People's United Financial, Inc. (PBCT) CEO Discusses Q2 2013 Results - Earnings Call Transcript

Jul.18.13 | About: People's United (PBCT)

People's United Financial, Inc. (NASDAQ:PBCT)

Q2 2013 Earnings Call

July 18, 2013 5:00 pm ET

Executives

Peter Goulding

John P. Barnes - Chief Executive Officer, President, Director, Member of Treasury & Finance Committee, Member of Enterprise Risk Committee, Chief Executive Officer of The People's United Bank, President of The People's United Bank and Director of The People's United Bank

Kirk W. Walters - Chief Financial Officer, Senior Executive Vice President, Director and Member of Enterprise Risk Committee

Analysts

Mark T. Fitzgibbon - Sandler O'Neill + Partners, L.P., Research Division

David Darst - Guggenheim Securities, LLC, Research Division

Collyn Bement Gilbert - Keefe, Bruyette, & Woods, Inc., Research Division

Matthew Brandon Kelley - Sterne Agee & Leach Inc., Research Division

Thomas Alonso - Macquarie Research

Casey Haire - Jefferies & Company, Inc., Research Division

Bob Ramsey - FBR Capital Markets & Co., Research Division

Operator

Good day, ladies and gentlemen, and welcome to the People's United Financial Incorporated Second Quarter Earnings Conference Call. My name is Patrick, and I will be your coordinator for today. [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 Incorporated. Please proceed, sir.

Peter Goulding

Good afternoon, and thank you for joining us today. Jack Barnes, President and Chief Executive Officer; Kirk Walters, Chief Financial Officer; along with Jeff Hoyt, our Controller, 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 website, peoples.com, under Investor Relations.

With that, I'll turn the call over to Jack.

John P. Barnes

Thank you, Peter, and good afternoon, everyone. I appreciate you joining us today. Before we get into the details of the quarter, I'd like to share my views on our recent -- on our current strategic positioning. As has been the case, since I took over as CEO 3 years ago, we are, consistent with our conservative approach, building this franchise for the long term. We are forming new relationships and deepening existing relationships across our geographic footprint while providing our customers with a broad set of solutions to their financial needs. Ultimately, we are shareholders and our choices are designed to maximize shareholder return, not only in the near term but over the medium and long term. We feel good about the progress we've made and the opportunities for future progress.

Now with respect to our second quarter results. On Slide 2, operating earnings were $62.4 million and net income was $62.1 million, each equating to $0.20 per share. The net interest margin declined by 5 basis points to 3.33% compared to 3.38% in the first quarter.

As I mentioned last quarter, we believe that our net interest margin has now largely stabilized. The margin for the first 6 months was 3.35%, which was in line with our full year margin guidance that we provided in January of 3.30% to 3.40%. This should allow net interest income to grow at a pace similar to our growth in earning assets.

We are very pleased that the end-of-period loans grew at 13% annualized rate in the second quarter. This marks our 11th consecutive quarter of loan growth and is a testament to both our relationship managers and our customers.

Further, our pipelines remain strong and runoff in the acquired portfolio has slowed, as we predicted in January. The efficiency ratio for the quarter improved to 62.7% from 64.1% in the first quarter, primarily due to revenue growth. Expected growth in net interest income combined with fee income expansion and expense control will produce efficiency ratio progress in the quarters ahead.

Asset quality remains strong, with net charge-offs below 20 basis points. As mentioned before, we firmly believe that sound underwriting is the only way to confidently grow a balance sheet.

We continue to optimize capital through share repurchases and dividend payments. We were, once again, opportunistic this past quarter, repurchasing 11.2 million shares at a weighted average price of $13.63.

During the first 6 months of 2013, we repurchased 22.4 million shares of common stock at a weighted average price of $13.30 per share. We believe we have captured compelling returns with these repurchases, with the tangible book value dilution earnback period of approximately 5 years.

In addition, the repurchases have improved our future dividend payout ratio, return on average tangible equity and earnings per share. Capital ratios remain solid, especially in light of our relatively low-risk business model and are now close to peer median levels on a tangible equity to tangible asset basis.

With that, I'll pass it to Kirk to discuss the quarter in more detail.

Kirk W. Walters

Thank you, Jack. On Slide 3, you can see a breakdown of the elements contributing to our 3.33% margin results for the quarter. As you'll recall, first quarter operating net interest margin was 3.38%. New loan volume impacted our margin by 5 basis points. Loan repricing and amortization as well as increased borrowings each had a negative impact of 1 basis point. This was offset by one more calendar day in the second quarter, which benefited the margin by 2 basis points.

In the quarters ahead, we'll be working hard to increase the mix of demand deposit accounts to help offset some of the decline in loan yields.

As Jack mentioned earlier, we anticipate that our net interest margin has now largely stabilized, having worked through significant levels of acquired loan runoff and over 4 years of repricing on the originated portfolio.

Slide 4 provides a breakdown in the elements contributing to our net increase in loans. The loan portfolio grew $705 million, or 12.7% annualized. This is a testament to our expanded footprint, as well as progress in our heritage markets and strengthened product lineup. We experienced acquired loan runoff of $201 million this quarter compared to $155 million in the first quarter of 2013. The acquired loan portfolio runoff is expected to remain at these lower levels for the balance of the year given our resolution of significant problem assets, continued portfolio seasoning and longer duration on the remaining assets.

Originated loan growth for the quarter total approximately $906 million. As in prior quarters, growth came from a variety of products and geographic areas. Commercial real estate contributed 66% of total originated loan growth, or $595 million, including $515 million from New York commercial real estate. The portfolio remains broadly diversified, with most relationships well below $25 million.

C&I contributed 9%, or $78 million. Within C&I, we saw strength across many categories, including asset-based lending, mortgage warehouse lending and equipment finance. Our municipal business tends to be seasonally lower in the second quarter as fiscal year-end activity negatively impacts loan and deposit balances. The actual business fundamentals within this customer base remain strong and it is merely a timing issue.

Excluding the change in municipal loans, C&I would have contributed $134 million, or 14% of total originated loan growth. Residential mortgages contributed 16%, or $145 million of originated loan growth, in the second quarter. Approximately 94% of the residential mortgage originations held for investment were hybrid adjustable rate mortgages. The residential mortgage pipeline is up 5% quarter-over-quarter and 69% of the pipeline is jumbo product.

New home equity commitments totaled $225 million compared to $182 million in the first quarter of 2013. It is important to note that 100% of home equity loans are retail originated, with 65% in a first-lien position.

You can see on Slide 5 a breakdown of the elements contributing to our net increase in deposits. Retail deposits increased by $18 million, while commercial deposits increased $172 million. It should be noted that we typically see lighter retail balances in the second quarter, primarily due to customer tax payments.

As mentioned earlier, the seasonality in our municipal business had a negative impact on commercial deposits in the second quarter. If we exclude the change in municipal deposits, total deposits would've increased $267 million, or 5% quarter-over-quarter annualized.

We continue to focus on improving the mix of our deposit base. Efforts throughout our franchise, lower deposit costs, particularly in acquired markets, contributed to a further decline in deposit cost of 38 basis points. The larger deposit opportunities relate to acquired deposits, continuing to increase our deposit mix in favor of noninterest-bearing deposits and a better utilization of our Southern New York branches. Acquired deposits represent 14% of total deposits. The weighted average cost is 71 basis points. Over time, the rates and mix of deposits and acquired markets will benefit from our franchise-wide emphasis on growing demand deposits. Over the last year, our acquired deposit costs have declined 17 basis points, or approximately 20%.

On Slide 6, we provide a brief update on the Southern New York branches that we acquired from Citizens on June 25, 2012. Average in-store deposits per branch have more than doubled, from $4 million at close to $9 million in the second quarter of 2013. Originally, we anticipated these branches would reach the breakeven point of $10 million of deposits in June 2014. We see a significant opportunity to bring the average deposits per branch up to the levels in our Connecticut in-store branches.

On an activity basis, meaning from the customer's physical banking location, our Connecticut in-store branches average approximately $44 million in deposits per branch. This transaction has benefited more than just our deposit-gathering capabilities. The branches provide significant support to our commercial lending efforts and strengthened brand awareness in the New York metro area. The income businesses, such as wealth management, brokerage, insurance, merchant and payroll services, have all benefited from our expanded presence in this market.

For the New York market as a whole, we have generated $46 million of mortgage loans and $70 million of home equity loans year-to-date, which represent approximately 40% and 200% improvements, respectively, over the prior year period. We currently have approximately 240 mortgage-certified and 300 consumer-loan-certified branch employees in New York.

Noninterest income grew 13.7% over the prior year period as business leaders and relationship managers continue to bring our customer focus banking model to our expanded geographic footprint. As mentioned before, we believe we are in the early stages of this process.

As shown on Slide 7, on a linked quarter basis, net -- noninterest income increased $3.2 million from an already strong first quarter level. Bank service charges were seasonally stronger, adding $2 million to the growth this quarter, while customer-derivative income increased $1.1 million. Loan prepayment fees and gains on loan sales decreased by $3.2 million and $1.5 million, respectively. Gain on acquired loan sales contributed $5.8 million to the growth this quarter, which is partially attributable to 3 loans in the Smithtown portfolio. Insurance revenue decreased $1.2 million. As a reminder, the second and fourth quarters tend to be seasonally weaker for this business.

On Slide 8, we illustrate the key components of our changes in noninterest expense. From an operating expense perspective, compensation and benefit expenses decreased $2.8 million, primarily due to lower payroll taxes, while occupancy and equipment costs fell $1 million. Net REO costs were higher by $2 million, primarily due to one large single-family residence in Fairfield County. Advertising and promotion expenses increased $1.9 million, which was driven by the timing of advertising campaigns. We also experienced higher professional and outside services costs. The net impact of the nominal $1.4 million increased on the operating expenses for the quarter.

The next slide details our progress on the efficiency ratio since the first quarter of 2010. As you can see, we have made significant progress over this time period.

Slides 10 and 11 are a reminder of our excellent credit quality. Once again, we did see an improvement in nonperforming assets this quarter from already industry-leading levels. Originated nonperforming assets at 1.33% of originated loans and REO remained well below our peer group and top 50 banks and are down from 1.67% in the second quarter of 2012. Acquired nonperforming loans are not included in these calculations due to the accounting rules. However, it is worth noting that we are very pleased with their performance, as we have seen these balances decline $78 million, or 33%, to $159 million in the current quarter from $237 million a year ago.

Looking at Slide 11, net charge-offs remain low at 19 basis points compared to 24 basis points last quarter and 26 basis points 1 year ago. Excluding acquired loan charge-offs, net charge-offs this quarter were 18 basis points. These levels continue to reflect minimal loss content in our nonperforming assets and are well below peers.

Over the last 4 quarters, charge-offs against specific reserves represent approximately 54% of total charge-offs. As such, we understand our credit issues well and typically have very few new credit events each quarter.

Now, I'll pass it back to Jack.

John P. 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 2 years, loans per share and deposits per share have grown at compound annual rates of 19% and 15%, respectively. Operating return on average assets for the second quarter was 81 basis points, up from 77 basis points in the prior quarter. Our return on average assets continues to be impacted by our larger balance sheet, particularly our investment portfolio. Progress will be driven by loan and deposit growth, fee income growth and a disciplined approach to expenses.

As rates begin to return to more historically normal levels, our asset-sensitive balance sheet is expected to positively impact future earnings.

Slide 14 illustrates the improvement in our return on average tangible equity from the low levels of 2010. We expect to see continued progress in this metric as we improve profitability and thoughtfully deploy capital. Still, our capital levels remain approximately 70 basis points over peers on a tangible common equity to tangible asset basis. Normalizing our equity base to be consistent with our peers shows that our return on average tangible equity is 11%.

On Slide 15, we see that capital levels at the holding company and the bank remain strong, with a tangible common equity ratio at 8.7% and Tier 1 common at 10.8%, which compares well to our peers at 8% and 10.2%, respectively.

We continue to take actions to grow relationships, increase fee income, reduce cost and return capital to shareholders while we strategically invest in the business for the years ahead. Our robust pipelines and strong originated loan growth contribute to the continued momentum of our franchise. The strength of our platform allows us to attract and retain exceptional talent and provides a sustainable competitive advantage. In addition, we are well positioned to benefit from increasing interest rates.

This concludes our presentation. Now, we'll be happy to answer questions you may have. Operator, we are ready for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Mark Fitzgibbon with Sandler O'Neill and Partners.

Mark T. Fitzgibbon - Sandler O'Neill + Partners, L.P., Research Division

First question I have relates to the buyback. Assuming you were to complete your buyback in the next quarter or so, your TCE ratio would be sort of hovering around 8%. Are additional buybacks likely in your mind at that point?

Kirk W. Walters

The guidance that we've been giving, I think, consistently throughout the year has been that we are not expecting additional buybacks after this one is completed.

Mark T. Fitzgibbon - Sandler O'Neill + Partners, L.P., Research Division

Okay. And then, secondly, Jack, you had said the earnback on the buyback was about 5 years, but I'm having trouble reconciling these numbers a little bit. If, for simplicity, you sort of said this quarter tangible book went down by $0.34 almost entirely due to the buyback, that would imply almost $0.07 of earnings pickup from this and that would suggest that earnings go up by almost 10% as a result of the buyback you did this most recent quarter. That seems like a very high number. What am I missing?

Peter Goulding

Mark, this is Peter Goulding. We've spoken about this a little bit in the past. I think your horizon is a little bit shorter than ours. We're looking at the earnings pickup over a couple of year period.

Mark T. Fitzgibbon - Sandler O'Neill + Partners, L.P., Research Division

So you would earn back the $0.34 in tangible book dilution within 5 years?

Peter Goulding

That's right.

Kirk W. Walters

The calculation we used is consistent of what we had used for acquisitions and that we've consistently used in prior acquisition. So we'll be happy, once the call gets done today, to go through that with you.

Operator

Your next question comes from the line of David Darst with Guggenheim Securities.

David Darst - Guggenheim Securities, LLC, Research Division

Kirk, could you walk through this Slide 18 with us on your interest rate profile and maybe you can tell us what changed this quarter in reducing the benefit under the twist? And then where in the balance sheet within loan portfolios you're seeing the most benefit right now as the curve steepens?

Kirk W. Walters

The primary reason for the change in the reduced value from the twist is the fact that interest rates are up as of 6/30. I mean this is -- as you remember, this is information that we've given in our 10-Q. Historically, we did move it up here. This is not -- this is runoff of the rates at 6/30. So embedded in that is already the higher interest rate curve, which means that when you're shocking rates again that the benefit's a little less in terms of what comes through. So for the twist, we do this twist of a increase of rates of 100 basis points at the 18-month point on the yield curve in general with where rates have moved. We do believe that there will be some additional benefit, but that is more backloaded as we project out 12 months and it's really more of a positive for '14 versus '13. And we think we're still a little early in this rate rise in terms of what's occurred with it.

David Darst - Guggenheim Securities, LLC, Research Division

Okay. And so I guess as your thinking about your margin stabilizing, are you getting most of your benefit from CDs? I guess it looks like you still probably have a fair amount of risk or -- or roll down in your CRE and C&I yields.

Kirk W. Walters

Well, now we've -- I think we've been pretty clear on this in the past. Really the biggest impact of driving loan yields down at this point is the fact that we've had terrific success at originating loans, and they are coming on at a rate that is still slightly less than where the portfolio is. So you've got to remember, in our portfolio, we have the acquired loans in there that are in there at a higher rate. So that's why we break out in the waterfall the impact of repricing and amortization, which is only 1 basis point. So continued success, which we're expecting to have on the ability to originate loans and grow loans, will continue to put some level of pressure on the margin to a point.

Operator

Your next question comes from the line of Collyn Gilbert with KBW.

Collyn Bement Gilbert - Keefe, Bruyette, & Woods, Inc., Research Division

Kirk, just to follow up on the comment. So I just wanted to try to reconcile the comments in the press release of large -- the NIM largely stabilizing but yet sort of continued downward pressure. So are you suggesting a couple of basis points a quarter?

Kirk W. Walters

I think we're basically talking about that we gave guidance of $3.30 to $3.40, right, in January? We publicly came out and gave guidance. And so far, that's for the year and we're at $3.35 through the first 6 months, so we're right square in the middle of that range. For the quarter itself, it's around $3.33. And we do expect to -- as I just mentioned in the prior question, as we continue to have good success in the loan front, that we could see that drift a little lower from where it's at currently as we go into the third and fourth quarters. In the third quarter, you have an additional day, so you pick up a little bit there. But the primary driver of any pressure on that is really coming from our success at growing loans.

Collyn Bement Gilbert - Keefe, Bruyette, & Woods, Inc., Research Division

Okay, okay. And just the -- you had mentioned that the new loan originations are coming in a little bit lower than your portfolio yield. Can you give a little bit more color on the structure and the rate on your new CRE credits? I mean...

Kirk W. Walters

We haven't publicly put numbers out in terms of the new loan originations in terms of overall yields. Like I say, we do put information out regarding the accretion, the amount of accretion that's coming through that you can adjust yields for, and it gets you relatively close to where stuff is coming on at. In the case of structure, I'm not quite sure what your question is there.

Collyn Bement Gilbert - Keefe, Bruyette, & Woods, Inc., Research Division

I guess, is it 5-year paper, is it -- that amortizes over 30-year and the pricing resets every 5 years? Is it 7-year -- I'm just trying to, I guess, get a sense more on term, maybe is the better question than structure.

John P. Barnes

Well, I'll answer that, Collyn. It's Jack. So I would say in terms of our approach to the business, I think having changed not only recently, but they haven't changed over quite some time. So the types of commercial real estate deals we're doing and the normal approach to structure and term are consistent. And the market is certainly competitive for sure. And if there is pressure -- if there had been pressure in the last 6 months or so, it would be on rate mostly. We don't compromise our underwriting, but we'll see what happens with the rate term in terms of the intermediate rates changing here in the last 1.5 months or so and what that means on the pricing.

Kirk W. Walters

Collyn, back to your question on overall yields. I mean we have in the past talked a little bit about spreads because commercial bankers, it's the way we think. And if you look at overall spreads on the new originations increase, they're probably around 2.25 over whatever is the matched term in terms of mid-swaps, that kind of thing. So it has gotten a little tighter, as Jack indicated, but still, all in all, a reasonable number.

Collyn Bement Gilbert - Keefe, Bruyette, & Woods, Inc., Research Division

Okay, okay. And are you still comfortable with the 55% efficiency target by the end of the fourth quarter of next year?

Kirk W. Walters

Yes, that's the guidance that we gave in January and we continue to work very hard to get to that. That's a 55% on a run rate in the fourth quarter.

Collyn Bement Gilbert - Keefe, Bruyette, & Woods, Inc., Research Division

Okay, okay. And just a final question on capital. You guys will be at a point where you've probably, by the end of the year, have levered -- fully leveraged your excess capital. How are you thinking about capital management going into 2014? I mean, do you want to get into a position or do you want to start to build again? Just sort of trying to think -- understand how you think about capital from that point? And funding of future growth, I guess, at the same time, too, and expanding balance sheet. Is that -- does that come out of the securities portfolio? Or do you -- or were you focused on rebuilding capital? Just curious about that.

Kirk W. Walters

Let me answer. You have multiple questions there, so let me try to hit upon a couple and then I'll have to go on to somebody else's questions. I think to the first question of capital that we are very happy to see that we are finally getting close to being normalized. And we do expect that when we finish this buyback coupled with the growth that we're experiencing in the balance sheet that we will be normalized with the peer group that we've defined in terms of capital. And capital management from there forward, I think, is still the many levers that we always talk about and we think about. First and foremost, it's about growing loans and deposits, growing our balance sheet, building customer relationships; second, continuing a strong dividend; third, that we always think about that if we don't have needs for the capital about how what's the most efficient way to return it to the shareholders; and probably the last or possibility is smaller M&A stuff, different things around there. So at this point, I think we feel good about getting the capital normalized in the way that we've done it in a thoughtful, careful way that we've deployed it over time and then we'll manage it in the same group of levers as we go forward.

Operator

Your next question comes from the line of Matthew Kelley with Sterne Agee.

Matthew Brandon Kelley - Sterne Agee & Leach Inc., Research Division

I was wondering if you could talk about -- I know you don't want to give specific pricing updates on commercial real estate or multi-family. But we basically had a move in the tenure here since April of 60 or 70 basis points. Just how much of that benefit has passed through on incremental commercial real estate, multi-family loan pricing have you seen?

Kirk W. Walters

Well, as I've mentioned in the past, I mean, we're really very focused at spreads over whatever is the underlying maturity. So if it's a 5-year and the 5-year moved x basis points, we would be looking to pass that through no different than if there was a 7 or a 10. So we'd really think about it in terms of spreads and wherever the underlying indices are. If they moved up and such, that we would be looking to pass the bulk of that through.

Matthew Brandon Kelley - Sterne Agee & Leach Inc., Research Division

Okay, got you. And where is the warehouse loan balanced in now, and what's your outlook for that business? Are you still adding relationships and how should we be thinking about that?

Kirk W. Walters

Yes, our warehouse loan balance grew a little bit from first quarter. It's about $750 million at this point, up from just a little under $700 million at the first quarter. We continue in that business to add commitments and add new customers, and also working on and expanding lines to existing customers. We know at this point the utilization rate is relatively high. In the business, we would expect that to moderate down as the business slows. And in general, we feel pretty good that as the new customers are coming in, that they're making up for some of that what we'll probably give up in utilization rate as we get later in the year and into next year and mortgage refinancing slows down.

Matthew Brandon Kelley - Sterne Agee & Leach Inc., Research Division

Okay. And you've had some borrowings during the quarter. What types of borrowings, term and rate, did you get?

Kirk W. Walters

We haven't put the rate out there, but in general, the borrowings we're doing are either FHLB borrowings or, in some cases, Fed [indiscernible] and shorter borrowings.

Matthew Brandon Kelley - Sterne Agee & Leach Inc., Research Division

Okay, got you. And last question, what should we be using for tax rate? Any changes as you've added more business in New York and some higher state-tax-rate locations?

Kirk W. Walters

Yes, we generally view you should use a tax rate around 33%.

Operator

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

Thomas Alonso - Macquarie Research

This is Tom for Bob. I just -- I wanted to circle back to Collyn's question about the efficiency ratio. On the 55% efficiency target, kind of given where we stand today with the economic environment and where rates are, how much of that improvement in efficiency is going to be revenue enhancements versus kind of cost saves?

Kirk W. Walters

The bulk of the improvement in the efficiency is, in fact, driven by revenue enhancements and it really comes from what we've talked about at length, which is growing a bigger balance sheet by continuing to grow loans and deposits, which we've had very good success in terms of the loan growth. There will be some continued we'll be always working on. It's our life's work in terms of reducing our absolute level of cost, and we'll continue to be working on that. But more of it is coming from the revenue side and really believe that we can continue to grow our loan portfolio at a good solid rate.

Thomas Alonso - Macquarie Research

Okay, great. And then kind of switching gears and moving over to the provision. I would've thought that provision would have been a little higher this quarter in light of the strong growth that you had. I mean, how should we kind of think about reserves to loans going forward now that it's kind of hovering around the 80-basis-point level?

Kirk W. Walters

Well, I think what you have to do, we give information in our slide deck, and I'm sure you have, that really looks at the loan portfolio broken down, the -- or the allowance broken down between commercial and retail because it's very different. And I think there's a couple of factors going on. And I would remind everybody that the first quarter, and we clearly called it out, that we had an impairment charge flow through on the acquired loan, which costs us about $2.6 million. So really our provisioning in terms of our basic portfolios is basically flat quarter-to-quarter. And what we see happening right now is, first, we continue to see nonperformers going down. So we have excellent coverage in terms of our allowance. And we're also continuing to see, as the economy improves, overall loan credit rating improving. And that coupled with the NPLs going down, in fact, provides some additional allowance that can go to the loan growth. So we do factor in, every quarter when we do the allowance, we go through a pretty detailed process. We're factoring in all of the new loans coming on and what loan ratings and everything they're at. So I think the fact that we continue to see improvement in quality, not only in NPLs but also in the overall credit ratings on the portfolio as a whole, is what provides the -- a little bit of room in terms of the provisioning.

Thomas Alonso - Macquarie Research

Okay, great. And then one last quick one. How much of your warehouses is purchase versus refi?

Kirk W. Walters

I don't -- Bob, I don't have that number right off in terms -- right off my head. I mean, obviously, the warehouse portfolio is one, as mentioned before, this is where, on a commercial basis, we are lending to mortgage companies. And so your question have to go to the companies as to how much of those particular companies are underlying refi purchase, and I don't have that in front of me.

Operator

[Operator Instructions] Your next question comes from the line of Casey Haire with Jefferies.

Casey Haire - Jefferies & Company, Inc., Research Division

So just a quick question on the fee side of things and on the expense side. The other lines both kind of went the wrong way a little bit, worked against you this quarter. I was just wondering what was the driver and what kind of run rate can we expect from those lines, both the other fees and other expenses?

Kirk W. Walters

Yes, and I think we pointed it out. In the other noninterest income, that's where the prepayment fees roll up into. We don't include...

Casey Haire - Jefferies & Company, Inc., Research Division

So that's the 3.5%?

Kirk W. Walters

Yes, we don't include prepayment fees in our margin. I know some people do, but we don't. So the drop there is really just the prepayment fees quarter-over-quarter. And down under other noninterest expense, the overall numbers that we have there, the drop -- are you referring to the drop in $38 million to $35 million? Is that the...?

Casey Haire - Jefferies & Company, Inc., Research Division

Right, but there was -- wasn't there a write-down in the last quarter that really inflated that number?

Kirk W. Walters

Well, the -- we had additional REO this quarter, REO expense this quarter of a couple of million. And then we -- this line is made up of a whole ton of items. But in particular, the -- if you look back to last quarter, we did have the onetime charges that we took for the nonoperating that flowed through. And I think that's back -- if you go all the way in the press release back to -- I think, it'd be around 17 where we reconciled our efficiency ratio, you'll see the write-down of the banking house assets, about $6.2 million. So if you take the $6.2 million there and offset the $2 million in REO, it's about $4.2 million in round numbers. And that's the reason for the drop.

Casey Haire - Jefferies & Company, Inc., Research Division

Got you, okay. And then just lastly, any update on what you're seeing in terms of M&A chatter in your footprint? Any -- has the bid act [ph] between buyers and sellers narrowed at all?

John P. Barnes

Really no update. Our perspective, things haven't changed for us.

Operator

Your next question comes from the line of Tom Alonso with Macquarie.

Thomas Alonso - Macquarie Research

Just real quick on the buyback in terms of sort of pacing. You were obviously more opportunistic here in the second quarter and got in ahead of what has been a pretty good rise in the stock price. Are you sort of -- is your intention to just buy back -- to finish that buyback this year almost irregardless of price, or will you continue to be opportunistic?

Kirk W. Walters

No, we'll continue to be opportunistic. I mean, we, in general, believe that we will -- and continue to believe that we'll finish the buyback this year. But it will clearly be subject to the market conditions. And we need to remember, we're doing the buyback for a variety of reasons. I mean, obviously, the financial returns where we have been able to buy back or the tangible book value of around 5 years has been certainly compelling. But -- and also what was driving it was to get a lower dividend payout ratio. Obviously, it helps on the earnings side and really getting our capital normalized to the peers in terms of helping you in the market trading. So no different than any other capital strategy we would use. We will be very thoughtful about how we continue to finish the existing authorization for the 11 million shares.

Thomas Alonso - Macquarie Research

Okay. And then just 2 quick questions on the fee side. The customer derivatives, the increase that you guys called out, is that something that you expect to see continue given the move in rates? And maybe you have some guys who had floating rate loans that now suddenly want to convert to fixed because there's a fear that, that rates are going to move away from them. And then just secondly, kind of similar on the pace. Do you think the rise in rates has an impact on that, and maybe that other line continues to trend down a little bit?

Kirk W. Walters

On the customer derivative income, to be honest, the activity has just been better really over the last year and particularly better this year. And I think it's -- the reality of that we've moved into these geographies and the Boston market, the New York market, that you tend to have a little bigger loans, you probably tend to have a little more sophisticated customers or customers that are used to using interest rate swaps on their loans, and there's been more demand for them. So I don't think it's, in particular, a customer running out of concern of rate rises right now. But it's been more that we have seen more demand for it in the flow and we've been much more actively marketing our capabilities here.

John P. Barnes

Yes, totally.

Bob Ramsey - FBR Capital Markets & Co., Research Division

Okay, great. And then just on prepays, any -- I mean, do you -- any sort of impact that you expect from the move in rates there?

Kirk W. Walters

I'm sorry, I -- you cut out there.

John P. Barnes

I think on prepayment fees and any change in pace that we would affect.

I really don't see any. I think a lot of folks that are -- that have gone through the exercise of thinking about whether they were willing to absorb the prepayment fees and refi in the market has started to move through the cycle here. There certainly continues to be some activity, but it doesn't feel like it'll change too much to the upside. It may slow down.

Operator

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

Peter Goulding

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

Operator

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

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