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People's United Financial (NASDAQ:PBCT)

Q3 2012 Earnings Call

October 18, 2012 5:00 pm ET

Executives

Peter Goulding

John P. Barnes - Chief Executive Officer, President, Director, Member Of Executive Committee, 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

Preeti S. Dixit - JP Morgan Chase & Co, Research Division

Ken A. Zerbe - Morgan Stanley, Research Division

David Darst - Guggenheim Securities, LLC, Research Division

Collyn Bement Gilbert - Stifel, Nicolaus & Co., Inc., Research Division

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

Damon Paul DelMonte - Keefe, Bruyette, & Woods, Inc., Research Division

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

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

Thomas Alonso - Macquarie Research

Michael Turner - Compass Point Research & Trading, LLC, Research Division

Dan Werner - Morningstar Inc., Research Division

Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the People's United Financial Inc. Third Quarter Earnings Conference Call. My name is Regina, 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 presentation over to Mr. Peter Goulding, Senior Vice President of Corporate Development and Investor Relations for People's United Financial Inc. Please proceed, sir.

Peter Goulding

Good afternoon, and thank you for joining us today. Jack Barnes, President and Chief Executive Officer; Kirk Walters, our Chief Financial Officer; along with Jeff Hoyt, our Controller, are here with me to review our third quarter results. Before we get started, please remember to refer to our forward-looking statements on Slide 1 of our 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. Good afternoon, everyone. As always, we appreciate your joining us today. On Slide 2, we provide an overview of our third quarter results. For the quarter, operating earnings were $64.4 million or $0.19 per share, down from $67.2 million or $0.20 per share in the second quarter. Net income for the quarter was $62.2 million or $0.18 per share.

Operating net interest margin declined to 3.82% compared to 3.88% in the second quarter. The decline in the margin is primarily the result of lower loan yields which was partially offset by lower funding costs.

Total loan growth amounted to 8.8% on an annualized basis. We are very pleased to see this increased momentum, which is significant when considering the runoff in our acquired portfolios.

Noninterest income in the quarter increased $5.7 million to $81.4 million. This increase was primarily due to higher prepayment fees, seasonally strong insurance revenues, higher gain on sale of residential mortgages and increased operating lease income.

We are particularly pleased with the progress on our efficiency ratio, which improved to 61.4% from 61.5% in the second quarter. We were able to drive operating leverage while absorbing the full quarter expenses of the Citizens branch acquisition. With the growing balance sheet, supported by strategic revenue initiatives and identified expense reductions scheduled in the quarters ahead, we look forward to continued progress on our efficiency ratio as we push towards our goal of 55%.

Asset quality, a longtime hallmark of this institution, continues to impress as net charge-offs totaled just 18 basis points this quarter, which is the lowest level since the second quarter of 2009.

During the quarter, we repurchased 4.5 million shares or $53.5 million at a weighted average price of $11.90 per share. Year-to-date, we repurchased 13.5 million shares or $164 million at a weighted average price of $12.12 per share. This results in approximately $8.6 million of annual dividend saving. We have 4.5 million shares remaining in our existing share repurchase authorization.

Capital ratios remain strong, with the tangible equity ratio at 11.2% for the third quarter. We continue to make progress deploying in our capital through balance sheet growth, dividend payments and share repurchase activity.

Now I'd like to turn it over to Kirk.

Kirk W. Walters

Thank you, Jack. On Slide 3, you can see a breakdown of the elements contributing to our 3.89% net interest margin for the quarter. Lower loan yields negatively impacted the margin by 9 basis points, approximately 5 basis points of this decline related to the runoff of higher yielding loans in the acquired loan portfolio. The other 4 basis point decline related to a combination of originated loans coming on at lower rates, payoff and repricing.

Cost recovery income, which represents settlements and payoffs in the acquired loan portfolio in excess of the carrying amount, continued this quarter and amounted to $4.1 million, down from $4.7 million last quarter, which negatively impacted the margin by 1 basis point. These forces are partially offset by a 3 basis point improvement in funding rates and mix. Deposit costs are 41 basis point, down from 45 basis points last quarter and 58 basis points in the third quarter a year ago. As a reminder, the favorable effect of fair value amortization on acquired time deposits in the Danvers acquisition will end this month and negatively impact our fourth quarter net interest margin by approximately 2 basis points. In this rate environment, opportunities continue to exist to lower deposit cost. For example, average deposits and acquired markets represent approximately 17% of total average deposits, with a weighted average cost of 77 basis points, which reflects progress, but is still well above our franchise wide cost of deposits.

In addition, we continue to improve our DDA mix. Overall, we anticipate a similar decline in our net interest margin next quarter, driven by the acquired loan portfolio runoff, lower absolute rates and the expiration of the fair value amortization on acquired time deposits.

On Slide 4, you can see that our operating net interest margin declined to 3.82% in the quarter. The difference between GAAP and operating net interest margin is a cost recovery income, which we view as discrete and transactional in nature. Our strong margin is a product of our low-cost, stable funding, loan mix and solid capital levels, all of which means that we do not need to stretch on credit. In addition, our margin is and will continue to be supported by approximately $900 million of accretable yield resulting from 5 acquisitions closed within the last 2.5 years.

Let me provide you a little more detail on the next slide. Slide 5 links closely with our discussion of the net interest margin. For the quarter, interest accretion on acquired loans total approximately $49 million, down from $56 million in the second quarter. The runoff in the acquired portfolio reached its highest level this quarter, as $383 million of loans paid off, matured or were settled, with just $32 million relating to Fin Fed. We now expect the acquired Fin Fed portfolio to remain with us into 2013. While we'd prefer that some of these loans had stayed with us, we have seen approximately $100 million of improvement this quarter in criticized and classified assets within the acquired loan portfolios.

The carrying amount of acquired loans at period end totaled $2.6 billion. Recall, these portfolios totaled $5.4 billion in aggregate as of their respective acquisition dates. Overall, we remain confident that our credit marks will be sufficient to cover the anticipated loss content in these portfolios.

Slide 6 illustrates the amount of noncash accretion running through our income statement. If you go to the top left, you will see that we booked total accretion of $49 million this quarter, which when you annualize and divide by the average balance in the acquired loan portfolio, gives an effective yield of 6.90%. Weighted average coupon in the acquired loan portfolio is 5.39%. This is actual cash coming in from the acquired loans. The difference between the 6.90% effective yield, the weighted average coupon of 5.39%, amounts to $10.6 million of additional interest income from the amortization of the original discount on the acquired loan portfolio. Annualizing this number and dividing it by the adjusted average earning assets in the third quarter shows that 17 basis points of our operating net interest margin during the quarter relates to noncash accretion.

So if you want to think about our core underlying margin, excluding the noncash accretion, it would be operating -- it'd be our operating net interest margin at 3.82%, less the 17 basis points or 3.65%. The noncash accretion was equivalent to $0.02 per share this quarter, as shown on the right-hand side of the page, which is similar to prior quarters.

Over time, as the acquired loans repay, mature or are settled, the amortization original discount will dissipate. At the same time, it is possible that we may also experience reclassifications from the non-accretable difference to accretable yield due to better-than-expected credit performance.

Slide 7 provides a breakdown of the elements contributing to our net increase in loans. As Jack noted earlier, the loan portfolio grew 8.8% quarter-over-quarter annualized on a period-end basis. We believe we operate in the best commercial banking market in the United States, and are one of the few banks that can credibly offer the full product suite of a large bank, while maintaining our outstanding customer service standards.

Originated loan growth for the quarter totaled $835 million. As in prior quarters, growth came from a variety of products and geographic areas. Originated commercial loans increased $722 million quarter-over-quarter. C&I and CRE expansion contributed 82% of this growth, with increases of $310 million and $286 million, respectively.

Within C&I, we saw strength across all categories, but I would highlight a few businesses that continue to outperform. Our mortgage warehouse lending business in both equipment and finance businesses, People's United Equipment Finance and PCLC, grew originated loans of $147 million, $72 million and $43 million, respectively, in the quarter. The mortgage warehouse lending business is one that is well known to us through years of experience. We are comfortable with the credit. And while the growth rate will likely slow from here a bit, it does have room to grow over the next 2 years, and is likely to continue to contribute nicely, given the low interest rate environment. Originated residential mortgages grew by $97 million. Of the residential mortgage originations, approximately 51% were hybrid adjustable-rate mortgages and 58% of the pipeline is Jumbo product. Third quarter 2012 average loan size or our close loans originated in the quarter was $316,000, while the average loan size for our loans added to the portfolio conforming or Jumbo was $596,000.

Average FICO score for our third quarter originations was 758, with an average LTV of 68%. Originated home equity loans increased by $11 million. Home equity loan closings totaled $197 million in commitments, compared to $164 million in the second quarter 2012. In terms of recent originations, the average line size, the third quarter originations was $133,000. The average FICO score was 7.60%, with an average combined loan-to-value of 57%. Consistent with our past practices, 100% of home equity loans are originated in the branches.

The acquired portfolio declined by $383 million. As we noted in the past, it is difficult to predict the rate of decline in the acquired portfolios. That said, we continue to manage the business with an eye towards growing our total loan balance at a mid- to high-single digits growth rate.

You can see on Slide 8 a breakdown of the element contributing to a modest decrease in deposits, which occurred this quarter, while we further reduce total deposit cost. Third quarter is seasonally our weakest period with respect to retail deposit flows, as customers tend to spend more during the summer months. In addition, we continue to improve the mix of our deposit base, as higher-cost time deposits decreased by $154 million.

Larger deposit gathering opportunities in front of us relate to increasing our deposit mix in favor of both retail and commercial non-interest-bearing deposits and better utilization of the recently acquired branches in New York. I am encouraged to see that we experienced DDA growth of 11% year-over-year, excluding the recently acquired branches in New York, and have seen good activity with respect to new account openings in the recently acquired branches.

Slide 9 shows that we continue to make progress on loan and deposit growth on a per-share basis, while maintaining excellent asset quality. We know that if we grow loans and deposits per share, increase fee income and continue to reduce cost, we will produce greater recurring earnings per share. Over the past 2 years, loans per share and deposits per share have grown at a compound annual rate of 21% and 20%, respectively.

Slide 10 provides a breakout of non-interest income, which increased $5.7 million from the second quarter. The income areas that demonstrate a momentum included loan prepayment fees and seasonally strong insurance, which increased $2.5 million and $2.3 million, respectively. Gain on sale of residential mortgages posted another strong quarter, producing income of $3.6 million, up $800,000 from last quarter and equal to first quarter levels. Other areas of strength included operating lease income and bank service charges, which were largely offset by weaker brokerage income. As a reminder, our insurance business is seasonal. The first and third quarters tend to be stronger than the second and fourth quarters.

On Slide 11, you can see that our non-interest expense base increased to $209 million from $206 million last quarter. During the quarter, we incurred $3.2 million of nonoperating expenses, $2.4 million of which related to the recent branch acquisition and $800,000 related to severance. As we think about non-interest expense, we are focused on the operating non-interest expense base. The third quarter operating expense base was $205.7 million, which included $7.6 million related to the recently acquired branches, and was up from $202.1 million last quarter. The impact of the recently acquired branches is partially offset by lower compensation and benefit, as well as professional and outside service reductions, which declined $1.3 million and $1.7 million, respectively.

Clearly, we are able to make better-than-anticipated progress and expense control this quarter. As a result, we now anticipate full year 2012 operating expenses to be in the range of $815 million to $820 million, as opposed to our prior guidance of a $825 million to $830 million. We remain committed to continuing to bring the absolute expense levels down while we grow revenues.

On Slide 12, we provide the historical perspective on our efficiency ratio. Since first quarter 2010, we significantly improved our operating leverage, as can be seen in our much improved efficiency ratio, which has declined from 76.1% to 61.4% this quarter or 15%. This quarter, we absorbed an additional $6.9 million of operating expenses associated with the recently acquired branches in New York, and still the efficiency ratio improved modestly.

Slides 13 and 14 are a reminder of our excellent pretty quality. Once again, we did see an improvement in nonperforming assets this quarter from already industry-leading levels. Originated nonperforming assets at 1.59% of originated loans and REO remain well below our peer group and top 50 banks.

Looking at Slide 16, net charge-offs were 18 basis points compared to 26 basis points last quarter. These levels continue to reflect the minimal loss content in our nonperforming assets, and are well below peers. Over the last 4 quarters, charge-offs against specific reserves represent approximately 52% of total charge-offs. As such, we understand our credit issues, and typically have very few new credit event each quarter.

On Slide 15, you can see the details for the allowance for loan losses by loan category. A few items to note. Our allowance for loan losses to commercial loans is 1.22%, with a coverage ratio of 82% of commercial NPLs. As we have stated previously, we have a strict loan loss allowance methodology, which is consistently applied. That said, mix shift and new originations can result in modest changes in the overall coverage ratio in any given quarter. The provision for loan losses this quarter of $15.1 million reflects $9.4 million in net charge-offs, including $4.8 million with previously established specific reserves, $5.7 million for acquired loans impairment and $4.8 million associated with loan growth. As we said earlier, overall, we remain confident in the credit marks of our acquired portfolios despite the lumpiness of both costs, recovery income and impairment, as individual loans and our pools reached the end of their lives.

Now I'll pass it back to Jack.

John P. Barnes

Thank you, Kirk. On Slide 16, you can see our operating return on average assets for the third quarter was 91 basis points, down slightly from the last quarter. However, these metrics does not reflect how we feel about our progress. The strong loan growth momentum and efficiency ratio improvement, while absorbing a full quarter of expenses associated with the recently acquired branches in New York.

It is important to reflect upon the progress that we have made since the management changed in the second quarter of 2010. We have strengthened the earnings power of the franchise through the additions of key personnel, expansion of business lines and through a thoughtful deployment of capital. We have also absorbed the negative impact of regulatory reform, related high cost of compliance, the impact of a prolonged low interest rate environment and a weak economic recovery. Through all of this, we have seen strong improvement in our return on average assets, and improved performance so that we are now performing at the same level as our peers.

Slide 17 illustrates the improvement in our return on average tangible equity with the low levels -- from the low levels of 2010. We expect to see continued improvements in this metric as we improve profitability and thoughtfully deploy capital. Still, our significant capital levels remain approximately 370 basis points over peers on a tangible common equity, tangible asset basis. Normalizing our equity base to be consistent with our peers shows that the bank is performing well with a return on average tangible equity of 12.3%.

Slide 18 illustrates our substantial progress since 2010 on a dividend payout ratio. We expect progress to continue in the quarters ahead on the improved profitability and continued share repurchase activity.

On Slide 19, we see that capital levels at the holding company and the bank remain very strong, with our tangible common equity ratio at 11.2% and Tier 1 common at 13.6%, which compares well to our peers at 7.8% and 10.7% as of the second quarter, respectively.

We have spent some time with the Basel III proposal released on June 7, 2012. We currently estimate that the Basel III proposal will negatively impact our risk-based capital ratios by anywhere from 50 to 100 basis points on an as-proposed or fully phased in basis. While we have studied the release, it is important to remember that the regulations are proposed at this point, and some sections are still subject to revision and interpretation.

Our game plan for successfully navigating the low interest rate and the slow economic growth environment continues to include growing loans and deposits, maintaining discipline on all asset repricing, lowering the cost of funds, lowering absolute expenses, growing fee income, maintaining excellent credit quality and maintaining our conservative position within the investment portfolio. Our robust pipelines in the strong originated loan growth contribute to the continued momentum of our franchise. The strength of our platform continues to allow us to attract and retain exceptional talent and provides a substantial, sustainable, competitive advantage.

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

Question-and-Answer Session

Operator

[Operator Instructions] And your first question today comes from the line of Steve Alexopoulos with JPMorgan.

Preeti S. Dixit - JP Morgan Chase & Co, Research Division

This is actually Preeti Dixit on for Steve. A quick question on your C&I loan growth, obviously very strong in the quarter, and I know you mentioned the leasing business, as well as the mortgage warehouse. And we've heard a lot of banks speak about their commercial customers pulling back here with the upcoming elections, the fiscal cliff. Is this something you guys are seeing or does it look like demand can hold up here? It's pretty strong in the quarter.

John P. Barnes

Yes, we actually are really pleased with the quarter. As we said, we saw solid growth in the portfolios across the franchise in the different geographic regions along with the growth in the business lines like mortgage warehouse. And we're not seeing any slowdown at all. We have very healthy pipelines, a lot of activities in our loan committees and a lot of closings anticipated here as we move through the next few months.

Preeti S. Dixit - JP Morgan Chase & Co, Research Division

Okay. Great. That's helpful. And then with regards to the lower $815 million to $820 million expense range that you gave for 2012, can you give us an update on how far along you are in your initiatives and maybe what's driving the lower guidance? And then, do you see much more room to lower that in 2013? Or is this a good run rate for you?

John P. Barnes

Well, we expect and in our commentary reflected the fact that we continue to work on and expect that we will bring down our absolute level of expenses. At this point, we have not given any guidance beyond the balance of this year. We will typically do that when we release earnings for the fourth quarter in January, which are, as you know, everybody is going through the planning process right now and so it's a little early to have anything out for the -- for next year. But I think you can see quarter-by-quarter, we continue to make progress in the base expenses. And I think this quarter was encouraging because we absorbed $7.6 million of expenses from the Citizens branch acquisition, and was able to absorb part of those in our run rate.

Operator

Your next question is from the line of Ken Zerbe with Morgan Stanley.

Ken A. Zerbe - Morgan Stanley, Research Division

Jack, kind of on exactly, you're on Page or Slide 16. You mentioned that you didn't think that the ROA really reflects the bank's progress. My question to you though is when does it? Like at what point and what do you need? I mean, do you need higher rates before you really start to see the benefit in ROA?

John P. Barnes

No. I mean, I think the slide does reflect some pretty steady progress forward. What we need is continued growth in our lending portfolios, both on the core franchise along with new markets and continued growth in our fee income businesses, which as well continue to move along nicely. So it's just continued progress. And as we just indicated in answering the last question, and it was pointed out, we've made good progress in the expense management front, too. So it's just improving performance and continuing to move along in that fashion.

Kirk W. Walters

But certainly -- Ken, it's Kirk. If you can get short-term interest rates up, we would be happy to see them up a little bit, too.

Ken A. Zerbe - Morgan Stanley, Research Division

I'll see what I can do about that.

Kirk W. Walters

I appreciate that.

Ken A. Zerbe - Morgan Stanley, Research Division

Yes, just one quick question. Would you guys mind explaining again the cost recovery income? Say, I gave -- came away last quarter thing, it was a little more one-time in nature, but...

Kirk W. Walters

Yes, the cost recovery income comes about from when we have settlements on loans. Our payoffs or any activity that the loan goes off the books and the acquired portfolios at a number higher, proceeds higher than where it's been marked. And what we've said about it is we do pull it out of our operating net interest margin. And what we've said is that we believe that it is transactional in nature, and it is hard to predict. So we have had a couple of quarters here, $4.6 million, $4.1 million of cost recovery come in. We do expect as we go forward that there will be some of this come in, but it's just hard to predict quarter-to-quarter how much and the frequency and timing of it.

Operator

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

David Darst - Guggenheim Securities, LLC, Research Division

Could you discuss, I guess, your New York commercial real estate effort and where you are? And I was beginning to see some origination volume and traction with that portfolio?

John P. Barnes

Sure. So we're basically -- there's 2 -- there's several things going on there. But if you -- the way we are managing forward and framing that, we've done 2 things. We have hired the team that we have talked about previously, and they are now up and running, if you will. We've had some nice contribution this quarter from some preclosings [ph] that were completed before the end of September, and we have continued progress into this quarter, this current quarter. So we're very pleased with the momentum of the team. As additional cover around that, the gentleman that we hired, the executive to lead that group, is also managing all of our New York commercial real estate effort. And so we have, for instance, moved in the Long Island commercial real estate group under his supervision. And he's had the time to spend with them on that portfolio, recognized customers that he's dealt with before to build on those relationships. And then, we've had a number of folks we've mentioned in the past that we've made many deals in New York City and have relationships from the legacy People's United Connecticut franchise. And we have taken that portfolio and the relationship managers there and moved them into that group, too. So I think you can all think of our New York commercial real estate effort as a 1-business unit looking to do general commercial real estate lending, including multifamily, across the entire state. And we're very pleased with the momentum that we have seen so far, and the feel for how we've reshaped the oversight and ability to progress as we go forward.

David Darst - Guggenheim Securities, LLC, Research Division

Okay. Kirk, has anything changed with your expected dilution from the branch acquisition, given the cost reductions you had this quarter?

Kirk W. Walters

I think when we look at the acquisition specifically, no. I think that we were encouraged this quarter that we saw other cost reductions come down to help offset part of it. But when you look at the specifics relating to that Citizens branch acquisition, at this point, there would be no changes in them.

Operator

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

Collyn Bement Gilbert - Stifel, Nicolaus & Co., Inc., Research Division

Kirk, just to go back, sorry to harp on it, but on the expense discussion. So the new guidance for 2012 for the year, the $815 million to $820 million, assuming I'm looking at the right numbers, that would assume a pretty meaningful drop then in the fourth quarter [indiscernible]?

Kirk W. Walters

No. I think if you look at the year, it's really the third quarter being down a little bit from the third quarter.

Collyn Bement Gilbert - Stifel, Nicolaus & Co., Inc., Research Division

But the $815 million to $820 million -- okay, so let me ask you this. Is that -- it's backing out certain items?

Kirk W. Walters

It's our operating expense. I don't know if you're looking at total expenses or you're looking at just operating.

Collyn Bement Gilbert - Stifel, Nicolaus & Co., Inc., Research Division

Okay. So if I look at the back schedule of the press release, when you guys break through your operating expense, that's the number I should be looking at?

Kirk W. Walters

Yes, right, the $205 million.

Collyn Bement Gilbert - Stifel, Nicolaus & Co., Inc., Research Division

Okay, okay. All right. And then on the NIM, your comment on the NIM expecting a similar drop in the fourth quarter to what we saw in the third quarter, is that coming off of the 3.82% base or the 3.89 % base?

Kirk W. Walters

Coming off the 3.82% base.

Collyn Bement Gilbert - Stifel, Nicolaus & Co., Inc., Research Division

Okay. Okay. And then, just the change -- sorry, I should have asked this. The change in the expense guidance, does that change the timing of your 55% efficiency target?

Kirk W. Walters

No. I think that what we've seen this quarter is we had down, and certainly some things continued progress a little faster. But at this point, we are not changing the guidance we have out there.

Collyn Bement Gilbert - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then just one last question. What's kind of the funding strategy right now? Seeing the drop in sort of retail deposits in the boosted borrowings a bit or was said for purchases, I guess, how are you thinking about funding? And I guess tied to that, I would think there still would be room for you guys to lower the CD costs a bit here. Maybe if you could just comment on those 2 points?

Kirk W. Walters

Sure. In terms of -- let me take the last and first, in terms of the CD cost, if you look at where rack rates and such are, we've definitely lowered them. And it's really a case at this point of the acquired CDs running off. As I mentioned, 17% of our deposits are the acquired deposits. They have an average rate of 77 basis points. So we are seeing in the old Bank of Smithtown as well as Danvers portfolios month-by-month the CD is rolling down and into more current rates. In terms of the first question on the funding, we really haven't changed much in terms of strategy. Third quarter is seasonally always our lightest quarter. Our lowest point in terms of deposits intends to build from there. And what we did see during the quarter certainly was continued good loan activity. And probably as we go forward, I think there's a possibility, if we continue to have real good loan activity, then it could outstrip our deposit growth. If that occurred, we could continue to see some modest increase in borrowing. But as far as the third quarter goes, a lot of that is just normal seasonal liquidity.

Operator

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

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

On the commercial real estate production, what were you seeing for yields on those assets, multifamily and then kind of office, industrial? How did that break out during the quarter?

Kirk W. Walters

Well, the -- we really haven't given breakout in terms of specific categories. I think when we -- the way we tend to think about all of our lending efforts tends to be more in spreads instead of yields. And really, it spreads in the CRE business. We look at spreads running about 2.25 to 2.75 over whatever is the term of the loan. We did, when you -- if you look at it on a linked-quarter basis, we did see some compression in those spreads as compared to last quarter, which would've been a little bit higher. And I think part of that is, is the New York commercial real estate business that we have coming in that -- and some of the multi-family stuff is probably a little tighter in spreads. But that's what it's been running about, 2.25 to 2.75 over what is some kind of -- whatever is the matched cost of funds.

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

Okay. And the multi-family business, is most of your product treasury-based or indexed?

Kirk W. Walters

Well, the multifamily product that happened in the city, that tends to be priced off of treasuries. But the way we do the pricing, we convert the treasury base to mid-swaps. So we tend to price everything here off of more mid-LIBOR swaps on a consistent terms.

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

Okay. And so on multifamily originations, how do you think about, kind of following up on Collyn's question, the funding of a 3%, 3.25% multifamily loan, how far out would you go if that was a 5-year type of structure? How much loan money would you put against that?

Kirk W. Walters

Well, when we think of funding, we're looking at funding our entire balance sheet. And so remember, that 40% of our assets are floating, and which is part of the pain and suffering we have with the low interest rate. And so, we really don't look at it loan by loan. In terms of our internal pricing systems, if it was a 5-year loan, we would put 5-year money against it, et cetera. But when we're thinking about funding the entire balance sheet, it's really much more about the -- or funding overall the balance sheet, not necessarily loan by loan.

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

Got it. And last question, the mortgage warehouse business, what's the size of that portfolio now, and where could that go?

Kirk W. Walters

The size of that portfolio is right at $600 million in terms of outstanding. They tend to run. The commitments, when you look at commitments, it's probably close to $1 billion. I would say in more normal times, utilization in that business tends to run more around 45%, 50%. But obviously, with the activity on the mortgage refinance business, it's been a little stronger than that. And I think in terms of where it's going, the continued growth, we've been encouraged that it continued to add new customers on, new clients. And that well, we believe we'll continue to see the overall customer base expand some. On the other hand, over time, I think utilization rates will revert more back to the norm.

John P. Barnes

They've done a great job. They certainly have a unit that can continue to grow and scale all the infrastructure there, a very experienced group and a great team. And we're real pleased, as Kirk said, with the progress they have made to date. And we don't see their momentum slowing down in terms of continuing to build the customer base, which will get broader.

Operator

Your next question is from the line of Damon DelMonte with KBW.

Damon Paul DelMonte - Keefe, Bruyette, & Woods, Inc., Research Division

Question for you. On the yield on the residential mortgage loans, it looks like they increased by 7 basis points during the quarter. Anything unique to get that as a higher yield?

Kirk W. Walters

That's our good friend, cost recovery income. But as we see that coming in, in different pools and such, that's what really drove up that yield. So...

Damon Paul DelMonte - Keefe, Bruyette, & Woods, Inc., Research Division

Okay. So none that's always sustainable or anything?

Kirk W. Walters

Yes. And then, Damon, if you look at the Page 13 of our press release, there's actually a footnote there, I believe it's Footnote 6, that will give you what the number would be without it.

Damon Paul DelMonte - Keefe, Bruyette, & Woods, Inc., Research Division

I got you, yes. Okay, that would've been 3.75%, okay. And then my other question, could you just give us an update on the wealth management? I know you guys have been trying to focus on growing that out. And it looked like brokerage commissions were down this quarter versus last quarter. I don't know if that something seasonal or maybe you could just give us an update on how you're viewing that segment of your business?

John P. Barnes

Sure. I'll do that, Damon. This is Jack. A couple of things are going on there broadly in the wealth management business. We feel very good about the progress that we've made to move that business forward, particularly incrementally in taking on our team in Boston. They have hit the ground running and are ahead of the plan, and we're real pleased with how that's going. So on a broad level, moving forward, regarding the brokerage income, we really did see in this quarter that the consumer, the trading volume in the mutual fund area slowed significantly. And so, that activity is slowing down. It slowed our fee income in that area. And that is the reflection of what's going on in the broader market, and as we continue to observe and hear about in terms of lower volumes generally in the equity markets.

Operator

Your next question is from the line of Mark Fitzgibbon with Sandler O'Neill + Partner.

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

Question for you. It looks like each year in the third quarter, other income blips up by a few million dollars. Why is that? Is there some seasonal item in there?

Kirk W. Walters

The primary seasonal item that we have is insurance.

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

But this is in other income, not in the insurance line?

Kirk W. Walters

Oh, you mean in other, other down there. That -- right. If you look at this quarter in particular, it's really prepayment fees that blipped up. I called out in my presentation, I think it was about $2.5 million.

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

Okay. Second question, the FDIC released their deposit market share data, I guess, about 1.5 weeks or so ago. And it looks like you guys have been taking a lot of deposit market share in the state of Connecticut, but losing a fair amount of share in Massachusetts. Why is that? Is there some competitive dynamic up in Massachusetts that make -- making it even difficult to hold deposit share there?

Kirk W. Walters

Well, I appreciate you noticing the Connecticut piece. We feel very good about that. In Massachusetts, you really have the impact of the transition with the acquisitions and the changes we're making in the funding costs there. So we are migrating both the Danvers and River customer bases to our pricing schedules, if you will. And we have lost some of the CD balances and in some cases, money market accounts to -- that we're getting premium rates in those areas. So we're -- the most of that change in the Massachusetts piece is coming from that effect, if you will.

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

Okay. And then lastly, you guys have been relatively quiet on the M&A front for a little while here. Do you think additional acquisitions are likely for People's over the next few quarters?

Kirk W. Walters

Well, I guess that's fair to say we've been quiet. It is -- right now, our take is kind of several things. First, as I've said before, we continue to strengthen and build our relationships across the Northeast and feel very good about that. But that said, it's a very uncertain environment, both with the low rates in the economy and the regulatory environment. And we think that the M&A has been quiet, and we don't see that general environment changing too fast.

Operator

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

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

I just wanted to talk a little bit about the provision line. I know it came in kind of the high end of your guidance, and you did mention the provision on acquired loans, the $5.7 million. Is that simply just related to sort of the reassessment of certain pools and sort of like you get the credit recovery on some pools, where the cash flows are greater than expected on other pools, you make other adjustments that result in low provision? Is that the right way to think about it?

Kirk W. Walters

That's exactly the right way to think about it. I mean, if we look at sort of the overall credit marks, we still feel pretty good about them in all the acquisitions. But as you know, you divvy it up pool by pool, or in the case of Bank of Smithtown, we also had quite a few individual loans. So you really do run into the situation where on some pools, you're fine or maybe even heavy, and you're reclassifying some over. And on others, you need to provide for via the provisioning. I think one thing to look at though is if you consider sort of the unusual adjustments that have gone through relating to the acquired loans reflected in cost recovery income up in the margin and the impairment down in the provision, they're roughly equal. And so, it's a little bit of a push and pull between them.

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

Okay, that helps. And then as you think about your provision costs in the fourth quarter, are you still in kind of the $10.5 million to $15 million range and would any amount of provision on acquired loans be a big piece of sort of what end of that range you ended up in?

Kirk W. Walters

As we think about the fourth quarter, I think $10 million to $15 million is the right range in there. We're certainly on sort of the on the ground, and the originated portfolio has been running sort of low into that range, the $10 million to $11 million type number. This quarter, we did pick up the -- some impairments on the acquired portfolios. But that is just going to be lumpy, depending as we get into this quarter, whether we see much more. My guess is that impairments will be lower quarter-to-quarter in terms of fourth to third.

Operator

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

Thomas Alonso - Macquarie Research

Most of my questions have been answered at this point. Just a quick one on the mortgage banking -- the mortgage warehouse stuff, or when you guys say that the utilization rate is sort of 45% to 50%, and it's elevated now, are these new relationships to you? Are you sort of the primary line of credit for these new relationships? Or is there somebody who already has a bank or 2, and then they add you just to get broader access?

Kirk W. Walters

Well, I think you'd probably want to think about that 2 ways. As we've told you, our team that has established this business here with People's United, it comes in 2 angles, some very significant historical relationships we had here for probably a couple of decades. And then, we've hired the team, and they had long-standing relationships that move to them very quickly. So new to People's United Bank, but not new relationships to the team, if you will. And most of those relationships, where the company we're lending to is substantial do have 2 or 3, sometimes 4-line relationships. So they're dealing with people. This is a very focused specialized business, and they're dealing with people that have -- that are similar to our team and very focused on. And they'll set up several facilities, and then they'll decide how to make them active based on service levels and the like.

Operator

[Operator Instructions] And your next question comes from the line of Mike Turner with Compass Point.

Michael Turner - Compass Point Research & Trading, LLC, Research Division

Sorry to ask on mortgage banking again. What was sort of the -- what was the average balance in the second quarter of that warehouse in the third quarter? I mean, it sounded like $450 million or $500 million is normal, maybe over $600 million or $700 million in the last 2 quarters, maybe any numbers would be helpful?

Kirk W. Walters

I think if we look at the averages and you're talking about the mortgage warehouse business, right?

Michael Turner - Compass Point Research & Trading, LLC, Research Division

Yes, yes, yes, sorry.

Kirk W. Walters

I think if you look at in terms of sort of the averages, it would be a little north of $500 million. I think they had a pretty solid quarter, and did build a bit as we got toward the end of the quarter. But I would say probably an average, a little north the $500 million is a pretty good one.

Michael Turner - Compass Point Research & Trading, LLC, Research Division

Okay. And then the same in the second quarter it was, maybe a little light and smaller than that?

Kirk W. Walters

No. I think if you go to the second quarter, I would probably lop about $100 million off of that because it is a business that we have been continuing to add relationships and extend lines. So we certainly did see it grow on a linked-quarter basis.

Michael Turner - Compass Point Research & Trading, LLC, Research Division

Okay. And then on the -- following up on the securities portfolio yield, it dropped 20 basis points quarter-over-quarter. I know rates are lower and prepayments are high. Was there premium amortization in there that maybe adversely impacted that or anything unusual?

Kirk W. Walters

No. There's -- I mean, first, on the premium income, we would have been pretty careful. In fact, if you recollect last year in the third quarter, we took some pretty large gains on our securities portfolio, and we sold out everything that had a high premium on them because it concerns our prepayment. So if you look at our book today, the price-to-book is just a little over $100 million, maybe $101 million. So we have very little premium amortization flowing through. I do think what is happening quarter-to-quarter is first, as we continue to add securities, which we did in the third quarter, we're bringing on CMOs at -- with an average life of 2.9 years that are coming on at a rate lower than the overall portfolio, which impacts it. And we also have amortizing in the securities portfolio is some 15-year mortgage backs that were bought 2, 3 years ago. And that balance continues to run down. So I think that's the combination of it. But we have very little premium risk in that portfolio. And, Mike, if you look at it, the overall duration of the portfolio, it's right at 2.9 years.

Operator

Your next question comes from the line of Dan Werner with MorningStar Equity Research.

Dan Werner - Morningstar Inc., Research Division

I promise I don't have a mortgage banking question. On the acquired CD portfolio, how laddered or how lumpy is it? I'm just trying to get a sense of how much is going to reprice fourth quarter versus 2013?

Kirk W. Walters

That's not a number that I have right in my head in terms of giving you a number. So if we could, either myself or Peter, will follow back up with you and get you that number. But that's -- you've asked a question, and in spite of all this paper in front of me, I don't have that one here.

Dan Werner - Morningstar Inc., Research Division

Okay. And then the other question I had was from the Citizens branch acquisition, how much runoff have you experienced so far from those deposits?

Kirk W. Walters

Actually, overall, those deposits have held up fine on a linked-quarter basis. If anything, they're up a bit from where they were when we acquired them. There was only about $320 million in those branches. And the activity has remained good in terms of getting new accounts, particularly DDAs and seeing those increase. You might recollect when we did that deal, the average weighted cost in those branches was in the low 40s. So we really didn't have a bunch of high-cost deposits in it. I think the thing that we're really encouraged about is how quickly the team over there has started generating residential mortgages and home equity credit lines.

John P. Barnes

They're a great group. They're very well trained, and they are eager to get into our mortgage, home equity certification programs and produce, and they're doing it. It's great. It's working out, and very, very good.

Operator

Your next question is a follow-up question from the line of Steven Alexopoulos.

Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division

I just wanted to follow up. I was looking at the chart off in NPAs, and they didn't seem to move this quarter. I just want to double check, did you adopt the new OCC guidance on secured debt? It's not obvious, looking at your numbers.

Kirk W. Walters

Let me just go back to the first statement, Steve. I think if you look at the nonperformers on our originated portfolio, which is what's in the graph, they were relatively flat this quarter. But in terms of acquired, which we also give in the release, acquired NPAs was down on a linked-quarter basis, right around $35 million. And in terms of our charge-offs, they were about 18 basis points. If you are referring to the Chapter 7 bankruptcy question that's been rattling around with some of the bigs, is that your second question?

Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division

Yes, yes. That's exactly what I'm referring to.

Kirk W. Walters

Where we're at on that is -- so you know is that first, in terms of any loans that are in bankruptcy and such, under our -- the way we account for them, we automatically put them on nonaccrual. So all of those loans are on nonaccrual. And we've always followed the guidance of marking them to 90% of the appraised value. So we didn't use discounted cash flows. So for us, that issue, which is a, I think the regulators have said, it's a narrowing of the interpretation of the possibilities under GAAP. Well, what that will do is it will increase our TDRs for next quarter as we fully implement it and...

John P. Barnes

Very modest.

Kirk W. Walters

It's very modest. It probably increases TDRs in maybe 10- to 15-type of range. But there should be no P&L impact relating to it.

Operator

Ladies and gentlemen, this concludes the question-and-answer portion of our event today. I'd like to turn the call back over to Mr. Goulding for some closing remarks.

Peter Goulding

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

Operator

Ladies and gentlemen, this does conclude our presentation for today. Thank you so much for your participation. You may now disconnect. Have a great day.

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