-over-year, return on average assets improved 22 basis points, while return on average tangible common equity was up 270 basis points. We are pleased with the progress we have made, enhancing our profitability metrics. As we continue to build the earnings power of the company, we expect further improvement in these metrics. Continuing on to slide 12, capital ratios remain strong, especially in light of our diversified business mix and long history of exceptional risk management. The final slide on page 13 displays our interest rate risk profile for both parallel rate changes and yield curve twists. We remain asset sensitive in spite of rising rates and we continue to be well positioned for further increases in interest rates as approximately 44% of our loan portfolio at quarter end was either one month LIBOR or prime based, consistent with the end of the second quarter, and up from 43% a year ago. Before opening up the call for questions, I want to remind everyone that the full year 2018 goals we updated in July did not incorporate Farmington Bank. With less than a quarter left in the year, we are not going to provide an update to these goals to include Farmington. However, we wanted to share the following September 30 data points for Farmington. Period end loans and deposits closed the quarter at 2.97 billion and 2.40 billion respectively. Now, we'll be happy to answer any questions you may have. Operator, we're ready for questions.

[Operator:]

[Operator Instructions] Our first question is from Jared Shaw from Wells Fargo Securities.

[Jared Shaw:]

I guess, maybe just starting off at - looking at the commercial loan trends, the core middle market and C&I trends, growth just overall has been a little slow. Can you talk to what you're seeing in the market? Is that - are you seeing more competitive pressure from some of the national players that maybe over the last ten years had stepped back from middle market lending? Are you seeing them come back and be more aggressive? Or is it more customer appetite is a little bit slower? And then, I guess, what do you think has to change to see that core middle market, C&I loan demand start to pick up?

[Jack Barnes:]

This is Jack, Jared. I would say, the core middle market business has always been very competitive, both in terms of larger bank competitors, but also smaller banks across the footprint. So, we bank high quality customers that are very attractive to everybody. So, there's a constant pressure to serve them well and remain competitive. We had a line utilization down in the quarter to 3 basis points. So that to us says that customers have cash and they're using it to pay down clients. Some of our balance impacted that. I would say, we look at the economic data and we think, things are in pretty good shape, but we don't see increased demand. We certainly have pipelines and when you think of people looking to expand plans or increase inventory levels, they're carrying, well, feeling like there's a lot of that. So, I think there's a lot of things - a lot of - there's a lot of competition. It does seem to be just okay demand, but not strong, given the economic data and in fact we saw some more utilization. So, that's what we're seeing. I would say, it's really hard to kind of project what that's going to look like, as we move forward. I don't think the competitive environment is going anywhere. That's for sure.

[Jared Shaw:]

And then with the closing of the Farmington Bank deal now and the good opportunities for cost saves by absorbing a local competitor, what's your M&A appetite going forward? And do you think that there's more opportunities for sort of cost saving, serving deals as opposed to adding new lines and in geographic expansion?

[Jack Barnes:]

Yeah. We're really pleased with Farmington and the aspects I mentioned in the opening remarks, we feel really good that we're able to move through the process very quickly. That has a lot of economic value and it also has a lot of positive impact on all the employees involved. So we feel really good about that. I think there are similar types of deals across our footprint where we can identify acquisitions that would have similar characteristics. And as we move forward, we'll certainly be pursuing those conversations and looking to be opportunistic about it.

[Jared Shaw:]

And then just a final one for me, looking at the deposit trends, David, I think you said that the beta for the quarter was 57% and I think in the past you'd said the long term two cycle beta as well like 55% to 60%. Where do you see the deposit beta peaking I guess in the cycle here, as we work through that end?

[David Rosato:]

Putting an exact number on where it peaks is a difficult proposition. What I would - the color I would offer is, we have, for us and for the industry, we have seen deposit betas over the cycle creep up. So, in the third quarter, it was the highest betas that we've had yet. We were actually asked last quarter what - when we thought the deposit beta would hit 50%. Our thinking there, and that's cumulative, not within the quarter. Our thinking is still - that's still in the back half of 2019. The deposit market across commercial, municipal, retail continues to be competitive. We, in this quarter, grant some CD specials, as we called out. Those CD specials or money market specials are still relatively reasonable funding costs. So, the industry has behaved reasonably to-date, though all of our betas are creeping up, but I'm not expecting unreasonable behavior coming from the competitors that we face.

[Operator:]

Your next question comes from Steve Alexopoulos from J.P. Morgan.

[Steve Alexopoulos:]

I wanted to first follow-up on the commercial real estate balances remaining a drag on growth. Can you just talk about the lending environment for CRE and how much more runoff we'll see before those balances bottom out?

[Jack Barnes:]

Well, we can talk about that and I'll certainly ask Jeff to share his thoughts here. But it's been very competitive. I would say we feel like it does continue to get even more so. People do seem to be looking for assets and really being willing to stretch more than we have seen. I would say it's been a gradual push on that, but my observation is, it does continue. We see it, but we've seen more stats delayed on the non-bank lenders and the amount of activity that's coming out of funds and the like. And some of our payoffs are coming from that direction as well as sales and a lot of our long-term strong customers have decided that some of the offers they are getting are too good to pass up on. Really hard to predict in my view, where it will flatten out. Jeff?

[Jeff Tengel:]

Yeah. I think that's exactly right. I mean you touched on all the things that are headwinds. Payoffs coming from a variety of sources, whether it's the sale of assets, from our core relationship customers or it's just really an intense market environment, both from the banks and the non-banks alike, and it is difficult to predict. We're supporting our good customers in every way we can, but it's tough to - from here to see a lot of growth in that business as we go forward.

[David Rosato:]

Steve, I would just add that we remain very disciplined around credit and that's where a lot of the competition is coming from.

[Jack Barnes:]

We're having to pass on opportunities to match deals that we're just not willing to do.

[Steve Alexopoulos:]

So when you think about the environment you're describing, which is really tough on the CRE side, it's not any better on the C&I side. I think we all get it that this year is not a 3% to 5% growth year, but is there any hope at all that 2019 could be a 3% to 5% growth year or is that just not likely at this juncture?

[David Rosato:]

Yeah. So I would say, yes, there is, in my mind and I would point, we just mentioned the new folks that we hired in Boston to lead those efforts. Those people are 20 year veterans in larger banks that have relationships they've had for a long time. Those are the kinds of opportunities continue to grow LEAF, continue to grow Vend Lease. We have, we started last year a healthcare vertical that has had good success and I think will continue to as we go in to '19. So there is just a number of fronts where we continue to be able to attract talent and with that talent comes opportunity to gain some market share.

[Steve Alexopoulos:]

And final one for David. How do you think about your ability to continue to drive NIM expansion with the - positive environment just seems to be getting worse and worse, here.

[David Rosato:]

As we were answering with Jared, we do expect modest, but continued deposit pressure, but as we said, it's not out of control by any means, it's not ramped across all of our geographies, and as long as it remains reasonably well controlled, and we pick our spots and our people are continuing to develop relationships, I think we'll be okay, because we also have asset sensitivity on the loan side of the book. We call out the one month LIBOR and prime loans and the - we're getting a nice assist this year for example from the LEAF transaction and Vend Lease, which are higher yielding portfolios. So when you put it all together, we managed so far to have 5 basis points of NIM expansion each quarter this year. And obviously, the Fed moving up short-term rates, we benefit from that as well.

[Operator:]

Your next question is from Brock Vandervliet from UBS.

[Brock Vandervliet:]

Kind of putting these pieces together in terms of the loan growth outlook and the fact you're knitting together several different acquisitions over a period of time. Could you, I don't know if you have a longer term efficiency ratio goal, but could you look - is now the time to look more aggressively at the expense side?

[Jack Barnes:]

Why don't - I'll take that. Brock, you're a little new to the story, but we've had considerable efficiency ratio improvements, let's say, over the last 5 to 7 years, up until a couple of years ago. They were primarily driven on the cost side, and we - while we still have very good cost discipline within the company, we've talked publicly about shifting those improvements going forward to the revenue producing side, and I would say we've been very successful in that transition, if you will, increasing the revenues, while still maintaining the cost. So rest assured, our cost discipline is very well ingrained in this company.

[David Rosato:]

I'll just go back to your point about the acquisitions as well. I mean, these acquisitions are a great cost save efficiency improvement vehicle, and we've executed well against them over the past number of years and we continue to move through Farmington well. So, as we think about efficiency and moving ourselves forward, one way is to do these end market transactions and take the appropriate cost out.

[Brock Vandervliet:]

And a separate follow up, with the leasing operation having grown in size, is there any sort of seasonality we should be aware of in modeling going forward?

[Jack Barnes:]

It tends to be stronger in the fourth quarter each year and we have no reason to think that wouldn't be true this year as well.

[David Rosato:]

Yeah, I agree. I would just add it's not dramatic or anything, pretty steady.

[Operator:]

[Operator Instructions] Your next question is from Matthew Breese from Piper Jaffray.

[Matthew Breese:]

I was hoping you could just give us a little bit more color on the new units, the franchise lending technology not-for-profit. For the teams you have, are these sufficient to meet your goals or do you need a little bit more scale and then if you could share with us for those verticals, maybe for looking out two, three years, what are you looking to accomplish from a deposit and loan perspective?

[Jeff Tengel:]

This is Jeff Tengel. I'll take the first stab at that. There is not a lot of scale that we feel like we're lacking when we've hired some of these people, in the case of franchise finance, it was one individual leader, we had already been in that business. This individual is going to get us more organized and more focused and allow us to expand our geography a little bit. And so we think that's going to be a leverage point for us to serve our existing customers better and attract new ones. The not-for-profit is a little bit different in that that was a team of people. So we're - again, we were already in that business. This is just going to accelerate the size and the scope of that. That business tends to be a little bit more deposit oriented than the franchise business So our expectations there are going to be a bigger lift on the deposit side than pound-for-pound and then on the loan side, per se, and the technology space is something that's a little bit unique to the Massachusetts market, Boston in particular. Of the three businesses we called out today, that's one of them that we historically have not been very active in, although it's a very big part of the Boston economy and we felt like we've really needed to participate in that in order to be an active part of that C&I market. So there again, we hired a very experienced banker to lead that initiative and we're in the middle of building out a team in that instance.

[Matthew Breese:]

And then maybe just switching to asset growth, overall. I mean if loan growth is going to be a challenge, might we see a different tactic on the securities portfolio? Could that start to be an offset?

[David Rosato:]

It may or may not be, Matt. As you know, our securities portfolio is a few percentage points lighter than peer averages. We tend to like that. I think the bigger - one of the key issues there is just our thoughts about the direction of interest rates, right. We are dealing with a fairly flat yield curve, [indiscernible] that is telegraphing continued rate increases and in a flat yield curve, that's not necessarily the highest risk to return endeavor. So we're going to just have to see as time evolves there. I would just say, I wouldn't want those on the call to be too passive and just stick around our thoughts around loan growth for next year. Steve asked whether 3% to 5% was possible, and I - or Jack said, yes, it is possible.

[Matthew Breese:]

Hello.

[David Rosato:]

Yeah. That was the end of my comment.

[Matthew Breese:]

Understood. Got it. And then maybe just going back to the M&A landscape and trying to get a sense for how high in the priority list M&A is. Might we see you do another deal within the next 12 months or so, is it that high in the list?

[Jack Barnes:]

Yeah. So interestingly, if you again maybe step back about our activity in the last few years, you can see that we have fired several banks kind of in footprint. We've also, over the last number of years, acquired insurance agencies that we've brought into the company, wealth management and also the LEAF, Vend Lease transactions. So we dedicate a lot of resource led by Kirk here in the room that we - and we are very involved with discussions across those markets. People understand that we want to grow those businesses and we're active on the bank front and in those areas. And we've made good progress. We are very pleased with all the recent transactions. So we will continue to actively look for opportunity.

[Operator:]

Your next question is from Collyn Gilbert from KBW.

[Collyn Gilbert:]

Just, do you happen to have, David, the balances, what the book balances were for your transactional multifamily loan portfolio at the beginning of the year and then what they finished at the end of the third quarter and then the same thing for warehouse lending?

[David Rosato:]

Let me start with the 12 or the 9/30 numbers. So the mortgage warehouse ended the quarter at 882 and at - I'm sorry, did you say 6/30 or -

[Collyn Gilbert:]

No. Well, like 12/31.

[David Rosato:]

Yeah. So, mortgage warehouse was 1.409 billion at 12/31 and 882 at the end of - at 9/30 at New York multifamily. I'm sorry, Collyn. Multifamily was 1.409 billion at year-end, and is a 1.046 [ph] billion at 9/30. And then mortgage warehouse at year end was 1.045 billion and at 9/30 was 882.

[Collyn Gilbert:]

And then, just curious how you guys are thinking about the resi book right now, and $6.9 billion portfolio, so a good chunk of the book, the 3.27 yield, how are you thinking about that strategically, financially, maybe what's the duration of that book? I mean given what you've laid out for loan growth expectations, I presume it's not necessarily a portfolio that you're - that you're interested in selling necessarily, but I'm just trying to understand, because I would imagine the spread on that, the portfolio is just really, really low, and certainly dragging on that ROA. So just wanted to know how you think about that portfolio and the risk return there.

[David Rosato:]

Yes. So we - just to check on it. We are - we're actually thinking about it along the line, I think where your question is going. As we look at improving our overall loan yield and we look at that portfolio, it's the lowest yielding. It is gradually improving as rates have come up, what we put on the books is going on at much better yield, so it will continue to improve. Most of the total book is 5/1, 7/1, 10/1, so I'll let these guys look at duration, but it's a great, great majority are arms, so the turn will be pretty reasonable. The way we're thinking about it strategically is just that we have a larger residential portfolio, when we look at peer group analysis and we think about how much of it we should be carrying and a lot of the things we're doing to build the other commercial businesses will give us an opportunity to shift the mix over time. So strategically, that's clearly in our sight. At the same time, strategically, it's also clearly in our sight that we want to grow primary household accounts on the [indiscernible] that residential products and home equity and resi is critical to being a good community oriented bank and so we want to remain strong with our capabilities to originate and deliver that product to our customer. So we're trying to navigate to higher yields, think about the overall mix, but totally, we want to have deep relationships in our markets with those customers.

[Collyn Gilbert:]

And just Jack to your point that the new yields you're originating are better than what's on there, what are you, I mean, I guess if you're just assuming replacing with a similar structure, but just generally the blended origination yields on the resi book compared to that 3.27 that I referenced is what?

[Jack Barnes:]

In the quarter, it was just a touch over 4%. I mean that perhaps your question really is the - that's the portfolio that's lagging the most from a rate reset. It's highly capital efficient as you know with the lower risk-weighting. However the - it re-prices up slowly.

[David Rosato:]

Like everyone else, we're not seeing a lot of refi. We're seeing purchase activity and we're serving the customer again. But it's slower, it kind of is reflected in our mortgage warehouse business, right?

[Collyn Gilbert:]

And I appreciate giving the period end balances on First Bank. Can I ask, if you have maybe more data there, do you happen to have a NIM or they ended the quarter on the NIM or a little bit more detail on them?

[Jack Barnes:]

No, Collyn. We actually - you can look at where their NIM has been historically, but they're not a significant change from where they historically were.

[Collyn Gilbert:]

And then just on the efficiency discussion, obviously, the benefits of higher rates and seeing that margin move the way it has, has been a key driver of the efficiency. But as you've - and I know this question was sort of already asked, but I guess I'm asking more specifically in terms of what you think kind of the organic operating expense growth will be in '19 and I guess within that, are there certain definitive initiatives that you have in place? I mean do you see expense growth accelerating or decelerating from kind of your historical levels?

[Jack Barnes:]

Really, the best guide we can give you is kind of where, how we think and what we've done historically. We're in the middle of building out our budget. So we're not prepared obviously for any '19 guidance. But Collyn you've known us a long time, and you know how we have controlled the costs here quite aggressively, while continuing to bring in talent and make the necessary investments in the franchise and you should just expect that to continue.

[Operator:]

Thank you. Ladies and gentlemen, this will conclude the time we have for questions. I would now like to turn the call over to Mr. Barnes for closing remarks.

[Jack Barnes:]

Thank you. Our results this quarter were highlighted by closing the acquisition of Farmington Bank on October 1, record quarterly earnings, which generated a return on average tangible equity of 14.5%, an increase of 270 basis points year-over-year, enhanced operating leverage that is evidenced by the efficiency ratio of 56.7%, net interest margin expansion benefiting from increase in loan yields, continuing to outpace the rise in deposit costs, strong deposit growth, improving the loan to deposit ratio to 97% and a common dividend payout ratio of 52.9%. Thank you for your interest in People's United. Have a good night.

[Operator:]

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