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People's United Financial (NASDAQ:PBCT)

Q2 2011 Earnings Call

July 21, 2011 5:00 pm ET

Executives

John Barnes - Chief Executive Officer, President, Director, Member Of Executive Committee, Member Of Treasury And 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

Peter Goulding - VP, IR

Kirk Walters - Chief Financial Officer

Analysts

Matthew Kelley - Sterne Agee & Leach Inc.

Collyn Gilbert - Stifel, Nicolaus & Co., Inc.

Michael Turner - Compass Point Research & Trading, LLC

Ken Zerbe - Morgan Stanley

Christopher Nolan - CRT Capital Group LLC

Thomas Alonso - Macquarie Research

Bob Ramsey - FBR Capital Markets & Co.

Damon DelMonte - Keefe, Bruyette, & Woods, Inc.

Mac Hodgson - SunTrust Robinson Humphrey, Inc.

Operator

Good day, ladies and gentlemen, and welcome to the United Financial Incorporated Second Quarter Earnings Conference Call. My name is Kharma and I'll 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 call over to your host for today, Mr. Peter Goulding, First 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, our Chief Financial Officer; along with Jeff Hoyt, our Controller, are here with me to review our second quarter results. With that, I'll turn it over to Jack.

John Barnes

Thank you, Peter, and good afternoon, everyone. As I begin my comments, please keep in mind that our objectives have been and continue to be straightforward and twofold: One, optimizing the existing businesses; and two, efficiently deploying excess capital. The second quarter, much like the first, represents progress against those goals.

On Slide 2, we provide an overview of our second quarter results. Net income for the quarter was $51.2 million or $0.15 per share with operating net income of $57.3 million or $0.17 per share. Net interest margin for the second quarter was 4.13% compared to 4.16% in the first quarter and 3.87% in the fourth quarter. Recall that last quarter we expected our margin to remain above 4%. Excluding accretable yield reassessment, our core net interest margin came in at 4.09%. We continue to see solid loan growth of $164 million or 3.7% linked-quarter annualized. Deposits also grew at a 3.7% annualized rate. This growth occurred while deposit costs declined from 59 basis points to 58 basis points in the quarter. Our noninterest income increased by $2 million quarter-over-quarter, which includes a $7.2 million gain on acquired loan sales from the Smithtown portfolio. We continue to make progress on our efficiency ratio, which declined to 65.7% in the quarter from 66.2% in the first quarter. As many of you have heard us say during the quarter, we are committed to reducing our efficiency ratio to 55% within the next 2 years. As you'll hear in a minute, we've made additional progress beyond what's represented in the second quarter's results. Finally, while our nonperforming assets as a percentage of originated loans, REO and repossessed assets increased in the second quarter to 2.05% of loans and REO compared to 1.96% in the first quarter. This increase was entirely due to the effect of a single credit. Of course, we'll be providing additional color today on our asset quality, which remains a source of pride for the company.

On Slide 3, we review recent initiatives. Our Danversbank transaction closed on June 30, effective July 1 for the financial reporting purposes, which is why their numbers are not included in our second quarter results.

We're pleased to welcome Kevin Bottomley to our Board of Directors. He will provide strategic leadership for our Boston growth efforts. In addition, he brings 35 years of banking experience to our board. We expect to convert Danvers to our operating system and rebrand their branches early in the fourth quarter. We successfully completed the system conversion of Bank of Smithtown during the weekend of June 17, which will result in annual savings of $3 million. In total, we've exceeded our target cost savings at the time of acquisition announcement. We'll see the full quarter benefit of the conversion-related savings in the third quarter.

As we announced in our earnings release, we have also undertaken a number of franchise-wide initiatives that will result in approximately $20 million in annual cost savings. These include changes to our retirement programs and other benefits and headcount reduction, primarily in corporate positions. We'll see the full benefit of these changes in 2012. We continue to seek new opportunities for business growth and announced early this month our hire of Michael Maiorino who will head our asset-based lending group and report directly to Jeff Tengel, Head of Commercial Lending. Michael's responsibilities will also include oversight of our new mortgage warehouse business as we view this as an asset-based lending product. Michael joined us from Sovereign Bank, where he spent the past 9 years. While at Sovereign, he was Executive Vice President and Divisions President of Sovereign business capital, a $2 billion business and EVP, Debt Management and Recoveries. Prior to that, Michael was Division President at Fleet Capital, now Bank of America Business Capital, responsible for the Business Finance Division. We have high expectations for growth in this segment.

Finally, we recently announced 3 new branches in Massachusetts, 2 in downtown Boston and one in Lexington, MA. With these new branches and the completion of the Danvers transaction, we now have 59 branches in Boston MSA with 6 branches in downtown Boston. From a deposit share perspective, we're also now the seventh largest bank in both Massachusetts and the Boston MSA. We're excited about the momentum we have in Massachusetts and the Boston MSA in particular. With that, I'm pleased to hand it over to Kirk.

Kirk Walters

Good afternoon. As I listen to Jack's comments on the quarter and the recent initiatives, I'd like to reflect on what I think is happening here from a big picture perspective. Recall much of the management team has changed over the past 2 years and Jack took over as CEO in April of last year. Particularly since Jack took over, this institution is refocused on optimizing the existing business which has reenergized key units of the business. In addition, important progress has been made on capital deployment, which has afforded us large new markets in Boston and Long Island such that we no longer need M&A to improve our profitability. It takes a little while for customers to reengage in businesses such as residential mortgage and Home Equity when you are effectively not a participant for 3 to 4 years. From my perspective, while we clearly have more work ahead of us, this franchise does have momentum as a result of a number of strategic decisions taken over the last year.

Now let me take you through some of the details. On Slide 4, you can see a breakdown of the elements contributing to our 4.13% margin results for the quarter. As you recall, core first quarter net interest margin is 4% excluding the 16 basis point benefit from People's United Equipment Finance accretable yield reassessments. This quarter, we had a 4 basis point benefit from accretable yield reassessments. The effects of changing loan mix and yield in both the acquired and originated portfolio was a 3 basis point improvement. Underlying this number is repricing pressure on our originated loans, which is more than offset by accretion on our acquired loan portfolio. In addition, we experienced 4 basis points of benefit from changing investment mix and yield as we invested more of our cash into securities and substituted some callable agencies for MBS. Finally, we picked up 2 basis points due to lower deposit and borrowing rates.

On Slide 5, you can see that our net interest margin has been growing steadily. Despite a prolonged period of low interest rates and pricing pressure in the market, we continue to expect our net interest margin to remain above 4% for the rest of the year. Our strong margin is a product of our low-cost, stable funding, good loan mix and strong capital levels, all of which means we do not need to stretch on credit.

Slide 6 provides a breakdown of the elements contributing to our net increase in gross loans. As we discussed last quarter, we look at our portfolio as 2 distinct pieces, originated and acquired. Our originated portfolio grew at a linked-quarter annualized rate of 12.2% compared to 11.4% last quarter. The 12.2% growth represents a weighted average of 18.7% in retail and business banking and 9.3% in commercial banking. I'm pleased to report that we experienced loan growth across the board in all of our originated loan portfolios. Even Home Equity saw growth for the first time in several quarters. Loan growth was led by retail, specifically residential mortgage, with $187 million of quarterly growth or 30% linked-quarter annualized. Our residential mortgage pipeline stands at its highest level in a few years, up 47% from last quarter. Second quarter growth and pipeline growth are attributable to a few changes: One, we have a Jumbo Mortgage Product. We didn't have one a year ago because we weren't portfolio and mortgages. 70% of the pipeline is Jumbo Product; two, acquired and Long Island branches -- acquired Massachusetts and Long Island branches have undergone mortgage certification training and are now more comfortable with the product; three, we've added 7 mortgage account officers; four, variable compensation has been adjusted to further encourage mortgage originations; and five, lastly, we have regained traction with third-party mortgage originators. This product is fully underwritten by us, just comes through a different channel and is only done in our footprint. I'd highlight that we are only booking hybrid ARMs to our portfolio and that we operate in excellent markets for high quality residential mortgages.

Finally, some statistics about our recent originations. The average loan size of the second quarter originations was $553,000, average FICO score for the second quarter was 759 with an average LTV of 65%. Also within the retail category, Home Equity outstanding actually grew in the face of low interest rates, which often lead customers to refinance their primary mortgage and consolidate Home Equity balances. In fact, second quarter was an outstanding period for this business. The new Home Equity commitment closings totaling $161 million, which represents a 65% increase versus the prior quarter and the pipeline increased 84% versus the prior quarter. Branch incentives, sales contests and Home Equity promotion including newspaper, advertising, direct mail and radio contributed to this growth. Again, some statistics about our recent originations, the average loan and line size. The second quarter was $126,000, average FICO score was 745 and the average combined loan to value was 54%.

100% of Home Equity loans are retail originated and all are in our footprint. The new approaches towards both our residential mortgage and Home Equity businesses are excellent examples of the strategic changes made by the new management team. Within the commercial portfolio, our growth was led by CRE with a $102 million increase followed by C&I with $63 million of growth. C&I originations on our new geographies, Boston and Long Island, accounted for 25% of our total originated commercial loan growth in the second quarter. The commercial pipeline is up approximately 10% compared to the prior quarter as a result of good growth in our core Connecticut markets coupled with growth in Boston, Long Island and Southern Maine and new initiatives such as the mortgage warehouse lending in particular.

Our acquired portfolio decreased during the quarter by 43% linked-quarter annualized. This change was once again amplified by acquired loan sales resolutions and charge-offs from the acquired Smithtown portfolio. Later in the presentation, we'll detail more of our progress to date on the Smithtown nonperforming portfolio. Taken together, the originated and acquired portfolios produced total loan growth of 3.7%, quarter-over-quarter, annualized.

You can see on Slide 7 a breakdown of the elements contributing to our net increase in deposits. We continue to see healthy growth rates within our de novo branches. In April, we opened 2 new Stop & Shop branches in New Haven, Connecticut and West Hartford, Connecticut as well as the previously announced Bronxville, New York branch. The acquired portfolio did shrink modestly, but deposit rates of those branches and overall mix improved. The run-off at these branches was entirely high rate single transaction CDs and municipal deposits, which in the great State of New York as a thrift chartered bank we are not allowed to hold. In Cedars [ph], which we have no reason to hold given their high cost and our strong funding base. Recall when we announced these transactions, our intention was and remains to move the deposit rates of the acquired institutions in line with our legacy branches. As of the end of the second quarter, the weighted average core deposit retention rate of the acquired banks since the acquisition closed is 109%. So we've actually seen nice core deposit growth in the acquired branch networks. During 2011, the average weighted cost of deposits of the acquired banks has dropped 20 basis points to 1.2%, so we definitely have more work to do but we're making good progress. And in the coming quarters, deposit rates will continue to move towards the franchise-wide deposit rate, which is 58 basis points in the second quarter.

Slide 8 provides a breakout of noninterest income. Bank service charges benefited from a full quarter of fee increases which were instituted in February, as well as seasonally stronger interchange fees. The increase in gain on sale of acquired loans in the former Bank of Smithtown portfolio of $1.7 million was more than offset by the $2 million decrease in net gain on sale of residential loans. As we will discuss in a moment, we've made significant progress with respect to the acquired Smithtown portfolio. And as a result, it's not likely that we will see the same magnitude of gains on acquired loans in the quarters ahead. We also saw seasonal and continued cyclical pressure on insurance revenue.

On Slide 9, we were pleased to report another quarter of solid cost control. On an operating basis, our run rate has been consistently under $200 million over the past 2 quarters in spite of carrying the full cost load of River and Bank of Smithtown. As the Danvers transaction closed in June 30, which is effective July 1, we will have a full quarter of Danvers expenses in our third quarter numbers.

On Slide 10, the efficiency ratio decreased slightly to 65.7% for the second quarter compared to 66.2% in the first quarter. As you saw in our press release and heard in Jack's comments earlier, we've taken some important steps to reduce our cost base by $23 million on an annual basis in 2012. These initiatives and the scheduled Danvers conversion are a part of a 2-year process, which we expect to produce an efficiency ratio of 55% or better.

Slides 11 and 12 are a quick reminder of our superior credit quality, which has remained far stronger than peers in the industry. As mentioned in the press release and earlier in this presentation, we did have one CRE loan to an in-market borrower with an out-of-market property that moved to nonperforming. A portion of which was charged off. The borrower is cooperating and current on payments. This single credit accounts for the entire increase in nonperforming loans and charge-offs. If we exclude this credit, the nonperforming loans are actually down $5 million, continuing the improving trend within the originated portfolio. Despite the slight uptick in nonperformers, which was entirely related to the aforementioned single credit, nonperforming assets at 2.05% of originated loans and REO remain well below the peer group in Top 50 banks. I continue to be encouraged by the overall positive credit performance of our loan portfolio, which is attributable to a heritage of strong underwriting.

Looking at Slide 12, as we said last quarter, we see the net charge-offs number as slightly volatile. While we remain pleased with the net charge-off levels, we do experience some lumpiness. If we exclude the single credit already discussed, net charge-offs average loans were 22 basis points, in line with last quarter's results.

On Slide 13, we've detailed our progress in working out the nonperforming loans within the acquired Smithtown portfolio. At the time of closing, nonperforming loans totaled $268.7 million. Since closing, we've experienced an additional $130.4 million of NPA inflows. Simultaneously, $125.3 million of loans in the portfolio have been sold, settled or paid off, while we've charged off $74.9 million. In addition, we've experienced $20.4 million of loans returning to accrual and $9.4 million of paydowns. This high level of activity leaves us with nonperformers totaling $169.1 million, which compares favorably to our remaining non-accretable difference or credit mark of $296.6 million. As many of you know, we have included a slide highlighting the non-accretable difference for each of the acquired portfolios in our Investor Presentation. We've updated that slide for the second quarter of 2011 and have included it as an appendix in this presentation. This slide now also includes the remaining accretable yield by portfolio.

On Slide 14, you can see the detail for the allowance for loan losses by loan category. As we just described, we feel confident in the direction of our credit trends. We had a specific reserve against the single credit so the provision increase reflects originated growth.

Slide 15 illustrates one of the best measures of our progress. Our operating return on average assets for the second quarter was 92 basis points, continuing to move towards a return on average assets goal of 1.25%. We expect future return on average asset improvements to come from additional loan and deposit growth, enhanced fee income, cross-selling initiatives, full quarter impact with the Smithtown system conversion and the integration of Danvers Bancorp, as well as the overhead cost reduction initiatives discussed earlier and additional cost reduction efforts.

Slide 16 is an important lens for us as we think about the growth that has occurred in the company and will occur in the quarters ahead. We know that if we grow loans and deposits per share and take care of business on the cost side, as we have discussed earlier, we will produce greater earnings per share. With 2 consecutive quarters of excellent fundamentals, I feel even more optimistic about the opportunities for this franchise then I did when I started March. Now I'll pass it back to Jack.

John Barnes

Thank you, Kirk. Slide 17 summarizes our sustainable competitive advantage. I don't think I need to remind all of you of the points on this page. We start from an advantaged position and are clearly building on our advantage. There is no doubt we have more work to do, but this team is excited about the quarters ahead. This concludes our presentation. Before we take your questions, Peter has a few remarks about the Q&A session. Peter?

Peter Goulding

Thanks, Jack. As we mentioned last quarter, we'd like to limit each of you to one question and one follow-up. If you have additional questions, we encourage you to get back in the queue. Now we'll be happy to answer your questions. Any questions you may have. Operator, we're ready for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And the first question comes from the line of Ken Zerbe from Morgan Stanley.

Ken Zerbe - Morgan Stanley

I guess my first part a question is, when you think about capital deployment and share buybacks, obviously, you were restricted because of Danvers in the second quarter. Can you talk about your near-term outlook, sort of second half 2011 of how much you're thinking or you'd be comfortable with in terms of share buybacks? And if possible, how much have you done in repurchases quarter-to-date?

Kirk Walters

Let me take a crack at that. In terms of the share buybacks, we really don't talk about how much or how we expect to go in the market on them. I think, as people know, we do have an approved authorization for 16 million shares. That has not been utilized at this point. And as you mentioned earlier, now with the closing of Danvers and earnings being released, we no longer are under a blackout. But other than that, we would not give any particular guidance on the activities we'll have this quarter.

Ken Zerbe - Morgan Stanley

All right. And then, I guess, the follow-up question in terms of the expense ratio gain from 65 where you're at now down to 55. Is there any kind of step functions that we might see, for example, the integration of Danvers, you may get a bigger drop? Or is it more -- is the reductions more weighted towards sooner versus later?

Kirk Walters

I think as we talked about when I was on the road with you, this is going to be a process that we expect to have continued progress each quarter. And certainly, you can see with the announcement of the recent expense initiatives and the savings of $23 million that will come out of the run rate in '12 relating to the retirement plan and some recent staff reduction. That is one step toward where ultimately we want to get. So this is going to be a process that we expect to make continual progress each quarter and moving the number down because certainly we are very focused on keeping the good momentum that we have on the revenue side in place and moving along.

Ken Zerbe - Morgan Stanley

And is that $23 million going to be fully in place as of first quarter or is that something that gets implemented throughout the year?

Kirk Walters

The $23 million, we will enjoy the benefit of that throughout the year.

Ken Zerbe - Morgan Stanley

Okay, so efficiency ratio falls as the year progresses, got it.

Kirk Walters

The effective rate starts in the first quarter.

Operator

And the next question comes the line of Damon DelMonte from KBW.

Damon DelMonte - Keefe, Bruyette, & Woods, Inc.

I was wondering if you guys could quantify the impact that it's expected with the Durbin Amendment for the fourth quarter.

John Barnes

We basically, now that the final rates have been set on the Durbin piece, we're looking at $20 million annualized based on the final rule.

Kirk Walters

I think if you go back to the discussions that had occurred, there was generally a range given, at $20 million to $25 million depending where they ended up with. So looks like we're going to be at the lower end of that range.

Damon DelMonte - Keefe, Bruyette, & Woods, Inc.

Okay. And you expect that to start in the fourth quarter, correct?

John Barnes

Right.

Damon DelMonte - Keefe, Bruyette, & Woods, Inc.

Okay. And then, I just kind of have my follow-up question. There's a fair amount of discussion on the initiatives regarding residential mortgages. I think right now resi mortgage is around 16% of your total loan portfolio. Could you just give us a little bigger picture perspective as to, like, how big of an exposure you'd like to have ultimately in the residential market?

John Barnes

Well, let me tell you that at 16%, we're not feeling certainly any pressure to slow down at this point. When we do look at our portfolio mix in our portfolio management process, we're not concerned about continuing to grow in our footprint and with the product structures that we have. But certainly, if we started getting to a significant weight in the balance sheet, we'd begin to reconsider. We don't have a specific percentage of the portfolio in mind right now. I just want to go back to your comment on Durbin to remind everybody that we are working in a number of ways to try to offset the impact of the interchange of fee loss that we have, and we have been doing that for a year by taking incremental steps on a number of fronts. And we're going to continue to do that to work hard to offset the impact.

Damon DelMonte - Keefe, Bruyette, & Woods, Inc.

Okay. So then, can we assume that, that $20 million might be lower by the end of the year?

John Barnes

I think that it's very hard for us to predict impacts of changes that we make on the fee side or balance side and it's also hard to predict what's going to evolve in the market and we will have more opportunities so we're paying a lot of attention to it. We're trying things and we just can't give you a prediction there on any offset at this point and when it will kick in.

Operator

Now the next question comes from the line of Christopher Nolan from CRT Capital.

Christopher Nolan - CRT Capital Group LLC

Jack, I might have missed your comments on the margin for the second half of the year. Are you still guiding for 4% margin?

John Barnes

Yes. As I indicated in my comments, we do expect that the margin to remain above 4% for the balance of the year.

Christopher Nolan - CRT Capital Group LLC

Okay. And then the increase in other noninterest expenses, does that relate to the increase in FDIC assessments or not?

John Barnes

No. I think that when you look at the other slide where we gave some breakout, the overall increase in other part of it was relating to advertising. When we look at the waterfall, we had advertising, marketing, expenses up, as well as some other miscellaneous expenses coming through there so.

Kirk Walters

It's pretty granular.

Operator

And the next question comes from the line of Mike Turner from Compass Point.

Michael Turner - Compass Point Research & Trading, LLC

A question really on the yield that just on the securities portfolio, it looks like your yield was up about 12 basis points. We didn't know what the cause of that was, if you're extending duration or if there's a mix there. And then also just wanted to find out the dollar amount of accretable yield that was recognized in the quarter.

Kirk Walters

The one in terms of the second question, that something that is given in the Wellford [ph] when we filed our Q, but we haven't put that out public at this point so you'll see it there, which will obviously be out shortly. In relation to the first question, I'm sorry, on the investment, we have been moving from cash into mortgage-backed as I noted in my comments. We also moved some callables into the mortgaged-backed. Actually this quarter, we ended up with our duration shortening up a bit to about 2.5% or 2.55 years versus the 2.7 that we are at.

Operator

And the next question comes the line of Collyn Gilbert from Stifel, Nicolaus.

Collyn Gilbert - Stifel, Nicolaus & Co., Inc.

Just to kind follow on, I know Damon asked the question, but Kirk to your comments on residential mortgage lending and Jack obviously your insights too. Could you just talk a little bit more about what is really driving that strategy? I mean do you see it, I know you sort of touched on it Kirk, but is it kind of leveraging your overall market share that you have in your core market? Is it kind of an interest rate move given the asset sensitivity of the balance sheet? And I guess within that question is kind of wanting to assess what your view is longer term of the residential mortgage business.

Kirk Walters

Let me take a first crack and Jack will add some comments onto it. First, within our markets, certainly the hybrid ARMS which is what we're putting in our portfolio, are a popular product, they have been for quite a while in the markets were you're doing the larger loans, and have been popular. And the history of this company has been that we have had excellent cross-sell to those customers of our other retail products. So it's a way of continuing to build our overall loan footing, but more importantly to really build our relationship base not only in our traditional markets, but in the Long Island, Boston markets, and I'd reemphasize what we're putting on the books I don't think I'd call a real interest rate debt. These are hybrid ARMs and so aren't long in duration. Anything that is a longer fixed rate is still sold and it's all sold servicing released. I don't know, Jack if you want to add, any additional color to that.

John Barnes

I would just kind of remind everybody about where we were say a year ago when we were looking to put a lot of cash to work and certainly view that from a long-term perspective. Our franchise has always been very strong in the residential origination area. And we had gotten out of it in Connecticut for a few years, but really had great strength in the retail relationships and interest in the product and we had the capability. And so we pursued, starting to eliminate the run-off of the portfolio and start to build it and that's what you're seeing. And to Kirk's point, whenever we study cross-sell, the residential mortgage is high on that list. So that's very much central to our strategy of deepening relationships and improving cross-sell across the franchise. So that's the essence of it. Again, kind of similar to the answer of the first question, at this point, we're not feeling any pressure given the structure and the rates that we're getting to slow down. But we've only been kind of back into the business of portfolio-ing for probably 12 months and it's taken us a good 6 of those months to just stop the amortization.

Kirk Walters

If I could, the question Chris Nolan asked earlier, I think it was Chris, regarding other noninterest, in looking back at that category. I need to reflect that part of it was the advertising, marketing I've talked about. But also, we've indicated elsewhere in here in terms of a part of our nonoperating was $2.8 million in severance to executive. And that in fact does roll up in that other noninterest line. So that's the other big part of the increase, so my apologies but I was glancing at the wrong line.

Operator

And the next question comes from the line of Tom Alonso from Macquarie.

Thomas Alonso - Macquarie Research

Just, I guess, bigger picture, the growth you guys are seeing on the commercial side, I mean, is that across your footprint? Are you bumping into competition? Is the pricing high? Just kind of any color you can give us on what sort of going on in that market.

John Barnes

Sure. First, the place I'd start, it is across our franchise. In our core business and our lenders across the footprint are doing a very good job of working relationships and starting to see some of the fruits of all the calling on new customers, that's always ongoing. We're getting our share of the business there. And also we're really pleased with the growth in Boston and the Boston MSA. That team, coupled with the early efforts to get the entire Boston area lenders, making progress in the market. It's really paying off. We're ahead of plan and doing very well there. And obviously, those growth rates are faster since we're restarting at a low spot. Long Island is also kicking in nicely, and we're very encouraged about the efforts. And those 2 new larger markets are panning out to be the opportunities that we had hoped for.

Kirk Walters

I might add to that, that we are also having success at hiring some additional, really great folks in the different markets and we saw that in Southern Maine, this round, this quarter we saw some nice credits booked in that market as well. So certainly, the markets we have are competitive. We talked about the pricing pressure and other things. But the fact that we are an amalgamation of a 100-year-old institution deeply rooted in these markets has proven very valuable as we have really started to leverage it.

Operator

[Operator Instructions] The next question comes from the line of Matthew Kelley from Sterne Agee.

Matthew Kelley - Sterne Agee & Leach Inc.

When you're looking at the acquired loan portfolio and the $902 million of remaining accretable yields, what is the expected life that will be recognized over.

Kirk Walters

Matt, that's not a number projection that we would put out there. We've certainly given the information. I think people have a sense of what's in those portfolios, but it's not a number that we're giving out publicly.

Matthew Kelley - Sterne Agee & Leach Inc.

Okay. Second question is the $23 million of cost saves that you've identified, that's in addition to the identified cost saves in the Danvers transaction, the $20 million after tax there, right?

Kirk Walters

That's right. Yes, the $23 million we've identified that Jack mentioned, $18 million comes from the change, the retirement plan and then the rest is cost saves related to staff reductions.

Matthew Kelley - Sterne Agee & Leach Inc.

Okay. And do you have a combined expense number just for 3Q as a base to work off of?

Kirk Walters

When you look at the third quarter from a combined basis including Danvers et cetera, we're probably looking at a number in the 210 to 215 range in terms of Danvers and then it starts ratcheting some down certainly as we get them converted in the fourth quarter. And then by the time we get to the first of the year, the expectation is we'll convert in October. By the time we get to the first of the year that we'll have the full cost saves in there from Danvers.

Operator

And the next question comes on line of Mac Hodgson from SunTrust.

Mac Hodgson - SunTrust Robinson Humphrey, Inc.

Just a question on capital. I think there's a mention in the presentation that pro forma tangible common equity ratio of 13% with Danvers. I think that's higher than what you originally put out when you announced the deal. What maybe changed from the original expectations?

Kirk Walters

I think what originally was advertised was would be around 12, 6. So to be honest, it's relatively close when we had a little better earnings dynamics and such in terms of what was going on. They probably had a little smaller balance sheet as well because of the sales of some of the securities. But it's right in the range. We might say doing 12, 6, so it's pretty close.

Mac Hodgson - SunTrust Robinson Humphrey, Inc.

Do you have the goodwill that's going to be added?

Kirk Walters

No, we are in the process. As you know that's close June 30, effective July 1, so we will be doing all the fair value adjustments and everything this quarter.

Mac Hodgson - SunTrust Robinson Humphrey, Inc.

Okay. Just maybe one more quick one if I could. With any of the commercial loan growth this quarter, syndicated credits, maybe just remind us your strategy there.

Kirk Walters

In terms of our strategy, we do participate in what I'd refer to as club transactions, which are the smaller transactions that do occur within the franchise and rarely do we at this point participate in any syndicated loans. So the activity is much more toward club transactions, are going on in the footprint.

John Barnes

The growth overall was, again, very well balanced in terms of how it came from the market and the type of lending that we did. C&I was probably the highlight, but everybody had a positive growth in the various portfolios.

Operator

And the next question comes the line of Bob Ramsey from FBR Capital.

Bob Ramsey - FBR Capital Markets & Co.

I appreciate the 55% efficiency target, but the question I want the answer this evening was sort of to follow up on buybacks. As you all think about ranking the priorities for your capital deployment, would you rather repurchase stock around current levels or would you rather find more acquisitions similar to those that have been done? Or how do you think about weighting the different opportunities that are out there and what tools do you use to measure which makes the most sense?

Kirk Walters

I think as we've indicated before in discussions that we've had, we really look at -- that we have a variety of levers on capital deployment. And we don't necessarily rank them 1, 2, 3, 4. Whatever is going to be the most beneficial for us to pursue in the long run and make sense, and so clearly, the first and foremost has always been organic loan and deposit growth, and that is our focus. And you can see we're making good progress on there. We continue to pay good dividend. And the other levers, we have to pull our buybacks versus M&A. And so the good news is we do have that optionality. And as we've indicated before, we'll be very thoughtful and careful about how we do both.

Bob Ramsey - FBR Capital Markets & Co.

Okay. And sort of you as you try and decide which is most beneficial, and are you looking at IRR or earnings accretion or what are some of the...

Kirk Walters

I don't peg anything to a particular ratio. It's a combination of things we look at financially. But also, what if, if it's an acquisition, what it's doing to the franchise, what are the opportunities it would give us. I think as we've described before, we are not intending to, on a real long-term basis, sit on a big war chest and as with Jack and my history at Chittenden we were also always thoughtful about returning the capital to the shareholders if we didn't have a better use for it in whatever way it made sense.

Operator

And the next question comes the line of Mike Turner from Compass Point.

Michael Turner - Compass Point Research & Trading, LLC

I just want to follow up on that 55% efficiency ratio again. What's kind of your loan growth assumption embedded in order to get there?

Kirk Walters

We're really not -- this is something I think I've described earlier in a number of place -- number of meetings and such. We're not betting on the revenue side to get to the 55%. In fact, Jack alluded to that. It will be predominantly through cost reduction. We think from a revenue side, as we look at it, we have a pretty decent contribution to the efficiency ratio. We're obviously going work very hard at increasing revenue, but the primary focus in moving that down will be on the cost side.

Michael Turner - Compass Point Research & Trading, LLC

Okay, thanks. And just one other quick one. Do you know what the risk-weighted assets are on a pro forma for Danvers? Just maybe a ballpark.

Kirk Walters

Not right off in terms of us having it here, but it is something -- maybe we could get somebody to call you back with it afterward because we gave some pro forma, but we just don't have it right here in front of us.

Operator

[Operator Instructions] And the next question comes from the line of Damon DelMonte from KBW.

Damon DelMonte - Keefe, Bruyette, & Woods, Inc.

I was wondering if we could get a little more color on that, the large commercial real estate loan that went nonperforming. Was that a self-originated loan or is that a part of the Smith [ph] portfolio?

Kirk Walters

I'm sorry. I'll give a little bit and Jack can fill in. And this was a self-originated loan to an in-market borrower who we have other loans with, and happens to be an out-of-market property.

John Barnes

I think just for additional color, it's a performing nonperformer we got a very cooperative customer that's working very hard to make this thing go the right way. But given the scenario with the property, we felt it was appropriate at this time to take this move in terms of the nonperforming status and the charge. It's a long-standing relationship and we're working very constructively to try to get it to a better spot.

Damon DelMonte - Keefe, Bruyette, & Woods, Inc.

Can you tell us which state is it in?

John Barnes

The state -- that the property is located in Florida.

Operator

Ladies and gentlemen, this concludes the time we have for questions. I would now like to turn the call back over to Mr. Goulding for closing remarks.

Peter Goulding

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

Operator

This concludes the presentation for today, ladies and gentlemen. You may now disconnect. Have a wonderful day.

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