People's United Financial, Inc.
Q3 2017 Earnings Call Transcript

Published: 20 Oct 2017

[Operator:]

Good day, ladies and gentlemen, and welcome to the People's United Financial Incorporated Third Quarter 2017 Earnings Conference Call. My name is Karen, 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] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to Mr. Andrew Hersom, Senior Vice President of Investor Relations for People's United Financial Incorporated. Please proceed, sir.

[Andrew Hersom:]

Good afternoon and thank you for joining us today. Here with me to review our third quarter 2017 results are

[Jack Barnes:]

Thank you, Andrew. Good afternoon. We appreciate everyone joining us today. Let’s begin by turning to the third quarter overview on Slide 2. Our third quarter performance demonstrates the success of our strategy to improve earnings growth for shareholders. We reported record quarterly net income of $90.8 million, an increase of 23% from the prior year quarter and net income per common share of $0.26, up $0.02 from a year ago. The positive operating trends in the quarter reflect specific actions we have taken to enhance financial performance. We’ve recently closed three successful acquisitions, made various investments in organic growth capabilities and maintain tight control of expenses. The result of these efforts was the widening of our net interest margin, improvement in operating leverage and increases in profitability metrics. We are pleased with this progress and remain focused on executing our strategy to further enhance returns. Higher revenues and thoughtful expense control generated the third quarter efficiency ratio of 57.3%, an improvement of 110 basis points from the most recent quarter. Total revenues increased 2% on a linked quarter basis as a result of continued growth in net interest income driven primarily by further net interest margin expansion. Expenses excluding merger related costs are up less than 1% despite closing the acquisition of LEAF Commercial Capital in early August. In regards to LEAF, we are very pleased with how quickly the transaction closed and how well the integration has progressed. We’re excited to have such a dynamic organizations built on a multi-channel financing platform which posses leading automation, strong brand identity and outstanding talents as part of People's United family. The addition of LEAF was the primary driver of period end loan balances increasing 10% on an annualized basis from the end of the second quarter. Excluding LEAF annualized organic loan growth was 1% for the quarter. Organic growth was unfavorably impacted by lower mortgage warehouse lending line utilizations and volumes, which tend to be more volatile than our other businesses. Excluding mortgage warehouse lending, loans grew 4% organically on an annualized basis driven by solid results in residential mortgage and middle market commercial and industrial lending. We also continue to experience good growth in our asset based landing and equipment financing businesses highlighting the importance and the impact of our diversified business mix. Our commercial real estate increased very modestly for the quarter. We remain optimistic about further growth opportunities in the fourth quarter as the pipeline is solid and we have a number of commitments ready to close. Growth in the third quarter was unfavorably impacted by slower market conditions, payoff activity of customers choosing to sell properties, more aggressive competitions and continued runoff of the transactional portion of our New York multi-family portfolio. While we are optimistic, commercial real estate is our largest portfolio and the full year growth will be influenced by fourth quarter market conditions. Period end deposits grew 9% on an annualized basis from the end of the second quarter. This increase primarily reflects continued success gathering commercial departments as well as seasonal inflows in our municipal business. Additionally deposit pricing pressure remains relatively benign in the quarter. Finally, recently released FDIC data showed we maintained strong deposit market share in each state in which we operate and we are particularly pleased with our continued number one market share position within Fairfield County, Connecticut and the State of Vermont. Before passing the call to David to discuss the quarter in more detail, I want to highlight that during the fourth quarter People's United will celebrate its 175th anniversary. Over this time, the company became a premium brand by understanding the value creation begins with a steadfast dedication to superior service combined with offering a full range of products. Our customer centric approach has enabled us to develop long lasting relationships that profitably fulfill client needs. This approach differentiates the franchise, enabling us to further strengthen our presence in the markets we serve. With that, I’ll pass to David.

[David Rosato:]

Thank you, Jack. Turning to Slide 3, net interest income of $284.6 million increased 4% on a linked quarter basis. The loan portfolio contributed $15.2 million to the increase in net interest income due to the addition of LEAF, higher yields on new business, repricing of floating rate loans and higher average balances linked quarter. Increased borrowing costs and higher deposit costs and volumes unfavorably impacted net interest income by $3.8 million and $3.2 million respectively. Results in the third quarter were highlighted by an 8 basis point linked quarter improvement – improvement in net interest margin to 3.04, the strongest level in three years. This expansion, as the slate on Slide 4, was driven by the loan portfolio, which favorably impacted the margin by 12 basis points as new business yields were higher than the total portfolio yield. The addition of LEAF contributed 5 basis points to the margin expansion for the quarter. Looking at the loan portfolio on Slide 5 period end balances were $32.4 billion, an increase of $773 million or 10% annualized by the end of the second quarter mostly due to the LEAF. Commercial loans accounted for approximately $719 million of the increase while retail balances were up over $54 million. On an organic basis, loans grew 1% annualized. Solid results in residential mortgage and middle market C&I lending as well as continued growth in our asset based lending and equipment financing businesses will mostly offset by lower mortgage warehouse lending balances, which ended the quarter at $1.023 billion, a decrease of $164 million from June 30th. As Jack referenced earlier, organic growth excluding mortgage warehouse lending was 4% annualized for the quarter underlying the importance of a diversified loan portfolio. The fourth quarter historically has been our strongest quarter in terms of loan originations and our current view is that – is for this trend to continue in 2017. As a reminder, the updated loan growth goal of 11% to 13% we provided in July did not incorporate the acquisition of LEAF. As such with annualized loan growth excluding LEAF of 9% through nine months and Jack’s earlier comments on commercial real estate achieving the lower end of our 11% to 13% goal will be challenging. Period end deposit balances of $32.5 billion increased $733 million or 9% annualized for the quarter. The increase was primarily driven by $543 million in higher time balances resulting from a few bank wide CD campaigns during the quarter. On a business segment basis, commercial continue to benefit from franchise wise deposit gathering efforts and grew $690 million or 24% annualized for the quarter. As expected, the seasonality in our municipal business including the onboarding of the Commonwealth of Massachusetts core banking services had a favorable $634 million impact on quarter end commercial balances. Retail balances were up $42 million, or 1% annualized. The third quarter represents a seasonal low point for retail deposits. Following historical trends, a high level of growth is expected in the fourth quarter. Moving along to Slide 7, non-interest income for the third quarter of $89.3 million decreased $2.3 million or 3% from the proceeding quarter. The decline was primarily driven by $4.5 million reduction in commercial banking lending fees resulting from lower loan prepayment income. Net interest income was also unfavorably impacted by lower brokerage commissions and customer interest rate swap income. The largest offsets to these declines was the $2.2 million increase in insurance revenues reflecting the seasonality of commercial insurance renewals, which are higher in the first and third quarters of the year as well as $600,000 in higher investment management fees. On Slide 8, we displayed the compounds driving the increase in non-interest expenses on a linked quarter basis. Included in this quarter’s results, the merger related expenses of $3 million with $2.7 million of these costs residing in professional and outside services and the remainder split between occupancy and equipment as well as other. As a reminder, second quarter merger related expenses were $24.8 million of which $10.8 million were included in professional and outside services, $3.4 million in comp and benefits and $10.6 million in other. Excluding merger related costs, noninterest expenses were $234.1 million, an increase of $1.6 million or less than 1% from the second quarter. The largest component of this increase was $1.4 million in higher costs related to compensation and benefits primarily due to the addition of LEAF. This increase was partially offset by lower professional and outside services costs of $800,000 reflecting the timing of certain projects. We continue to enhance our operating leverage as evidenced by the ongoing improvement in the efficiency ratio through revenue growth and well controlled cost. As displayed on Slide 9, the efficiency ratio for the third quarter was still 57.3%, which marks an improvement of 110 basis points on a linked quarter basis and 260 basis points from a year ago. Going forward even with the significant progress we have made with our efficiency ratio, we will continue to emphasis improving our operating leverage. Our asset quality as demonstrated on Slide 10 continues to be exceptional. Originated non-performing assets as a percentage of originated loans and REO at 64 basis points is once again well below our peer group and top fifty banks. Net charge-offs of 6 basis points remains at a very low level and continues to reflect the minimal loss content in our non-performing assets. As seen on Slide 11, return on average assets was 84 basis points and return on average tangible common equity was 11.8%, both improved from recent quarters. We are pleased with the progress we have made improving these metrics of the recent periods and remain focused on revenue producing initiatives to further enhance returns. Continuing on to Slide 12 as expected and discussed on last quarter’s call, capital ratios declined from June 30th as a result of the LEAF acquisition. However, capital levels at both the owning company and the bank remains 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 twist. As you can see, we remain asset sensitive and well positioned for additional increases in interest rates. Before opening the call up for questions, I wanted to note the effective income tax rate was 30% for the third quarter and 31% for the first nine months of 2017 compared to 31.4% for the full year of 2016. The decline is attributable to our continued investment in tax preference items. Now, we’ll be happy to discuss – happy to answer any questions you may have. Operator, we’re ready for questions.

[Operator:]

Thank you. Ladies and gentlemen, we are ready to open the lines up for your questions. [Operator Instructions] And our first question comes from the line of Jared Shaw with Wells Fargo.

[Jared Shaw:]

Hi, good afternoon.

[Jack Barnes:]

Hi, Jared.

[David Rosato:]

Hi, Jared.

[Jared Shaw:]

Okay, I just start maybe with the margin. Are you still adding to the time deposit? Is that promotion still going on? And if so, where are you seeing the pricing – I discussed the pricing preference picking some of that up? And then as we look at adding more of the LEAF balances, do you think that the margin is stable here or is that still maybe a little under pressure from here?

[David Rosato:]

Hi, Jared. It’s David. That promotion is continuing. It's actually two different CDs. It’s a one year and a two year. When we think about the margin over time, first of all in this quarter we only had LEAF for two months. So, going forward, it'll be in the run rate for full quarters. A big driver is also for the last three quarters the new business going onto the balance sheet has been higher than the average portfolio yields and I am talking loans here. So we think that trend will continue. So I don't need to spend additive to our margin as we said by five basis points in the quarter for two months. So I think our margin is stable to maybe a small upward buyer over time.

[Jared Shaw:]

Okay, that's helpful. Thanks. And then looking at the securities portfolio, should we expect to see you continue to make more of these investments I guess in munis and see more of the held to maturity growth or is that – or you happy with where we are at this point?

[David Rosato:]

Our portfolio from a composition perspective and size of the balance sheet is about where we would like it. But with that said, our preference going forward is to continue to build our municipal securities portfolio. If rates fall or the yield curve flattens, we get nice protection in longer and non-mortgage backed security type investments that won’t prepay us quickly, so it gives us positive convexity if rates fall and it’s the best yield – yielding asset of the asset classes we’re willing to put on the balance sheet and securities.

[Jared Shaw:]

Okay, great. Thank you.

[David Rosato:]

You’re welcome.

[Operator:]

Thank you. And our next question comes from the line of Ken Zerbe with Morgan Stanley.

[Ken Zerbe:]

It’s great. Thank you, actually a similar question just on the time deposit. Can you just talk about, I guess, the overall environment for gathering deposits because obviously you know I’d love to see the money market or noninterest bearing deposits go up more than time. Like how do you guys make that decision why time versus trying to grow some of the other deposits side?

[Jack Barnes:]

Well, the CDs, I think the primary thing to think about and look at with us on the CD promotions and that category is that we constantly have CDs maturing and many times kind of coming out of the last campaign we might have run or one we might have run a year or two or three ago. And so, we're looking to continue to maintain the balances at least at that level. And then when we have a campaign and we’re getting the results we want, we make a decision of how long to run the campaign based on how active it is and whether we'd like to grow that time deposit category any further and we can stop the campaign whenever we would determine. It’s actually interesting to us and I would say builds our confidence in the deposit franchise when we see that we can put campaigns out and gather retail deposits in a factored rate with a competitive interest rate. So we've been doing it regularly over the years. We look to maintain that book as I described and then decide if we want to grow it any further.

[David Rosato:]

Ken, by no means are we not focused on noninterest bearing deposit growth that just goes without saying day in and day out.

[Jack Barnes:]

Our primary objective on the deposit side is growing demand deposits and increasing households and growing of checking accounts. So if you want to think about it in terms of what we prioritize, it's right there. And actually, you'll see some campaigns coming out from us in that category as well.

[Ken Zerbe:]

Got you. Understood. Okay, that's helpful. And then, just a follow-up or a slightly different question. You mentioned that you're seeing a lot of payoffs in the commercial real estate side. I guess, who's the buyers of those? Do they sell the properties? Obviously, they're not refinancing with you guys. I mean, are losing the business to other banks, to cash buyers to nonbanks?

[Jack Barnes:]

I would say on the sales side, it’s really a real mix. There's a lot of different buyers in the market these days from funds to cash buyers, et cetera. So that one's a real mixed bag on that side. On the payoffs we're getting in the competitive side, that's also a mix. Very recently, we had one refinanced to Fannie Mae, which every once in a while, we get some of those with the terms and rates are just too much for our borrower to resist. We also had a large international bank take us out of a large property recently. And we have a lot of competition in the local markets from the small bank. So it also runs the gamut. That – the smaller banks, it's a bit of a mix of terms and conditions and spreads.

[Ken Zerbe:]

Got you. Okay, yes, it's just, you know, if that had changed or how that had changed versus the prior quarter or two?

[Jack Barnes:]

I think the big change there is the larger non-bank player is being a little more active. It seems when we mentioned market conditions, if you ask just to point our finger at something that would probably be it.

[Ken Zerbe:]

All right, great. Thank you very much.

[Operator:]

Thank you. And our next question comes from the line of Steven Alexopoulos with JP Morgan.

[Steven Alexopoulos:]

Hey, everybody.

[Jack Barnes:]

Hi, Steve.

[David Rosato:]

Hi, Steve.

[Steven Alexopoulos:]

I wanted to start first regarding being challenged at the low end of the loan growth guidance. Are you guys saying there'll be a challenge even including the $700 million plus or so of loans from LEAF even with those now will be a challenge?

[Jack Barnes:]

No, that’s not included. So we gave guidance exclusive of LEAF at that mid-year point. So we're trying to just recognize and have you realize that, the fourth quarter is very strong for us across a number of business lines, including commercial real estate. And we think we could bake the lower end of the guidance, but we wanted to recognize that it's going to be a challenge to get there. Certainly, expect if we don't, it's going to be close. But again, trying to be appropriately signaling the challenge; that's all.

[Steven Alexopoulos:]

Okay.

[Jack Barnes:]

We – if we have the type of fourth quarter that we expect, we'll get there.

[Steven Alexopoulos:]

Thank you. And on expenses, with all the acquisitions you guys, are just about $44 billion of assets now. Can you help us think about how much of the expenses in the run rate now for SIFI preparation? And where does that need to go over the next year?

[Jack Barnes:]

Well, I’ll take the shot at that, and I'll let David add his color. He spends a lot of time on – naturally on the CCAR pieces. And so we've been trying to lay out our B50B project, talk about the work that we have done and kind of what is baked into the run rate in terms of activity. And we feel very good about our preparation there around things like enhanced prudential standards, so all of the risk management functions in the bank and the scope of those programs and the skill sets and the people and talent that are in those groups. And that's been a substantial build over the last two or three years. So when you look at that piece of the run rate and you think of all of those units, you can feel good and confident that we feel like we're there. If you think about broader things, like that of governance and strengthening our environment for being as certain as we can be, that the rigor around that for a larger institution, that we're ready for it, we have staffed that. We have increased the governance around it. We have purchased software to help us improve our ability to control that governance. So we've – again, that is – what I just described to you is in the run rate. And I’ve mentioned, for instance, on the living will, we did research with our staff. We realized that, okay, we understand it. We know it’ll take place. We’re not going to spend any money on that. So if we had to go write a living will, if and when the day comes, there would be some – but that would actually be pretty modest in the scheme of things. And then there's CCAR and the status of where we are in that preparation, and I'll let David describe some of that.

[David Rosato:]

Thanks, Jack. And Steve, I don't have too much to add. The way I would think about it is if we compare where we are today and what we might be up against from a CCAR perspective versus a year ago, we have more – we’re farther along, we have more people onboard in different areas, and that's in the run rate. So we're more prepared, certain aspects of our bank today, I would say, where we could be – or where they need to be – to be over $50 billion. But I think what's also changed is the regulatory environment, it seems a lot more favorable today than it was a year ago for many of those requirements being eased and maybe even the $50 billion line being moved. So we're going to continue building out our capabilities around data governance and around stress testing, which is where we're really focused currently and have been for the last 12 months or so and improving processes. But there is not – there we so far maintained confidence that there's not a big uptick in expenses over the next 12 to 24 months to be ready and we think the goal posts are probably going to wind up moving on some of these standards anyway, which will be helpful to us. And as probably worth noting, we recognize this is an important issue for everybody on the line and elsewhere. This – we have had regular dialogue, very consistent dialogue, with our primary regulator, with the OCC, on all of this preparation, the project and the details around it and where we are, and we get feedback. And we have had good contact with the Fed, both in New York and in Washington, about our continued work on being prepared and our desire to be in sync with all of our regulators as it relates to that transition. So think of that as very consistent regular communication feedback loop and an understanding from us that we need to continue to keep moving along where we do, and I think an appreciation on their end that we are working hard to do that.

[Jack Barnes:]

And we’ve said it before, we have been stress testing semiannually now for five plus years and writing capital plans and sharing them with regulators and receiving feedback.

[Steven Alexopoulos:]

That’s very helpful color. Just one follow up, so if we assume the SIFI threshold stays constant at $50 billion, do you guys think you could keep pushing the efficiency ratio lower even as you get closer to $50 billion given all the prep work you've done already?

[Jack Barnes:]

Yes, I would say, that’s a definite yes. We've added everything that we've described to you. And so it's all about the operating leverage, right, and continuing to build and strengthen the revenues while we have managed the expenses slightly, but we've been doing that and we – you can see a good consistent progress there. And so that would be the goal.

[Steven Alexopoulos:]

Okay, thanks guys. I appreciate the color.

[Jack Barnes:]

Thank you.

[Operator:]

Thank you. And our next question comes from the line of Casey Haire with Jefferies.

[Casey Haire:]

Thanks guys.

[Jack Barnes:]

Hi, Casey.

[Casey Haire:]

So, I guess, Dave you have mentioned capital. I think you’d said previously that the low 7% TCE ratio, you guys have been comfortable there. Can you just give us some updated thoughts on what your floor is? I mean, I have capital ratios kind of still in sideways from here. Are you guys comfortable there for a prolonged period of time? Or would you like to see it build? And then sort of as a follow-up, would that sort of lower capital ratio prevent you from pursuing M&A if those opportunities are still out there?

[Jack Barnes:]

Sure, Casey. So what we – what I would say is the change in capital ratios from June 30th to September 30th were exactly as we expected and telegraphed when we announced the LEAF acquisition. We are very comfortable with our current capital levels. And our retention of capital continues to improve as the dividend payout ratio comes down. So we would not in anyway think or I would want you to think that we feel capital-constrained, number one, from running the business on an ongoing basis or from an M&A perspective.

[Casey Haire:]

Okay, and on the M&A front, are you – I mean, you guys have done pretty well in this LEAF deal and then Suffolk as well. So I mean, are you still seeing these opportunities and having these kind of conversations?

[Jack Barnes:]

We are certainly continuing to work on our relationships as we always are and we described to you guys. We – so in terms of finding, et cetera, I really don't have anything to say about that. And as you know, these things, dialogues happen and maybe something moves or it doesn't, but then I don't read into that. Well, I am just reaffirming that yes we do continue to look for opportunities and we do continue to build relationships.

[Casey Haire:]

Okay, understood. And apologies if I missed this. But the transactional New York CRE book, obviously the pay downs there are muting the CRE growth. How big a book is that? I just want to get a sense on how vulnerable you are to that headwind to loan growth.

[Jack Barnes:]

That book stands today as about $1.5 billion – $1.4 billion to $1.5 billion.

[Casey Haire:]

Great, thank you.

[Jack Barnes:]

Casey?

[Casey Haire:]

Yes.

[Jack Barnes:]

Sorry, so I do think as we look at the portfolio, there are some larger multifamily loans in there. So as to the runoff there and how those relationships build over time and whether we consider them transactional relationship needs to be just thought of. We don’t expect all of that – those balances to run out.

[Casey Haire:]

You know, understood.

[Jack Barnes:]

Okay.

[Operator:]

Thank you. And our next question comes from the line of Erik Zwick with Stephens.

[Erik Zwick:]

Good evening, guys.

[Jack Barnes:]

Hi, Erik.

[Erik Zwick:]

Hey, David, maybe first on the mortgage warehouse portfolio. The average loans are up in the quarter and period-end were down. And I appreciate the prior comments about those balances being volatile. But can you provide any color into what happened in the latter part of the quarter, whether it was kind of the lower utilization from just a few borrowers or whether it was a broader trend?

[Jack Barnes:]

Yeah, I don’t – in terms of a few borrowers or otherwise you’re a little far away from your phone or something. So I think we got you. But – so the averages in the quarter were actually up, approximately $150 million even though ending balances were down. And just a couple of pieces of color around there. They do continue to build relationships, so they've actually – we've approved and they've booked new lines, new relationships, and that continues to move forward. But we're out of the summer home purchasing season, so that will slow activity, the refi continues to slow, and that's the volatility in that business. We're not making any assumptions about further growth or decline as we think about moving through the quarter. There's pros and cons that are impacting it.

[Erik Zwick:]

Okay, and the Suffolk transaction closed a little over six months ago, so it’s still relatively early. But can you talk about how the deal has gone so far with regard to both employee and customer retention versus your original expectations?

[Jack Barnes:]

Yeah, glad to, it’s gone very well. So probably, just some color on the retail side. We feel very good about the deposit retention. We've integrated the retail branch personnel. And I think things are settling down there very well. They are much more comfortable about the systems and products, and the meetings that we're having there with managers are really all in a very good spot. On the commercial side, we actually have increased our pipeline, especially in the business banking sector, where a lot of the commercial relationship managers came over. They’re doing very well and their pipelines are growing. And so they're focused on the next piece of business rather than transition, which we always look for and want naturally. Howard Bluver is very active with the larger customers, in particular, and involved with the dialogue there. We do have competitors that are trying to take advantage of the transition, and we feel really good about our ability to slow that down and we feel good that we have. We've done a number of deals with old customers, existing customers where we’ve used our figure balance sheet, so we’ve grown some of those relationships that was part of our plan. And I would say I am very focused on making sure they're all focused at going at the competitor's customers and growing some market share and including getting myself out there to enjoy the competition.

[Erik Zwick:]

And then lastly, on deposits. Last quarter, you talked about bringing on the state of Massachusetts as a municipal customer. Is that process complete? Or is there still more to come that could impact balances in the fourth quarter?

[Jack Barnes:]

It basically completes. It’s just one more smaller step, but I think in the scheme of things, it's hundreds of accounts and tens of agencies. And it's basically – it’s all in, it's all active, and the deposit balances, on average, will – are in the numbers.

[Erik Zwick:]

Great, thank you for taking my questions.

[Jack Barnes:]

Thank you.

[Operator:]

Thank you. And our next question comes from the line of Matthew Breese with Piper Jaffray.

[Matthew Breese:]

Good evening everybody.

[Jack Barnes:]

Hi, Matt.

[Matthew Breese:]

Just one quick question. What was the total balance of the LEAF loans that were acquired again?

[David Rosato:]

$735 million.

[Matthew Breese:]

$735 million. And so, if I back that out and kind of think about where you need them to achieve your full year guidance including Suffolk, on a quarter-over-quarter basis, I would have to get something you know north of a billion dollars in net growth and it sounds like you guys are close, but it will be challenging. And so just I wanted to make sure that I had my numbers right for the fourth quarter that it will be exceptionally strong and that net growth could be north of a billion dollar, which is that accurate?

[David Rosato:]

Yes, it is.

[Matthew Breese:]

Okay. And do you want to – could you frame that up a little bit better if it's going to be that strong because you – color it for us a little bit.

[Jack Barnes:]

Well, we’ve given you some color on the various business lines. If we – I'd say, where some of that confidence comes from would be the strength of our commercial real estate pipeline, particularly in New York and Connecticut, although Boston has some good activity and very strong pipelines in C&I in Boston and the Massachusetts market. And I mentioned that the business banking pipeline, and particularly in New York, in the Long Island area, and the residential continues to do well. We've been seeing declines in home equity like everyone else, so we don't see a lot of contribution there. And the equipment finance leases will be onboard for a quarter. And the other units, I would say, are facing stronger-than-average competitive pressures. The larger banks are holding a lot of larger deals some that we would traditionally get pieces of. So, that’s a bit of a more uncertain piece of growth as we look forward to the fourth quarter and beyond, as we work our plans.

[Matthew Breese:]

And what is the – if you have it, what is the blended rate of the pipeline versus the quarterly loan yields?

[Jack Barnes:]

We don’t have that.

[Matthew Breese:]

Okay. And then looking beyond the fourth quarter, we think about your original 2017 loan growth guidance, I think it was for mid to high singles from 5% to 7% growth. In your early outlook, is that’s still a good estimation of what we could see, looking over the next 12 to 18 months?

[David Rosato:]

Matt, it’s David. We’re not ready to go to 2018 yet. We’re just in the middle of budgeting for next year and working on our strat plans. So we'll have an update on 2018 in January.

[Matthew Breese:]

Understood, okay. And then my last one is really just around M&A and preference. If the next deal were to come across, do you think it's more likely it would be a whole bank deal, a portfolio deal or some sort of fee income type of acquisition and what would your preference be?

[Jack Barnes:]

The preference is to strengthen the company. So be accretive and move us forward. As we've said in the past, if – I will say banking is – feels to me like it's a lot more attractive than it was three months ago based on the regulatory environment. The regulators are trying to improve the timing, and that's been evidenced, I think, in some recent deals. So that is encouraging. But the opportunities like LEAF and in the insurance and in the wealth management business, are certainly attractive to us. And so where we have the resources and the reputation, I think, to attract discussions, and so we look for opportunities that strengthen us.

[Matthew Breese:]

Thanks, Jack. That’s all I had. Thank you for taking my questions.

[Jack Barnes:]

Thank you.

[Operator:]

Thank you. And our next question comes from the line of Collyn Gilbert with KBW.

[Collyn Gilbert:]

Thanks, good evening guys.

[Jack Barnes:]

Hi.

[Collyn Gilbert:]

David, just to go back to the – some NIM-related questions and loan yield questions. So for the last two quarters, you guys have had loan yields up, like, I guess, about 16 basis points linked-quarter, which is a really big move, probably one of the biggest I've seen, certainly, in my universe of coverage. Can you just talk a little bit more about that? And then I know you had indicated that the origination yields now have been higher than the portfolio yields for the last couple of quarters. But just break that down a little bit more as to the color that's sort of driving that. And then if there's a correlation there, specifically to obviously the move-in rates and what that's done for loan yields and maybe what you're thinking about in terms of the NIM trajectory as we look out over the next quarter and then into next year, given the potential Fed move.

[David Rosato:]

Sure, for a couple of years, what I would say is rates were falling and spreads were compressing. And so since the last year, we've had Fed funds go up a 100 basis points, and you really had a stabilization of spreads, so you – we had a reversal of two – of the two major drivers, right? The interest rate rising rather than falling and spreads stabilizing rather than continuing to compress. The – about 43% or so of our loan book is floating, so we've clearly benefited from LIBOR being up about 100 basis points over that time frame and it's really just that. The combination of those two things on a $32 billion loan book, I would say, only about 43% of it is prime or LIBOR-based. But that's very powerful, and that's really all it is that’s been helping us.

[Jack Barnes:]

Just one a little bit additional color there, that one of the things we've been doing is really looking hard at our mix and the contributions of that, right? And so you remember, we had started backing away from that New York multifamily, and that wasn't a quality issue, it was a yield issue and where the spreads were compressing too. So as that runs off, our entire commercial real estate book is looking better and contributing better. And in the residential area, we're trying hard to attract activity in the products that are giving us better return as well. So the big things are what David just talked about, we are trying to work around the edges as well and keep that moving in the right direction.

[Collyn Gilbert:]

Okay, okay, that’s helpful. And then just on the provision, I know, you had indicated it would be contingent upon mix and quality and all that type of thing, but are you still thinking that the provision could kind of fall in that $25 million range for the full year this year? And then maybe, I know you're not giving guidance, David, next year, but I'm just trying to think about how you're thinking about the outlook for credit and maybe where you would be building the reserve or where you maybe would be releasing the reserve or just how you're thinking about it altogether.

[David Rosato:]

Yeah, when you think about the $25 million to $35 million guidance, we put out, if current trends continue, which is what we would expect, we'll probably be at the lower end of that guidance range for this year. The caveat to that is clearly the loan growth over the balance of the year. But as far as charge-offs, we’ve been in a very nice place and very steady for quite a few quarters now. So I'd say, from a guidance perspective, on the good side of that guidance.

[Jack Barnes:]

Collyn, I think from our perspective, the credit outlook is basically the same, and we're not immune from customers going through challenges. I think we're very good at working with customers and very good at underwriting, so that it's – the numbers come out consistently where they do. And I don't see any big shift in the credit environment that would cause us concern at all.

[Collyn Gilbert:]

Okay, okay, that’s helpful. And then just one final question. I know it’s hard to predict obviously that – this kind of the swap income and just that other income line. I mean you've seen it go as high as, I guess, $30 million in the first quarter and this quarter was low of $13.7 million, all in. Is there any – just it's a big number that swings quite a bit and then makes it a little bit hard to project. Is there any way we could think about it maybe qualitatively for the direction of that line item?

[David Rosato:]

Well, you started the question with the swap income, right? And yes, that's really, in large part, driven by commercial real estate origination activity. So that was a little light in the quarter. The origination activity as we’ve talking about was soft, and it impacts that line. The other – I would actually say, from my perspective, it – there historically has been some lumpiness in that, but it's really settled down. And you look at second to third quarter, this quarter, and there's a $0.5 million differential. So I would expect that to continue going forward more muted changes.

[Collyn Gilbert:]

Okay, okay, all right. Thanks. I will leave it there.

[Jack Barnes:]

Thank you.

[David Rosato:]

Well.

[Operator:]

Ladies and gentlemen, with no further questions in queue, I would like to turn the call back over to Mr. Barnes for closing remarks.

[Jack Barnes:]

Thank you. In closing, we’re pleased with the company's strong performance in the quarter, which was highlighted by the successful closing and integration of the lead commercial capital transaction, record quarterly net income, further expansion and net interest margin to its highest level and three years, ongoing improvement in operating leverage, driven by revenue growth and tight expense control, strong deposit growth and exceptional asset quality. As we celebrate our 175th anniversary, our commitment to building a strong banking franchise for the long-term remains unwavering. And we are confident in our ability to deliver superior service to clients and consistent quality earnings growth to shareholders. 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.