First Connecticut Bancorp's (FBNK) CEO John Patrick on Q3 2016 Results - Earnings Call Transcript

| About: First Connecticut (FBNK)

First Connecticut Bancorp Inc. (NASDAQ:FBNK)

Q3 2016 Earnings Conference Call

October 20, 2016 10:30 AM ET

Executives

Jennifer Daukas – Investor Relations

John Patrick – Chairman, President and Chief Executive Officer

Gregory White – Executive Vice President, Chief Financial Officer

Michael Schweighoffer – Executive Vice President and Chief Lending Officer

Analysts

Damon DelMonte – KBW

Laurie Hunsicker – Compass Point

Matthew Breese – Piper Jaffray

David Bishop – FIG Partners

Operator

Good morning and welcome to the First Connecticut Bancorp, Inc. Q3 2016 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Ms. Jennifer Daukas. Please go ahead.

Jennifer Daukas

Thank you, Nancy. Good morning, my name is Jennifer Daukas and I’m the Investor Relations Officer for the company.

Before we begin our presentation today, we would like to remind you to read our Safe Harbor advisement and forward-looking statements on our earnings announcements. Forward-looking statements by their nature are subject to risks and uncertainties. Certain factors could cause actual results to differ materially from expected results. Our comments today are intended to qualify for the Safe Harbor afforded by that advisement.

Thank you. And here is John Patrick, our Chairman, President and CEO.

John Patrick

Good morning everyone, and thank you for interest in our company. As you’ve read, we’ve reported earnings last night of $0.25 per share. Our earnings are consistent with, I think, the some of the guidance that we’ve given relative to our long growth and deposit growth. But we’re really pleased with those – both those growth factors during the quarter, particularly the deposit growth that we had in our branches as well as somewhat of a rebound of the municipal banking core deposits with several of the municipality that we have primarily relationships with in the Connecticut.

And an overall basis, when we think about comparing this year to last year, I very pleased where we have been from an expense perspective. Overall year-to-year expenses only went up about $157,000 and when you think about the fact that we’ve added three branch offices and two lending centers during that period of time. And those branch offices of yield to this over $160 million in deposits as of today, which we’ve obviously went out to the marketplace.

We’re pleased with the performance of our teams in those markets and we’re pleased with the traction we’re gaining in those markets with very, very good companies, and companies that have been in those market as well as consumers and individuals over the last several years. As we continue to build the franchise value, I think an important factors that fact again during the quarter, we grew our checking accounts by 3% or 1,624 net new accounts almost 6,000 net new accounts from a year ago.

And as we grow those accounts and they continue to mature, we have the ability to cross selling for those accounts and enhance those relationships and keeping those relationships and that results in providing good franchise value. So our story continues to remain taking the deposits, making good loans, again that resulted in this quarter of very positive reduction in our loans and deposit ratio down to 110% from 118%. And we’re very focused on those fundamentals to continue to move our company forward and to build franchise value.

I’ll just turn it over to Greg for a couple comments relative to some of the financials.

Gregory White

Yes. Good morning. Thanks John. I’ll just touch on the net interest margin, since obviously it did go down little more than we expected. On the last page of the press releases are non-GAAP table, you can see our core net interest margin went down 7 basis points. But here it’s not quite as bad as it looks, here’s the breakdown of that. Our cost of funds went up 2 basis points which was somewhat related to a new branch in the Vernon, Connecticut.

Our core loan yield which is just for prepayment penalties actually fell by 2 basis points. In a basis point of that is due to the day count, because we’ve report our margin on an actual 365 basis. So adjusting for that, our core to loan yield fell by 1 basis point, so the remaining three was basically a change in asset mix. Our securities portfolio was relatively low yielding. It grew by about 10% during the quarter, mainly for collateral pledging purposes.

And then our average – our Fed Funds balance grew percentage wise by a significant amount as well during the quarter. So set another way our – on an average balance basis, our loans grew by just under 2% during the quarter, but our non-loan assets or lower yielding assets grew by about 16% during the quarter, and therefore contributed negatively to the margin by about 3 basis points, so just kind of wanted to cover that. Thanks.

John Patrick

Yes. And as you all recall, obviously we were looking at a year ago the tenure was much and much different place that it is. And even was at the beginning of a quarter to where it is at the end. So we continue to make sure that we have flexibility within the balance sheet. We continue to maintain asset sensitivity within the balance sheet for in eventual increase in short-term interest rates.

We have replaced theoretically most of our any fixed rate mortgages with variable-rate production and so we continue to – as I said, before to remain assets sensitive and the balance sheets in a very good position for the future. Again I’m very, very pleased with the return in the three de novo that we opened in the past year.

Again Vernon, Connecticut as Greg is alluded to is off to a great start I think we’re $65 million in deposits in that marketplace. With some significant new relationships and some significant new commercial relationships have been in the market for a long period of time that have go over to our company. So we’re very pleased with that today.

With that, I’ll – I know it’s a busy day for everybody on the phone. Now open and know that you’ve all had a chance to view our release. I’ll open it for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from Damon DelMonte from KBW. Please go ahead.

Damon DelMonte

Hey good morning guys. How are you going today?

John Patrick

Good. How you doing?

Damon DelMonte

Good, thanks. So my first question relating to the deposit growth this quarter, how much of that was kind of more seasonal and nature of related to muni accounts you guys have versus maybe more core secured deposits that will stay around in the coming quarters.

John Patrick

That was municipal Damon, was that the question.

Damon DelMonte

Yes, yes. So the pretty sizable amount of deposit growth this quarter, right. So how much of that was kind of seasonal related to the municipal business.

Ken Burns

All right. About – this is Ken Burns. Of the $190 million overall growth, but $160 million was muni, the remaining was non-muni. We had – we expect probably 20% of that muni to be non-seasonal that grows every year, and the rest of, you’re right, will – we expect ultimately to leave by the end of the year and come back next year.

Damon DelMonte

Okay.

Gregory White

Hey, Damon, this is Greg. So year-to-date for the nine months, $91 million is muni, and $165 million is non-muni. That’s for the nine-month period. But can just cover the three-month period, but year-to-date we’ve done very well on non-municipal deposits.

Damon DelMonte

Got you, okay. And you attribute that to the new branch openings, I’ll just deeper penetration throughout the footprint opening for an account.

John Patrick

Deeper penetration throughout footprint with our concentration on the core checking account, the new branch openings and then just across the board market.

Damon DelMonte

Okay. Okay, that’s helpful. And then as we see some of that municipal deposit kind of outflow in the fourth quarter. Do you expect any relief the margin? So as we go to model the margin, do we look for it to maybe stabilize at this level? Or do you think there’s going to be more pressure?

John Patrick

I think the pace of decline is going to slow, again we do report on an actual basis. We are going to look at changing that to 33%, 60% which would stabilize our margin quite honestly. With that said I think margins are still going to feel little pressure here. I don’t know about the cost of fund side, but asset yields would – rates where they are we might feel, but certainly the pace of decline, I think is slow.

Gregory White

We have a small room in the cost of funds when it comes to the re-pricing down to some of the specials at the new branches.

John Patrick

But basically the muni – specifically the muni is that – if that ran out today we probably borrow overnight at a similar rate maybe a slightly higher rate. So it would be – muni’s beneficial the margin but not materially.

Gregory White

And Damon, I’ll just comment one more thing on the muni pieces that, this is a strategic business that we started to build in 2010. So it’s not – there’s a lot of companies out there that send out a fax every morning to municipalities that are need cash and say this is the rate. This is a business that we’ve made and in my remarks I talked about core municipality that we are a primary relationship for.

And when you think about municipal, there’s a variety of other pieces of municipal, boards of education, fire districts, water districts things like, yes, it’s not just town. And so that’s why it’s not all seasonal, but what we are seeing and a primary concentration of the municipals within Connecticut, we do business I would say, we’re about 65 towns and cities in this…

John Patrick

84.

Gregory White

…84 excuse me – 84 towns and – different towns and cities in the state. So it’s pretty diversified, but as a result of the challenges in the state economy, we’re seeing some of these municipalities obviously holding less cash utilizing a lot more of their cash than they did before. So it’s very diverse. It’s a business we’ve built up. It’s part of our core business. We do recognize and understand these fluctuations and have for a long period of time. So it’s just not going out and bidding on dollars.

Damon DelMonte

Got it, okay. And then could just give us an update on your commercial real estate portfolio and maybe talk little bit about your overall concentration as a percentage of capital. Have you guys tripped any those of the regulatory triggers of 300% of capital or the phase of growth or any concern regarding that?

John Patrick

So, I don’t have a concern over it. And this is my reason why don’t wear it 304%. I know many of you have written about concentration throughout the country and throughout New England. Before we even started our growth and our growth, if you think about our growth over the last four years has been averaging over 20% up until it was last year. We signaled the regulators that we were going to grow like this.

But it was going to be prudent growth, the asset quality. We had good metrics in relative to our risk parameters and credit discipline. And so when we think about some of the issues that are facing the industry and some of the institutes that are fear space today relative to commercial real estate.

We’ve been stress testing our portfolio and doing the thing that some of the other banks and some of the regulators are suggesting that you do for the last four years. And so we’ve done that not just internally, but we’ve taking it through the whole governance cycle. We’ve taken it through several regulatory exams. And so, it’s always been that matter of how you measure monitor that portfolio, have you understand the risks within your portfolio. Take a look at concentrations and variety of other things within that portfolio.

So I feel really, really comfortable where that portfolio is, again we’ve been through several regulatory cycles with extraordinary growth. We have a good relationship with our regulators, and in fact I’ve mentioned publicly before, I think it was July of this year. We constitute what we call a regulator day. We call the Federal Reserve, the State of Connecticut, the FDIC. We had them all come in here at senior level not the examination level.

The senior level, and quite frankly it’s not something that they do with banks have done historically on an ongoing basis and say, and walk them through kind of our CAMELS rating and have them understand where we see the risk within our company. How we evaluate that risk, how we manage it and monitor that risk. And how we flow that risk through the governance system with the board in a variety of other things.

So from that I think on an ongoing basis they feel comfortable about where we are there. They feel comfortable about where our ratios are and things like that. We’ve been proactively managing. And might some give you some metrics relative to some of the things that we have there. So I’ll turn it over to him right now to give you a little bit deeper understanding of that.

Michael Schweighoffer

Yes. Hi, Damon.

Damon DelMonte

Hi.

Michael Schweighoffer

As we’ve told in the past we do track weighted average debt service across the entire portfolio weighted average loan to value in within the various product types. But overall and this is the investment CRE portfolio, we’re at a weighted average debt service as of the end of the quarter at 1.83%, weighted average loan to value 56.7%. And I do want to point out that within the guidelines that are out there as part of the 100% and 300% regulatory guidelines that and investment CRE standpoint for construction.

Okay, we have $35 million of share investment CRE construction loans that’s less than 5% of our entire CRE portfolio. That doesn’t include by the way own or occupied which – I forget how anymore million, but it’s immaterial for this discussion. But in any case, we continue to underwrite very prudently we look at various food groups if you will product types, we look a geographies, and then I think we’re doing underwriting and as John said, our ability to identify measure monitor control and controller risk is right there, where we need to be.

Damon DelMonte

Got it, okay. That’s helpful. That’s all I had for now. I hop now and let’s somebody ask those questions. Thank You.

John Patrick

Thanks.

Gregory White

Thanks.

Operator

Our next question comes from Laurie Hunsicker from Compass Point. Please go ahead.

Laurie Hunsicker

Yes, thanks. Hi, good morning.

John Patrick

Good morning.

Laurie Hunsicker

Mike, actually this is the question for you to regarding commercial real estate. Can you give us an update on what your commercial real estate non-accruals are? And can you just talk about the one CRE that came over for the 35% LTV into non-occurring this quarter.

Michael Schweighoffer

Yes. That won’t – that won’t specifically was a situation that we’ve been tracking over time. We evaluated all the various alternatives. In this case, we’ve decided to work with the customer, but it was a situation where we had to place on a non-accrual. It is a well secured loan. We have a current appraisal showing 35% LTV, we – that by our own internal policy we update the appraisals at least manually in this case. So we’re comfortable where are these things going, this will take time to resolve because we are providing the customer with some time, which again we thought was the appropriate things to do as far as the total…

Laurie Hunsicker

Yes. It’s less than $5 million compared to…

Michael Schweighoffer

Yes. As far as the total amount where – in terms of CRE, yes, we’re less than $5 million. And the loan that we just talked about the specific loan has the vast majority of that. But the CRE book remains as far as the metrics in very solid shape there’s indicated by the metrics that I just pointed out that Laurie, to Damon.

Laurie Hunsicker

Okay. So basically, your CRE non-accruals went from a $1 million to $5 million. So $4 million of that roughly has this loan.

Michael Schweighoffer

Yes, little bit more on than that.

John Patrick

Yes.

Michael Schweighoffer

Yes, that’s specific – it’s actually $4 million.

John Patrick

Yes in that loan had a maturity in rather than kicking the can down the road, we tell that’s the maturity and as Mike said, working with the borrower to…

Laurie Hunsicker

And what type of commercial real estate is this?

John Patrick

Yes. That was a development loan. We’re – the borrower had went into some challenges with some joining and the development of that property and get some other projects going on and we got to the point where we needed to expanded to a lot in time, but we got to this prudent placing on non-accrual.

Laurie Hunsicker

And so did this fall within your peer commercial real estate book, the $932 million or did it fall within your construction book of $50 million?

Michael Schweighoffer

That’s with the construction.

Laurie Hunsicker

Of $50 million, okay. And then is that the extent of the exposure to this borrower?

Michael Schweighoffer

Yes.

John Patrick

Yes.

Laurie Hunsicker

Okay. I mean your credit is very good. So I mean to sort of hone in completing that…

John Patrick

No, that’s why we outlined it in the press release, Laurie because we said let’s just roll it out there. I mean, it’s a single asset, real estate entity, and hit the maturity we said, okay with the kick the can down the road and expand it. We want all the borrowers speak to the fire, he was running across some problems that takes an extended period of time to get some zoning variance as Mike said. And so we’ve had – let’s hold to the fire, let’s just prudent to putting on non-accrual like just do it. Let’s call it spade a spade.

And I think if that gets back to Damon’s point earlier when we talk about 300% and how the regulator view, how you manage your portfolio, I think this is probably one where we probably internally we could have said, okay, let’s extend the maturity, but we said, let’s this is what it is. And I think that’s appreciates from regulatory perspective too. We’re not kidding anybody.

Laurie Hunsicker

Okay, great. And then one more question on credit. How much do you have in OREO that was in the release?

Unidentified Company Representative

In OREO zero.

John Patrick

Zero, right now.

Laurie Hunsicker

Zero, so that was down from 279,000 in June.

John Patrick

Yes, right.

Laurie Hunsicker

Okay, great. Okay, just circling back to your de novo branches in Vernon at $65 million, that’s fantastic. Can you just give us an update on deposit as of September 30 or as of where you sit today on East Longmeadow and West Springfield to Massachusetts funds?

John Patrick

Yes, yes, roughly it’s a $100 million.

Laurie Hunsicker

Between the two?

John Patrick

Yes. I think East Longmeadow is just a little bit higher. Note the other way around.

Michael Schweighoffer

West Springfield 57, East Longmeadow is 43.

Laurie Hunsicker

43, okay. That’s great, okay. And then Manchester is that still opening in the fourth quarter?

Michael Schweighoffer

No. Actually we’re going to push, we need to push that back – we’re pushing that back a quarter.

Laurie Hunsicker

Okay. So 1Q, 2017. Okay, any reason for that delay?

Michael Schweighoffer

Just construction stuff that was going on with the owner and things like that. We like the location. So we were working with him to resolve a couple things that he was doing relative to zoning again.

Laurie Hunsicker

Okay. And then what are you looking at in terms of de novos for 2017 for…

John Patrick

Yes. Right now we have nothing on the drawing board. We want to make sure that when we do make this investment it’s in the right location with the right opportunity. Obviously there is – in some of our markets are continues to be change in destruction and name changes and some consolidation.

And so we want to see a little bit how that plays out and to make sure that if we have an opportunity to take advantage of that in a market that might be contiguous, we’re going to take advantage of that. But obviously, we can look more south toward New Haven or try to fill in between up in Western Massachusetts a little bit more. But I have nothing. We don’t have a week. I can’t tell you that in June. We’re going to put an office here.

Laurie Hunsicker

Okay, okay. I mean is it possible as you look at your de novo that you might actually take a pause and we could see some further digestion and drop to the bottom line or you are still actively looking?

John Patrick

I would tell you that I’m actively looking, but that doesn’t mean that we might not take a pause. It’s just – its where is the opportunity going to be.

Laurie Hunsicker

Okay.

John Patrick

And so I think we’re positioned well to take advantage of an opportunity that presented itself to us.

Laurie Hunsicker

Okay, got it. On your loan service for others in your MSR, do you have financials on that?

Gregory White

The MSR, we reversed 90,000 of the roughly 375, I think it was.

Laurie Hunsicker

Right, I saw that. I mean so…

Gregory White

Of the impairment the total…

John Patrick

$525 million.

Gregory White

$525 million service for others.

Laurie Hunsicker

Okay. And then what does that actually carried out. What’s the actual number?

Gregory White

It’s around 90 basis points.

Laurie Hunsicker

Anyway, okay. That’s helpful.

Gregory White

Yes.

Laurie Hunsicker

Okay. And then can you help me understand…

Gregory White

…give or take if you Laurie but as roughly that.

Laurie Hunsicker

Okay. Yes, that was 84 basis points last quarter. That makes sense. Okay. Can you help me understand a little bit this accounting change in your off balance sheet commitments and how to think about that?

Gregory White

You want?

John Patrick

That’s on the reserve for last year to me last quarter. That quarter last – so we were reserving for unused lines. And so we took a look at...

Catherine Burns

No. We just review our methodology and made a change with that last quarter. And so the variance in that line, so that this quarter…

Laurie Hunsicker

So you made a change at the end of last quarter. So just can you help me think about that a little bit because that was a pretty substantial increase in your expenses? Is that an ongoing? Is that just one-time or was that an ongoing?

Gregory White

That’s a one time. So when we reduced other non-interest expense last quarter in the – I’m sorry in the June, the quarter ended June 30 by the 423,000 one-time.

Laurie Hunsicker

Got it.

Gregory White

And obviously we have a small for bit I think it was 13,000 this quarter provision expense going forward on that. And then correct me if I’m wrong Cathy, we just apply the same methodology that we do for on balance.

Laurie Hunsicker

Okay, okay.

Gregory White

Yes.

Laurie Hunsicker

Okay, great. And just one last question, can you comment a little bit about share buyback. I mean I think there are shares this quarter, you guys are doing everything right, but I love the buybacks and certainly that was a little bit disappointing. I think you are super cheap at these levels. Can you just help us understand how you think about it and why you wouldn’t be buying back stock at 110 book?

Gregory White

Yes. No, historically if you look we bought up to 105% of book, which today is $17 and then obviously we’ve been bumped in our dividend a little bit. And we’ll monitor that if our capital ratios continue to be stable or increase. We’re not ruling that out moving to 105% to higher level. But we’ll do that analysis at that time. But we’ll just kind of what monitoring our capital little bit as well.

Laurie Hunsicker

Great. Okay, thanks, I’ll leave it there.

John Patrick

Yes. And from a capital management perspective, again, we look at the three things, the buybacks, the loan growth and the dividends, better returns on the loan growth and then we’ve supplemented that. We just have the dividend increase during the quarter.

Laurie Hunsicker

Yes, I saw that. Okay, thank you.

John Patrick

Yes.

Operator

Next question comes from Matthew Breese from Piper Jaffray. Please go ahead.

Matthew Breese

Good morning, everybody.

John Patrick

Good morning, Matt.

Gregory White

Good morning.

Matthew Breese

Just to clarifying the accounting change, other expenses, which I’m assuming it was a part of this quarter was $400,000 higher this quarter. Should I take that out next quarter or leave it in?

Gregory White

The accounting – the change in estimate impacted the quarter ended June, 30. They had no effect on this quarter. But if you are comparing quarter-over-quarter, you have to take into account of June 30. The June 30 numbers the non-interest expense was reduced by $423,000, which you can see in our non-GAAP table on the last page. So it had no impact other than – I think it was $13,000 provision expense this quarter.

Matthew Breese

So the $2.8 million of other operating expenses is probably the right run rate going forward.

Gregory White

Say that again, Matt.

Matthew Breese

Other expenses was $2.8 million this quarter and I’m assuming the accounting change was in there 2Q to 3Q. I’m just curious of that $2.8 million going forward is the right run rate.

John Patrick

I think it is but Greg is going to try, look on real quick, but we have to verified and get back to you Matt.

Matthew Breese

That’s fine. Okay. And then I understand the municipal business can drive some volatility in the overall margin. Maybe we could try that another way and talk about just overall net interest income and what you – your expectations for growth in net interest income is over the next 12 months and 18 months.

Gregory White

Yes. I mean obviously on a core basis it grew about $255,000 over the past quarter. With that said I think if you look at the average balance of loans compared to the spot balance and see a lot of the growth came at toward the end of the quarter. I don’t think we’re going to move off are roughly $150 million of growth.

Matthew Breese

No.

Gregory White

And we’re getting current spreads versus deposits in the 2.50% to 3% probably more 2.50% on organic growth right now.

Matthew Breese

Okay. Are you thinking more like low-single digit growth on an annual basis of net interest income?

Gregory White

Yes. I think that – that’s probably in the ballpark. I mean obviously your assuming rates stay where they are, correct?

Matthew Breese

Yes, yes.

Gregory White

I mean I said, as we’ve been over previously the Fed tightening our margin roughly goes up 5 basis points. So if rates stay here that’s probably not unreasonable.

Matthew Breese

Okay.

Gregory White

If you compare the nine-month to nine-month, this year versus last year, I think we’re up about 4% of net interest income, which is about 2 million box.

Matthew Breese

Okay, all right. And then you did mention the deposit – the deposit market too curious in Connecticut, how things fair competition wise, its sounds like there is broad based competition and competition is heating up and I just wanted to get your perspective on that. Where are you seeing the competition most heated with product line?

Gregory White

Yes. You know what – everybody talks about heating up, it’s never been cool, when we’ve always been in a very, very competitive market from as long as I can remember being here and at other institutions and organizations. And so – and I would tell you that as much as things are driven by rate its not all driven by rate either.

We have ebbs and flows I think especially and historically is to be able – some of the mutual, we want to get out in front of a rate change or try to increase your deposits. Times are little different everybody is trying to manage things. So someone they come out with a special that they have fought out very well relative to filling a bucket of loans or securities or something that they are trying to do.

There is tremendous amount of competition in our market, there are always has been and there are always will be. And as we challenge our people every day is that we hire people with experience, we’re very pleased with the team that we have. And we would say that we need to out think the competition. And we give them the tools necessary to be able to discuss rates and variety of other things. Some times someone might come in and they want to go to another bank because they are offering 25 basis points more and you can sit down with the calculators and say is going to cost you more in gas to move the account why do you really want to do that.

And so we have these discussions every day, we could provide our people with the tools necessary. And that’s why I think that when we take a look at – and we’ve always been emphasizing, I think the last three or four years in our releases that net new checking accounts growth of 3%, that’s not rate driven okay.

And then you take a look at the 12% annual year-over-year, of course to 6,000 net new checking accounts in our core and expanding marketplaces. Those are relationships I think that we can continue to deep in, we talk to customers all the time, that’s a one account they bring over and then there might be some other ancillary council all along the way that we look at that, but Connecticut is and always will be very committed market.

Matthew Breese

Right. And you get that success.

John Patrick

Yes, I mean…

Matthew Breese

One of those metrics we look at it as loan to deposit ratio and its down from 118% last year to 110% today.

John Patrick

Right.

Matthew Breese

Is that trajectory, what you want to see over the next 12 months as well another market improvement?

John Patrick

Yes, I like too, I mean, we want to continue I mean again, we haven’t given follow guidance, we haven’t included our budget, but we’re going to be in the ballpark of $150 million loan growth and $175 million deposit growth next year the same way, we are this year. Unless we see things changed dramatically, but that’s kind of how we’re looking at the world right now.

I think our retail team has done a phenomenal job, not only we deepen relationships in our new markets, but in our core existing franchise that’s been here for a while. We continued to see good growth in Farmington and Avon and Burlington is a market that we over the last several years we double the size of our deposits in that marketplace. So just overall community, but our team’s done a great job in that market.

Matthew Breese

Right. Related to the Connecticut market it’s a lot of more negative headlines recently. How is that effected you and has it hadn’t affect and how do you feel about what affects it might have going forward.

John Patrick

Yes, I think we talk about that a lot and one of the things that’s important to understand. So – is there a probability that Hartford may file bankruptcy. Yes there is a real probability that may happen next year. And so how does that – does that affects us? We take a look – we bank with the City of Hartford and we take a look at that municipal banking book that we have and I think you or somebody ask the question a couple of quarters ago, what’s the effect on the municipal banking book, and I think just kind of illustrated that with Damon’s question is that, these municipalities are holding less money they did before.

The good thing for us is that again, from a prudence perspective and the governance perspective went in this business, we develop concentration and as we develop deposit limits relative to overall deposit municipal relative to overall deposits. And we have – as Ken mentioned we have 84 different municipalities that we deal with today. So there is a tremendous amount of diversification within that.

So I think that’s the one piece that we say – that would have the most effect relative to the challenges that Connecticut has from an economy perspective. On the lending side, I think there is less impact, I think that quiet frankly when we take a look at our manufacturers and other types of C&I business that we have in the state. They’ve done a nice job in diversifying their product base, their customer base its not Connecticut, we don’t have – I don’t believe that we have anyone in our portfolio that has a significant relationship with municipalities or the state.

And then our book is pretty diverse. So we have customers that we bank before in the past that have diversity within their streams and their flows on the commercial real estate portfolio. We’ve diversified with college and universities throughout New England and Northeast. So I’m not -- we have a negative effect yes but I’m not concerned it’s going to have a negative credit event on our assets here.

Matthew Breese

Right, that’s very helpful. Last one on the swap the income that was very solid this quarter and I wanted to get your perspective on whether or not that is sustainable and if not where would you expected to go?

John Patrick

Yes, I think that – it was a good quarter for us. I think that what we tried to do and one of the reasons that we’re able to win business besides in pulling in some prudent customers is a flexibility that we have within pricing. We don’t force people into swaps.

So we want to make sure that they are educated about swaps if there sophisticated individual relative to those they understand them, they understand the positive attributes from their perspective and the negative attributes from their perspective. So we – when we take a look at pricing we offer our borrower as a different menu as Mike would say relative to shorter-term pricing and longer-term pricing, both inside and outside and then in the swap option.

Quite frankly, and low interest rate environment many of the borrowers are choosing for the swap option because in rising interest, our rates going to go lower. So they’re making in a bit of a debt depending on what their plan is with that investor piece of property that they have. Is something that going to hold for three years or is something that’s going to hold for five years? It is a family entity that this is a family deriving the cash flow off of this property and others.

And so if you take a look at this low interest rate environment you get into a swap if rates rise, there’s probably, and they have an opportunity to exit because of rising values arising opportunities in that specific sector. They have a chance to be in the money rather than having some type of prepayment penalty in the future.

It’s just a lot of flexibility that we have that we provide to our to our lenders and our team and then we work with work with Greg in determining what’s the best way to go forward. I mean individual long basis.

Matthew Breese

Right. Okay that was very helpful. Thank you guys appreciate taking my questions.

John Patrick

Sure.

Michael Schweighoffer

Thank you.

Operator

[Operator Instructions] Our next question comes from David Bishop from FIG Partners. Please go ahead.

David Bishop

Hey, good morning, gentlemen.

John Patrick

Hey, Dave.

David Bishop

John sticking with that maybe that the swap question there, I think in the past, I think we had on the road that we were talking about maybe the credit spreads of about 200 basis points, I think the give up was around 100 basis points or so. It sounded like in terms of the comments before there, I think it’s still holding up around 200 basis points. Is there of any sort of change in sort of the spread give up from that swap position here.

John Patrick

Yes, not materially, it might be a few basis points more today, just because the treasury is come down so significantly. So if you think back a year ago treasury was let’s say, I’m going to using rough numbers here now 240. The beginning of the third quarter treasury is came down 137. Okay, rebound it to 150 treasuries about 160. So when you have that differentiation in the treasury, there was much more of a give up today there’s not – there’s less of the give up. And then LIBOR has come up a little bit too. So – go ahead, Michael.

Michael Schweighoffer

Dave, it’s Mike. I think that 100 basis points that we have talked about in the past was actually the index to index differential meaning if we’re pricing off of the Federal Home Loan Bank index versus the swap index. So for instance today, the 10, 20 swap index – I’m sorry the 10 20 FHLB is 2.33. If we apply a 200 basis point credit spreads, just for argument’s sake that would equate to 4.33, Okay. Whereas on the flip side, if we’re getting swap thirty day LIBOR has been kicking around 52 or 53 basis points.

If we apply that same to credit spread, 200, okay, you’re looking at 250 to 253, 252. So there’s your difference in yield versus yield. That 100 I was always referencing to you probably an outside conversation was the difference to the borrower and the incentives to the borrower to perhaps look at a swap very, very strongly and consider a swap. So it’s not the give up that – you know the give up to us is not 100 basis points. Does that help or does that further explain it?

David Bishop

Yes, yes, sorry I think I sort of phrase that question wrong in terms of trying to frame that there, so it seems like it’s relatively consistent from that perspective.

Michael Schweighoffer

Yes, yes, but right now our swap book out there is $361 million. So we’re getting the floating as the LIBOR plus whatever the credit spread is on that in the credit spreads are, they vary based on each deal.

John Patrick

Yes. And when we talked about the give up before and the talk of the give up of current net interest income to remain asset sensitive, take the variable piece rather than the long-term piece.

David Bishop

Got it. So in terms of – there’s been the talk in terms of the increase in LIBOR, I guess more in the 90 day side has the – has there been in terms of the movement on the short side 30 day or so. Has that had much of an impact in terms of loan yields thus far for you all?

Michael Schweighoffer

I mean not a lot. I mean, yes, the swap of prices off for 30 day LIBOR, so if it’s up 7, 8 basis points that book is going to go up 7, 8 basis points over the 30 day period.

David Bishop

Got it.

John Patrick

Yes, I mean the real bump will come on Fed tightening, if it happens.

David Bishop

Got it. And I think in the past you’ve spoken about some opportunities maybe out of market in terms of lending footprint, doing stuff a variance in the Northeast. Does that become more of a focal point if do you see a little bit of a slowdown in the regional footprint given what’s happening in Hartford and maybe some of the other regional areas up in Connecticut?

John Patrick

Yes. I mean it’s one where what we’ve talked about Davis following our customers. So if we have a customer that’s diversifying and they have an opportunity outside the market, we’ll follow the customer to the market again as long as it makes sense. So throughout the Northeast, we’ve done some things, we’ve done some things with some customers and in other areas of the country what we tried to do is get a good understanding of what’s happening economically first in that area of the country just because the borrower wants to be there, it doesn’t mean necessarily that we want to be there.

We try to understand those economic attributes when we underwrite that. And historically, when we are doing something out of market at the loan to values and the debt service coverage is that that Mike is talking about before and usually with credit, very, very good credit attendance.

David Bishop

Got it. Thanks for the color.

John Patrick

Yep.

Operator

[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Mr. John Patrick for any closing remarks.

John Patrick

Just thank you everyone. Thank you for your interest in our company. Thank you to our shareholders, who are on the call. And we really appreciate the opportunity to share our story with you. We continue to prudently grow our company organically in the future and focusing on that organic growth and building franchise, value and managing capital in a very, very prudent way. So thanks for being on the call. I hope everyone has a great day.

Operator

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.

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