People's United Financial, Inc.
Q3 2014 Earnings Call Transcript

Published: 17 Oct 2014

[Operator:]

Good day, ladies and gentlemen, and welcome to the People's United Financial Inc.’s Third Quarter Earnings Conference Call. My name is Jenison, and I will be your coordinator for today. At this time, all participants are in 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. Peter Goulding, Senior Vice President of Corporate Development and Investor Relations for People's United Financial Inc, please proceed sir.

[Peter Goulding:]

Good afternoon and thank you for joining us today. Jack Barnes; Kirk Walters; David Rosato; and Jeff Hoyt are here with me to review our second quarter results. Please remember to refer to our forward-looking statements on Slide 1 of this presentation, which is posted on our Web site, peoples.com, under Investor Relations. With that, I'll turn the call over to Jack.

[Jack Barnes:]

Thank you, Peter. Good afternoon, everyone. As always we appreciate you joining us today. This quarter’s results reflect the core strengths of our franchise. The benefit of investments we continue to make in people, products and services, as well as our expanded geographic footprint. These investments helped total revenue growth by $3 million over the prior year period. This is in spite of net interest margin pressure and residential mortgage gain on sale headwinds. Even with these important investments and revenue initiatives and higher cost of regulatory compliance, we continue to hold operating expenses flat through a process of effective expense management. Now I’d like to discuss our third quarter results. On Slide 2, operating earnings were $63 million, while net income was $61.6 million both equating to $0.21 per share. Net interest income on a fully taxable equivalent basis increased to $233.3 million, which represents 2% growth over the prior year period. The net interest margin declined by 8 basis points to 305 compared to 313 in the second quarter of 2014. End of period loans grew at an annualized rate of 8% in the third quarter. This marks our 16th consecutive quarter of loan growth and is a testament to both our relationship managers and customers. Our growth is founded on customer relationships which have expanded as we have added talent, product capabilities and deepened our presence in the large markets of Metro New York and Greater Boston. Total deposits grew at a 19% annualized rate which was largely attributable to a $900 million increase in brokered deposits. Excluding brokered deposits, organic deposit growth was 5%, as we further strengthen relationships in the larger New York and Boston markets, our deposit base will be set for growth. Our commercial relationship managers have deposit gathering as one of their top goals. This approach is consistent with our long held preference for relationship-based banking on both sides of the balance sheet. And what is a seasonally strong quarter, non-interest income was $4.5 million ahead of the second quarter at $84 million. Operating expenses remained flat at $206.7 million as a result of disciplined expense control. Efficiency ratio for the quarter improved to 61.4% from 61.8% in the second quarter of 2014, due to both revenue expansion and careful expense management. Asset quality remained strong with net charge-offs of 30 basis points and non-performing loans of 92 basis points. As mentioned before, we firmly believe that sound underwriting is the only way to confidently grow a balance sheet. With that I’ll pass it to David and Kirk to discuss the quarter in more detail.

[David Rosato:]

Thank you, Jack. On Slide 3 we provide detail behind the linked quarter change in net interest income on a fully taxable equivalent basis. Runoff in the acquired loan portfolio resulted in declines in accretion of 2.8 million. Lower yields offset growth within the investment portfolio, negatively impacting net interest income by 400,000. Borrowing cost increased 1.3 million following the subordinated debt transaction in the second quarter. While increased deposit volume negatively impacted net interest income by 300,000. This was offset by strong originated loan growth and one more calendar day in the third quarter, which positively impacted net interest income by 3.5 million and 1.8 million respectively. As we have mentioned before, growth in net interest income from the originated portfolio outpacing lost accretion on the acquired portfolio is a positive sign for the quarters ahead. On Slide 4 you can see a breakdown of the elements contributing to our quarterly net interest margin results. New loan volume and mix negatively impacted the margin by 6 basis points as new business yields remained lower than the total loan portfolio yield. The subordinated debt issuance contributed 2 basis points to the net interest margin decline, while lower security yields and deposit volume each pressured the margin by 1 basis point. An additional calendar day in the quarter positively impacted the margin by 2 basis points. More broadly, benchmark interest rates and credit spreads are lower than at the beginning of the year. Our continued strong loan growth in this environment has resulted in more net interest margin pressure than we have anticipated. Slide 5 give provides a breakdown of the elements contributing to our net increase in loans. The loan portfolio grew 499 million or 8% annualized. This was achieved through leveraging our expanded footprint, as well as our progress in our heritage markets. Originated loan growth for the quarter totaled 597 million, as in prior quarters growth was well balanced from a product and geographic perspective. Commercial real-estate contributed 161 million of the total originated loan growth, while C&I contributed 208 million. Within C&I, we saw particular strength in our equipment finance and asset based lending businesses. These business units have recently demonstrated meaningful productivity increases. The commercial portfolio remains broadly diversified with respect to loan type, geography and industry. Residential mortgages contributed 198 million of originated loan growth in the third quarter. Net of acquired loan runoff, the residential mortgage portfolio grew at an annualized rate of 17%, reflecting strong demand for jumbo hybrid ARM portfolio products all within our markets. The consumer portfolio contributed 30 million to originated loan growth, which was driven by higher home equity advances in the third quarter. It is important to note that 100% of home equity loans are retail originated with approximately 63% of third quarter originations in a first-lien position which is slightly above the range we have experienced over the last three years We experienced acquired loan runoff of 98 million this quarter compared to 133 million in the second quarter and 220 million in the third quarter of 2013. We anticipate runoff in all of our loan portfolios including our acquired loan portfolio to remain at low levels. Slower runoff is expected to contribute to continued healthy loan growth. You can see on Slide 6 a breakdown of the elements contributing to our net increase in deposits. Total deposits increased 1.2 billion supported by brokered deposit growth of 900 million. The seasonality in our municipal business had a favorable $247 million impact on commercial deposits in the third quarter. The third quarter represents a seasonal low point for customer retail deposits with growth expected in the fourth quarter. As alluded to earlier, we believe we are underway commercial deposits and continue to make changes to further emphasize deposit gathering. We firmly believe that deposits are an important part of the customer relationship and our ongoing focus remains on growing organic deposits and improving our deposit mix. Now I would like to pass it to Kirk.

[Kirk Walters:]

Thank you, David. On Slide 7 we take a closer look at non-interest income which performed well in the third quarter. The seasonal nature of insurance renewals benefited fee income by 2 million. Commercial banking’s lending fees increased 1.2 million which was mostly driven by loan prepayment and commercial lending services fees. Gain on residential mortgage sales increased 1.1 million, while bank service charges increased 500,000 due to higher overdraft and interchange fees. Customer interest rate swaps decreased 400,000. On Slide 8 we illustrate the key components of changes in non-interest expense. As we have mentioned before, we continue to tightly control expenses while investing in revenue producing initiatives and covering the higher cost to compliance. Non-operating expenses increased 500,000 which is attributable to branch closure and severance related costs. From an operating expense perspective professional and outside services decreased 600,000 which is partially offset by the timing of advertising expenses of 400,000. Importantly the net impact was a flat operating expense for the quarter. The next slide details our efficiency ratio over the last five quarters. As I mentioned earlier the efficiency ratio improved this quarter as a result of revenue growth and disciplined expense management. We continue to remain very focused on improving operating leverage. Slides 10 and 11 are a reminder of our excellent credit quality. Once again, we did see an improvement in non-performing assets this quarter from already industry-leading levels. Originated non-performing assets as a percentage of originated loans and REO at 92 basis points remains well below our peer group and top-50 banks and are down approximately 27% from 1.26% in the third quarter 2013. Acquired non-performing loans are not included in these calculations due to the different accounting model applicable to such loans. However, it is worth noting that we are very pleased with their performance as we have seen these balances decline 38 million or 25% to 116 million in the current quarter from 154 million a year ago. Looking at Slide 11, net charge-offs continue to remain low at 13 basis points compared to 10 basis points last quarter and 17 basis points one year ago. Excluding acquired loan charge-offs, net charge-offs this quarter were 12 basis points. These levels reflect the minimal loss content in our non-performing assets and are well below peers. Over the last four quarters charge-offs against specific reserves represent approximately 58% of total charge-offs. As such, we understand their credit issues well and typically have very few new credit events each quarter. Now I’ll pass it back to Jack.

[Jack Barnes:]

Thank you, Kirk. Slide 12 highlights our ability to grow both sides of the balance sheet. We continue to make progress on loan and deposit growth on a per share basis, while maintaining excellent asset quality. Over the past year, loans per share and deposits per share have grown at compound annual rates of 15% and 17% respectively. Operating return on average assets for the third quarter was 74 basis points compared to 72 basis points for the prior quarter. Our return on average assets continues to be impacted by the ultra-low interest rate environment and some recent initiatives which we are still ramping up to a more normal level of productivity. Progress will be driven by continued loan and deposit growth, fee income growth and a continued disciplined approach to expenses. Slide 14 illustrates the improvement in our return on average tangible equity since the third quarter of 2013. We expect to see continued progress on this metric as we improve profitability and thoughtfully deploy capital. Now I’ll pass it back to David to discuss our capital ratios and interest rate risk profile.

[David Rosato:]

Thank you, Jack. On Slide 15 we see that capital levels at the holding company and the bank remained solid with our tangible common equity ratio at 7.8%, Tier 1 common at 9.9% and total risk-based capital at 12.3%. Slide 16 illustrates our interest rate risk profile for both parallel rate changes and yield curve twists. As you can see, we are a bit more asset sensitive this quarter as compared to last particularly in the yield curve twist scenario of short end up 100 basis points. The primary reasons for the change relates to our originating more C&I loans, which tend to LIBOR based and the building of a brokered CD book with terms ranging from three months to five years with the current average maturity of nine months. Now I’ll pass it back to Jack to wrap-up.

[Jack Barnes:]

Thanks David. Our franchise founded on deep commitment to exceptional customer experience as well as a continuously improving set of talent and capabilities is well position for growth. Along the way we’re building the business the right way, the only way for long-term. With that in mind we intend to submit within the next few days an application to the office of the control of the currency to convert People’s United Bank to a national bank charter from its current federal savings bank charter. Concurrently we intend to file an application with the Federal Reserve Bank of New York for a bank holding company status. We believe this conversion will better match our commercial banking business model. Further, we will benefit from both the OCC and the Federal Reserve’s deep understanding of and experience in supervising large commercially oriented financial institutions. This concludes our presentation. Now we’d be happy to answer any questions that you may have. Operator we’re ready for questions. Question-and-Answer Session

[Operator:]

Ladies and gentlemen, we are ready to open the lines up for your questions. (Operator Instructions) And your first question comes from the line of Sameer Gokhale with Janney, please proceed. Sameer Gokhale - Janney Capital Markets Hi, thank you. First question really relates to your growth on the commercial loan side and you talked about this in your comments the mix of more maybe equipment finance and ABL loans, but I was trying to reconcile that to the decline in your average yields it seemed like a fairly steep decline about 12 basis points sequentially. So was that decline largely attributable to a mix shift given have the equipment finance and asset based loan originations, can you give us a sense for how much of the sequential growth came from pure C&I versus equipment financed loans that would be helpful.

[David Rosato:]

Sure Sameer it’s David. It was actually a combination of both. We did see continued spread pressure during the quarter. Generally speaking across all of our portfolios and then we did also have a mix change. The net effect was about half and half between spread change and mix change. Sameer Gokhale - Janney Capital Markets Okay, thanks David. And then the other question I had was just expectations from the standpoint of provisioning, the loss provision is a little bit higher compared to what you’ve been reporting I think over the last few quarters and I wanted to get a sense for whether you think, you expect provisioning to come back down a little bit, I know there is some provisioning for growth but how should we think about that looking out the next few quarters?

[Jack Barnes:]

Hi, Jack. I would answer that in two ways I mean we are very consistently as we have move through the last number of years approaching the provisioning in two different ways one is to deal with covering charge-offs net of specifics if we have them laid out. The other is dealing with loan growth. So, we’ve been provisioning within a pretty consistent range I would say, this quarter we had one particular credit that we dealt with in the charge-off side but, so depending on we don’t expect any major changes in kind of asset quality metrics or charge-off levels within the range we’ve been in is what we’d expect and naturally based on loan growth and mix again we would be provisioning for the growth. Sameer Gokhale - Janney Capital Markets Okay, just my last question was really on your dividend policy I mean when you look at the valuation of the shares relative to the dividend yield obviously it seems fairly high and yet gradually it seems like the dividend per share has been creeping up. I understand that that’s gradually but at what point do you say clearly the stock on a dividend yield basis seems to be yielding a pretty rich yield. So maybe we should just hold off a little bit on increasing dividends going forward, how do you think about that?

[Jack Barnes:]

Well, again I would reference you to the last number of periods we generally like the idea of being able to continue to increase the dividend very much in the same manner we have in prior years and we’re very focused on improving profitability which will bring the dividend payout ratio down as it has been doing gradually overtime.

[David Rosato:]

Yes Sameer, the dividend increase history that we’ve had is a penny per year on our share count equates to $3 million per annum and our plan is definitely to have loan growth or have earnings growth outpace the dividend increase so that you will continue to see our a trend down in our dividend payout ratio. Sameer Gokhale - Janney Capital Markets Okay, that’s helpful, thank you.

[Jack Barnes:]

Thank you.

[Operator:]

Your next question comes from Collyn Gilbert with KBW, please proceed. Collyn Gilbert - Keefe, Bruyette & Woods Great, thanks. Good afternoon guys. Jack, if I could just follow-up or maybe actually David might have made that comment or nevertheless, just a comment that you guys made at the beginning where just saying that the strong loan growth created more NIM pressure than you anticipated, what exactly do you mean by that?

[Jack Barnes:]

Well, you’ve seen the our NIM come down each quarter this year and when you look at the drivers of that its benchmark interest rates so, 10 year treasury for example is down 90 basis points on the year and 5 year notes are down about 40 basis points. And then those being continued competitive pressure on spread. We are doing our best to pick our spots for loan business and we have a lot of different portfolios, so we’re trying to grow where there is less competition. But the statement was just around the fact that, as the year is unfolded, it’s become a tougher environment than what we thought at the beginning of the year. Collyn Gilbert - Keefe, Bruyette & Woods Okay, that’s helpful. I mean, are you thinking about when you thinking about that the balance sheet in totality and the profitability profile that you will balance it such that you will continue to grow with it just as you continue to grow NII?

[Jack Barnes:]

Yes, I mean basically, I think one of the great advantages that we have from an operating aspect was that run the number of businesses that we do run and if you look back at that 16 quarters of loan growth now and that’s a pretty consistent demonstrating a consistent ability to move all of the businesses forward. We feel very good that we will be able to continue to do that and that that will allow us to continue to grow net interest income as we move forward. Collyn Gilbert - Keefe, Bruyette & Woods Okay, that’s helpful and then just a question on the brokered deposit, I think so you guys you have grown I think you said 900 million, I think last quarter you were targeting more like $700 million level, what’s driving that difference and do you expect to sort of continue to pace of growth ahead of where you maybe originally would have anticipated?

[Jack Barnes:]

I think the pace of growth will subside a little bit. We did a little bit more in the third quarter than we thought we would. Really what’s new there is we started to build a CD portfolio which we mentioned in the script, so we’re starting to term out a little bit a CDs just provide liquidity prior to needing the fund loan growth. Collyn Gilbert - Keefe, Bruyette & Woods Okay that’s helpful, and then just one final question, any change in your positioning on M&A in terms pursuing potential targets?

[Jack Barnes:]

No, there is no change, I would say we continue to work at it as we have and work our relationships and it might feel like the environment is changing a little bit, but not dramatically from our perspective.

[Operator:]

And your next question comes from David Darst with Guggenheim. Please proceed. David Darst - Guggenheim Securities David, could you talk about your target capital ratios and I guess you’ve grown the balance 10% year-over-year, but it looks like you’ve retained earnings growth and probably supports only middle single-digit lowering balance sheet growth going forward and I just wanted know how you’re planning for it?

[David Rosato:]

Well, our capital ratios have come down, but I would say only moderately. If you look from the second to the third quarter, we are slightly above our, what we would call our operating targets and we believe that we do have the ability to continue to grow the balance sheet. However, we would expect loan growth will probably slow a little; it’s just the law of large numbers as we get bigger and are not concerned about having the capital to fund that growth. David Darst - Guggenheim Securities Okay, got it, and then you talked about your organic commercial deposit strategy, could you maybe outline how you’re approaching that and maybe in what markets that you’re doing it?

[Jack Barnes:]

Sure, this is Jack, David. The primary focus is on cross-sell and good fundamental banking. We have always had an expectation that we would gather deposits from commercial relationships. What we’ve done in the last several years as we have intensified that focus through changes that we have made in incentive programs and also frankly just toned from the top management focus and another critical component that’s helping us a lot, in kind of execution of those expectations as we review relationships for credit events, and outside of credit events we’re reviewing customer profitability and return on capital measures. And it really highlights the importance for our relationship managers to gather deposits from their customers and increase the other percentage of deposits that we have already. So there is a lot more focus and a lot more ask going on, on the deposit side which is giving us some good results. David Darst - Guggenheim Securities So is that rooted in some of your comments where you talk about your needing the backfill into some of your markets to get more relationships that you maybe did not have a number of years ago?

[Jack Barnes:]

Yes, I would say in different pieces of our footprint and legacy some have been stronger than others overtime. Business we’re all doing quite well and making progress. The other thing that I think is really important for people to think about with us is if you look at our presence in New York and Boston, the branches that we acquired from Smithtown and citizens in New York were barely small underperforming. And we’ve been building those out steadily and there is, in New York there was just under a 100. So that creates a lot of opportunity for us to generate new deposits and strengthen our deposit growth rates. And Boston is very much the same thing, it went through a different kind of transition after the acquisitions that were completed in 2012 and we have been moving forward on retail and commercial in the Greater Boston area with deposit gathering as well. So there is a lot of just good solid banking in the new markets that will result in good deposit generation.

[Operator:]

And your next question comes from Matthew Kelley with Sterne, Agee. Please proceed.

[Matthew Kelley:]

Hi, I was looking at slide 20. You give a nice table reconciling the reported versus the core margin. The core margin is 298 now. In the current interest-rate environment, where would you see that over the next year, assuming no changes in the rate environment or Fed funds policy?

[David Rosato:]

Hi, Matt its David. It's the $1 million question, if we look back on this year we have our new business yields at the beginning of the year were above our originated portfolio, and then they have fallen behind -- and then they been above and below the originated portfolio. So, we believe that there is still more margin pressure, there is more forces on the margin to take it down rather than to take it up, that’s a combination of competitiveness, some other lenders as well as the interest environment. So, it's a little too early, we believe to put that, out a number out there, we’re in the middle of our planning process for next year, but suffice it to say we’re doing it everything we can to manage our business to preserve margin while still working to maintain an asset stand to their position. So hopefully that’s helpful.

[Matthew Kelley:]

Okay, okay. Then the brokered deposit strategy, how much more is that going to continue over the next couple quarters? And ultimately, where do you see your loan-to-deposit ratio next year?

[David Rosato:]

Well, I’ll start with the latter. So you saw our loan-to-deposit ratio at the end of this quarter was 102 when it come down I believe from 105 at the end of the second quarter, we certainly like that direction. Ultimately, we want a loan-to-deposit ratio of around a 100%. And the efforts that we have in the commercial bank to get our whole share of deposits in those markets will help us achieve that. In the short-term there will be growth, continued growth broker deposits but I would think the pace will subside.

[Matthew Kelley:]

Okay. And last one, 35% tax rate still we should be using through next year?

[David Rosato:]

Probably 34.

[Matthew Kelley:]

Okay, got it. Okay. Actually, one last question, if I could. What are your current rates for that core 5/1 multi-family product in the New York market? I know that's been a big driver of growth over the last year or two for you folks. Where are you right now on pricing and what are your thoughts on that business?

[Jack Barnes:]

Jack, first of all more broadly on the business, we have seen spread compression come in during the year here pretty meaningfully and I think we talked about it at one of the conferences recently that we, we were slowing our pace of growth in that portfolio because of where spreads are going. So, we are committed to the business, we’re committed to working with the quality sponsors. But that said we are not going to kind of grow the portfolio with these spreads at the rate we have been anticipating. So, we are slowing our participation but we are going to stay in the game for the long-term. And just in terms of we talk about spreads and we’ve definitely seen probably between 25 basis points and 50 basis points compression during the year.

[David Rosato:]

Yeah, that current spreads in the five year about 150 to 160 over swaps. And as Jack said that’s getting tight.

[Operator:]

Your next question comes from the line of Bob Ramsey with FBR please proceed.

[Robert Ramsey:]

I appreciate you taking the questions. To follow up on Matt's question about margin, I can appreciate you all are still in the planning process for next year, but do you have a sense of what compression could look like in the fourth quarter, based on your loan pipeline, and do you think you will still be able to stay above the 3.10% guidance you all have previously given?

[David Rosato:]

Hey Bob its David. As you know the guidance at the beginning of the year was 3.10% to 3.20%. Year-to-date that margin is 3.12% and it was 3.05% in the third quarter. So we would think that we would be at the low-end of that guidance the very low-end of that guidance.

[Robert Ramsey:]

That suggests that you're going to have, I guess, a more moderate pace of compression in the fourth quarter than the third?

[David Rosato:]

We are trying to achieve.

[Robert Ramsey:]

Okay.

[Jack Barnes:]

That given the last few days in the market. Right?

[Robert Ramsey:]

Yes, it changes every day, right?

[Jack Barnes:]

One thing is important to remember Bob is as Kirk gave. For the third quarter. We had a four quarter interest expense on this coordinated debt to third quarter and that was issued right at the end of the second quarter. So I was thinking about linked quarter compression that’s already reflected in numbers.

[Robert Ramsey:]

Remind me; was that a couple basis points of -- 1 to 2 basis points of drag in the third quarter from the debt?

[Jack Barnes:]

There was 2.

[Robert Ramsey:]

2, okay, great. Talking about -- you all were asked about growth in capital earlier and you said you do expect growth to slow, and you have talked, too, about the competitive environment in multi-family and narrower spreads. Just curious, as you expect growth to slow -- I think you all talked about the law of large numbers, is that a 2015 event or is it a longer-term event when you start to see the pace of loan growth slow?

[Jack Barnes:]

2015. And I would say we are looking out that far. What the point is that as we have grown out things like ABL mortgage warehouse, mid-corporate portfolios. Even Long Island C&I and the things that we have been referencing for a couple of years as they get to more kind of normal growth rate that would come from just hitting $0.5 billion or $1 billion in size the ability to add business in those new platforms that at the pace we have been this logically doesn’t make sense when the numbers get larger. So that’s what we mean by the comment that’s made.

[Robert Ramsey:]

Okay. You had also mentioned at the end of your prepared remarks that you have applied to change charters. Remind me, because I think you all went through this process once before and then withdrew the charter application. Could you just give me maybe a little bit of background about -- remind me what happened then and talk about what's different about the application now or why you see it progressing differently?

[Jack Barnes:]

Well it’s I would say pretty straight forward. We have had the OCC and Fed as our primary regulators and over the last number of years as the Thrift and OTS went away. And we have been going through an evaluation of which direction should we go, which is basically national charter or state. And as we have built a relationship with the OCC over that period of time and we both have gotten to know each other very well. It makes good sense for us to go into the national charter and to continue on with the relationship where we are not starting from scratch.

[Robert Ramsey:]

Okay, and then, what's different this time than the last time that you all, I guess, had applied to change charter? Or had applied for an OCC charter?

[Jack Barnes:]

I know the comments I just made about understanding the regulator much better having built the relationship over that period of time and the benefits of the national charter.

[Robert Ramsey:]

Okay, great. Last question and I will hop out. You all had a good quarter for fee income. I think last quarter you all had said that the goal was to hold fee income flat year over year, and just curious, with one quarter left to go, how you all are thinking about the opportunity to hold fee income flat?

[David Rosato:]

Hi, Bob its David. Once again we are doing everything we can across each of our lines of business. Each of our fee income businesses. We have good traction in our wealth management business, our cash management business. We did see a positive change in our gain on sale line however it’s substantially down year-over-year and continues to provide one of the larger headwinds. We’re hoping we get a little pick up in the fourth quarter on that line item with what’s going on in the interest rate market.

[Robert Ramsey:]

Sure.

[David Rosato:]

That’s from the last couple of days we start to see a little switch in application volume where refinances are starting to come back a little bit it’s early it’s only been two weeks that grades are really starting to fall but we’re pulling all the levels that we have to hold the line on fee income.

[Robert Ramsey:]

Okay. Thank you very much.

[Operator:]

Your next question comes from Casey Haire with Jefferies. Please proceed.

[Casey Haire:]

Hi good afternoon guys.

[Jack Barnes:]

Hi Casey.

[Casey Haire:]

One of the follow up on the capital adequacy question if I may I just said another way, the TCE ratio at 7.8 at what level would you not like to see that TCE going lower?

[Jack Barnes:]

Well, we think we can, for the risk of our business model which we figure is, which we believe is very low risk especially based on the credit performance that we put in. We can operate in the 7.5% range for TCE the tangible assets.

[Casey Haire:]

Okay. When you see that is to getting ratio for you or what would be Tier 1 leverage?

[Jack Barnes:]

It’s probably TCE if there was one.

[Casey Haire:]

Okay.

[Jack Barnes:]

That’s a range, that’s not a absolute floor we’re not saying it would never go below 7.5% but right around 7.5% which was to my earlier statement we’re a little above where we think we will be long term.

[Casey Haire:]

Understood, okay. And then just a question on slide 16, the NII sensitivity to be up 200 bps shock. Can you just go over some of the assumptions there? It obviously screens very well versus peers, but it just seems aggressive, given if I strip out the broker deposits, the loan-to-deposit ratio, if my math is right, it’s over 110%. So if you could just go through some of the assumptions that gets you that kind of lift, specifically around the broker deposits?

[Jack Barnes:]

From a broker deposit perspective we assume that any money market broker deposits are going to go up basis point by basis point with any change in the fed funds right. So a 100% elasticity to rising rates. Within the broker deposit the broker CDs would have a slight lag because on the prepared comments we said that there is a -- we’re doing CDs from three months from five years and currently that look as a nine month weighted average. So there was a little lag effect there. Our balance sheet has been changing as we’ve been doing less fixed rate multifamily and less fixed rate commercial real estate and doing more C&I and also not to the same extend we’re doing a little more in key logs. We have been able to grow that portfolio slightly that’s the prime based portfolio most of the C&I is one month LIBOR base. So our assets, the asset side of the balance sheet has got more sensitive to rising rates than where it was for example six months ago or a year-over-year. A big driver in all models is your assumptions around deposits and we spent a lot of time on deposit assumptions. We have elasticity, that ranges anywhere from 15% up through 75% meaning up a 100 some deposits for example non-interest or interest bearing checking account may only for a very lower tier balance account they only go up 15 basis points but a retail CD will go up 75 basis points if any market move. So when you put all that together still a strong core retail and commercial deposit base and more assets that are LIBOR based as well as a very short highly cash flow and securities portfolio that is only 13% to 13.5% of total assets significantly below our peer group that’s what creates this asset sensitivity.

[Casey Haire:]

Understood. Thank you.

[Jack Barnes:]

You’re welcome.

[Operator:]

Your next question comes from Kenneth Bruce with Bank of America. Please proceed.

[Unidentified Analyst:]

Hi its Cardy Bott [ph] on for Ken Bruce. Just looking at the tax rate in the quarter, it looks like it was a little bit lower than what we were looking for. I guess last couple of quarters; it was running closer to 35%. Was there something driving that?

[Kirk Walters:]

I will take that one it’s Kirk. Typically in the third quarter we threw up our caps rates I think lot of institutions to it’s the a raw level of income coming in we probably do have a little higher amount of municipal securities and IRBs and such than originally was billed into the rate I think to one of the earlier questions looking forward and thinking about this year we’ll probably turn into right around the 34% all in rate for the year.

[Unidentified Analyst:]

Okay, thanks. And I guess just looking at expenses, it seems like you guys are still ramping up some initiatives, but at the same time, we are talking about growth potentially slowing. Just wondering how we should think about just the current -- the expense run rate over the next couple quarters. We are looking at, I think, $208 million right now. Is that kind of a good run rate?

[Jack Barnes:]

Yes, on an operating basis we’re drawn $205 million to $207 million where $206.5 million I believe this quarter other than ramp up in the first quarter because of benefits, employee compensation benefits we think our run rate is right in this range.

[Unidentified Analyst:]

Alright, thank you.

[Jack Barnes:]

And I would just add, we work hard to keep it in this range.

[Unidentified Analyst:]

Sure, thanks a lot.

[Operator:]

Your next question comes from John Pancari with Evercore, please proceed.

[John Pancari:]

Could you give us -- I appreciate you giving us the new money loan yields for the multi-family business, and can you give us the similar new money spreads or yields for the non-multi-family commercial real estate, as well as for C&I, just to get an idea of how the competitive pressure is impacting the spreads? Thanks.

[Jack Barnes:]

So for non-multifamily commercial real estate we’re actually see much better spreads you see spreads in the call it 2.15 to 2.25 range. And for middle -- what we call middle market C&I, you’ll see spreads between call it two in a quarter to 2.5.

[John Pancari:]

Okay. Do you have what they were last quarter, so we can get an idea of how they are trending, those spreads?

[Jack Barnes:]

Generally speaking I would say those spreads are down about 10 basis points if I have to pick a number, about 10 basis points.

[John Pancari:]

Okay. All right, that's helpful. Then, simply, sorry if this was already asked, but you indicated that in your prepared comments and in your press release that you are seeing some elevated regulatory and compliance spending, as I am sure -- obviously, as a lot of other banks are, as well. But can you help us quantify where those costs are currently on an annualized basis and what your outlook is for 2015 for those costs?

[Jack Barnes:]

Sure, this is Jack. So we haven’t been specific with exactly where all the regulatory cost are frankly there the organization over the last number of years has been absorbing additional cost in many different ways. Some very direct things like building out compliance cost or risk staff other is more indirect like dealing with the operational impact of different expectations and having to absorb changes and process and unlike. So, it’s not the kind of number that’s easily grab the hold of them and not something we’ve been sharing our sense of.

[John Pancari:]

Okay. Okay. Lastly, in terms of the other category in the expense bucket, I just wanted to get some color on what drove the increase in the third quarter in that line item.

[Kirk Walters:]

Hey John, it’s Kirk, how are you?

[John Pancari:]

Good.

[Kirk Walters:]

Really if you look at it second quarter was abnormally low if you look at sort of the linked quarters and page 10 of our press release in the second quarter we did have its bits and pieces but we did have a gain on a brands that we closed and sold and a few other things. So when you look at this quarter and then you look back at the other linked quarter this is pretty well and average quarter for us.

[John Pancari:]

Okay, thank you Kirk and thanks guys.

[Kirk Walters:]

Thank you.

[Operator:]

(Operator Instructions) And your next question comes from Matthew Kelley with Sterne, Agee, please proceed.

[Matthew Kelley:]

Yes, just a quick follow-up, if you are pulling back a little bit on the multi-family commercial real estate because you are a little concerned on the spreads and it's getting thin there, would you consider adding more in the security side or adding more in the jumbo mortgage side? Give us a sense on what the yields are in those departments if you decided to maybe add a little bit more of those types of earning assets instead?

[David Rosato:]

Hey, Matt, it’s David. It’s a great question with what’s going on in the bond market, we’re not really inclined to put securities on at these levels. So that’s as you know we tend to run a smaller securities portfolio than the peer group, so we don’t necessarily see securities growing in as a percentage of total assets. On the residential mortgage side, we did have good solid growth last quarter and as you know the only thing that with portfolio our arms 51s, 71s, and 101s. Our sense is that customer demand will continue to be there. I think we will add to that asset class and spreads there are going to hold up better than on the security side, so of the two I would expect to see in residential mortgages.

[Matthew Kelley:]

Okay, thank you.

[Jack Barnes:]

I will just add, again, just thinking about all of the businesses we’re in, we had better spreads certainly than not the family and things like equipment finance lending, mortgage warehouse lending, business banking are small business portfolios across our footprints. So what we’re looking to do would emphasize those businesses where we do have a healthier spread and move focus on growing those portfolios as an alternative.

[David Rosato:]

And to Jack’s point, the fourth quarter does tend to be a good quarter for us form a C&I perspective as well.

[Matthew Kelley:]

Along those lines, what was the mortgage warehouse balance and any commentary, just what you're seeing more recently here with the plunge in treasury rates?

[Jack Barnes:]

Well, the mortgage warehouse balance was that was $700,000 million at the end of the quarter, which I think at June it was 708. So it was really unchanged on the quarter. With assuming these lower rates hold, I would expect to see mortgage broker volumes pick up and if we did see that relate to larger balances in our mortgage warehouse and we would expect that.

[Operator:]

Ladies and gentlemen, since there are no further questions in queue, I will now like to turn the call over to Mr. Goulding for closing remark.

[Peter Goulding:]

Thank you again for joining us today. We appreciate your interest in People’s United. If you should have any questions, please feel free to contact me at 203-338-6799.

[Operator:]

Ladies and gentlemen that concludes today’s conference. Thank you for your participation. You may now disconnect. Good day.