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People's United Financial Inc (NASDAQ:PBCT)
Q3 2020 Earnings Call
Oct 22, 2020, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the People's United Financial, Inc. Third Quarter 2020 Earnings Conference Call. My name is Gigi, and I will be your coordinator for today. [Operator Instructions]

I would now like to turn the presentation over to Mr. Andrew Hersom, Senior Vice President of Investor Relations for People's United Financial, Inc. Please proceed, sir.

Andrew S. Hersom -- Senior Vice President, Investor Relations

Good afternoon, and thank you for joining us today. On the call to review our third quarter 2020 results are Jack Barnes, Chairman and Chief Executive Officer; David Rosato, Chief Financial Officer; Kirk Walters, Corporate Development and Strategic Planning; Jeff Tengel, President; and Jeff Hoyt, Chief Accounting Officer. Please remember to refer to our forward-looking statement on Slide 1 of this presentation, which is posted on the Investor Relations website www.peoples.com/investors.

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

John P. Barnes -- Chairman of the Board and Chief Executive Officer

Thank you, Andrew, and good afternoon. We appreciate everyone joining us today and hope you and your loved ones are remaining safe and healthy. Before discussing the results, I want to take a moment to thank our employees who have successfully adapted to the pandemic-driven environment and its many challenges. This has enabled them to effectively meet customer needs, successfully introduce AlwaysChecking our new free digital identity protection service and further advance strategic initiatives, very proud of the dedication our employees have displayed in the creative ways that they have supported customers and each other during these uncertain times. This is a reflection of the deeply ingrained culture People's United has, which has been built over many years and differentiates the company in the markets we serve.

Let's begin by turning to Slide 2. We are pleased with our third quarter financial and operating performance, which is the result of strong execution across the franchise. Operating earnings of $144.7 million increased 43% linked-quarter and 7% from a year ago. On a per common share basis, operating earnings were $0.34, up $0.10 from the previous quarter and in line with the prior year. These results benefited from solid fee income, well maintained expenses, reduced provision linked-quarter and the lower effective tax rate. Partially offset in these favorable items was net interest margin compression. Our continued thoughtful approach to expense management and realization of projected cost savings from acquisitions drove a 300 basis point improvement year-over-year in the third quarter efficiency ratio to 53.8%.

We are particularly pleased that with our ability to successfully control cost and strengthen operating leverage has led to a significant enhancement in the efficiency ratio in recent years. A full-year efficiency ratio has improved annually since 2013 when we reported a ratio of 62.3%. By 2019, the ratio was down to 55.8% and we expect this improving trend will continue in 2020 as the year-to-date efficiency ratio stands at 53.8%. Importantly, we remain focused on expense management and discipline, we are also steadfast in our commitment to investing strategically in the business. Such investments include further enhancing digital capabilities, delivering innovative products and services, and strengthening leadership and talent. The third quarter was indicative of this commitment. We announced the formation of our Business Transformation Office in August. This specialized team will lead the company's efforts related to digitization, process automation and Fintech relationship. We are excited about the enhancements and efficiencies this team will deliver moving forward.

During the quarter, our focus on expanding digital capabilities was evident in treasury management as we bolstered their suite of technology. In partnership with multiple Fintech firms, we implemented integrated payables and invoices-to-pay solutions as well as an electronic billing and payment offering. These additions deliver simple, secured digital capabilities for commercial banking customers. In July, we introduced AlwaysChecking, a premium digital identity protection service, which we are providing free to all personal checking account customers. This offering builds on our core value proposition of service and protection. We are confident that it will further attract and retain customers. And in August, we expanded the regional leadership team in our wealth management business, People's United Advisors, with the addition of Senior Executives in New York and Massachusetts. The addition of these two seasoned industry veterans will further benefit customer retention and drive profitable growth in their respective regions.

Moving onto the balance sheet, period-end loans and deposits each declined 1% linked-quarter, leaving the loan to deposit ratio unchanged at 91%. Commercial period-end loans grew $422 million from June 30th due to record mortgage warehouse balances and the solid growth by LEAF within our Equipment Finance segment. Conversely, the retail period-end loans decreased $643 million, mostly due to our planned reduction of residential mortgages as we further remix the balance sheet with a focus on higher yielding portfolios. The modest decline in period-end deposits resulted from run-off of higher costs wholesale funding and lower municipal balances, partially offset by strong commercial deposit growth.

It is evident the pandemic has significantly affected the economy. Demand within our commercial real estate and middle market C&I businesses has been limited due to the reduced economic activity and funding provided by PPP loans. Lower demand is particularly demonstrated by C&I line utilization rates, which declined for the second consecutive quarter and are below their historical quarterly averages. Similar to the second quarter, we did experienced some areas of growth. In particular, mortgage warehouse continues to benefit from robust origination activity in both the Purchase and Refinance segments as well as from the solid growth in new customer relationships. In addition, LEAF has continued to perform well, primarily due to increased customer demand for technology, hardware and software. This trend is attributable to the strong growth from a number of significant long-standing vendor relationships with LEAF and VAR technologies, which LEAF acquired last year.

The total impact of the pandemic on the long-term economy is unknown. However, improvements in economic activity during the quarter provided us the level of cautious optimism as we look ahead. Another positive indicator was the significant reduction in the number of our customers needing relief as the total loan deferrals were approximately $1.6 billion or 3.5% of total loans at September 30th, down from more than $7.1 billion or 15.8% of total loans at the end of June. Additionally, deferrals have continue to decline since the close of the third quarter. These results are consistent with the expectations we provided on our second quarter earnings call. We believe this improvement is a testament to our long-held conservative underwriting approach and reflects the strong capital and liquidity profile of our customers.

The forbearance level at quarter-end was comprised of almost $1.4 billion of second deferrals and $217 million of loans still in their first deferral period. Notably, our relationship managers continue to maintain high level of contact with customers to closely evaluate their financial condition and help them navigate their specific situation. As expected, the large -- largest concentration of second deferrals were in our $1.1 billion hospitality portfolio, which includes hotels. Total deferrals in this portfolio were approximately $670 million at quarter end, which includes $640 million of second deferrals. In comparison, total deferrals at the close of the second quarter were $876 million.

The hotel industry has been significantly impacted by the pandemic. The severity of the impact varies by property, influenced by many factors including hotel type, primary customer base and location. The challenges faced by this industry will likely extend into next year. As such, we expect to offer modifications to most of our hotel customers after their deferral period ends. Our strong relationship with these customers has facilitated ongoing conversations, which provided granular views of their current operations and financial resources. This has driven a constructive and collaborative process to determine appropriate terms to continuous support.

Importantly, our hotel portfolio is well diversified particularly by geography. Of note, only 6% or approximately $55 million of our hotel loans are collateralized by properties in New York City. We have confidence at the strength and experience of our hotel owner operators and our originated portfolio should enable them to successfully emerge from a pandemic-driven industry slowdown. Two other portfolios we have previously called out has significantly affected by the pandemic commercial retail and restaurants have performed well and experienced a substantial decline in deferrals. A $3.5 billion pre-retail portfolio has seen deferrals improved from $1.5 billion at the end of the second quarter to $138 million at the close of September. As a reminder, this portfolio does not have material exposure to enclosed malls and essential tenants, such as grocery stores, pharmacies, and big box home improvement locations comprised roughly half of the portfolio.

Similarly, deferrals in the restaurant portfolio, which has approximately $500 million of loan balances have declined from $290 million at June 30 to $45 million at the end of the third quarter. The portfolio is mostly in well-known national quick service franchises, which have established -- experienced a lesser degree of disruption, especially, where drive-through traffic remains strong. Deferrals have continue to improve since the close of the quarter, and notably, our franchise finance business no longer had any deferrals in its restaurant book.

Finally, we announced the sale of People's United Insurance Agency to AssuredPartners for $120 million in cash. The transaction allows us to simplify our operating model and monetize the company's long-term investment in this business at an attractive multiple of 3.7 times trailing 12-month revenues. It also enables us to focus additional resources on delivering core banking products and services and further enhance digital offerings, which will generate superior returns for shareholders over time. The transaction is projected to close in the fourth quarter subject to customary closing conditions. And we expect to realize a pre-tax net gain of approximately $75 million to $80 million, which will improve the CET1 ratio by 15 basis points. Before turning the call over to David to discuss the third quarter in more detail, I want to thank our colleagues of People's United Insurance Agency for their meaningful contributions to People's United over the years.

With that, I'll turn it to David.

David Rosato -- Senior Executive Vice President and Chief Financial Officer

Thank you, Jack. I will begin on Slide 3. We are pleased with our strong third quarter financial performance, which was highlighted by pre-provision net revenue of $198.9 million, an increase of 4% linked-quarter and 15% from a year ago. On an operating basis, PPNR of $203.5 million was down 3% compared to the previous quarter due to a modest increase in expenses, but marked an improvement of 14% year-over-year. Provision for credit losses on loans of $27.1 million decreased $53.7 million from the second quarter, and further strengthen the allowance for credit losses to total loans by 3 basis points to 94 basis points or 99 basis points, excluding PPP loans. The provision was comprised of $17.3 million of net charge-offs, which were up $18.8 million linked-quarter, and an increase of $9.8 million in the allowance for credit losses, down from an increase of $72.3 million in the second quarter.

As you can see on Slide 3, we break down the allowance for credit losses by loan portfolio segment. The total allowance at September 30th of nearly $424 million, up from $414 million at the end of the second quarter provides significant coverage as it represents more than 6 times our annualized third quarter net charge-offs and 138% of non-performing loans. The allowance at quarter-end reflects consideration of a baseline economic forecast as well as a more adverse scenario each prepared as of late September. The baseline scenario reflects modest improvement in most key economic variables compared to the baseline scenario employed at the end of the second quarter. The more adverse scenario includes continued uncertainty associated with the status and extent of further economic stimulus in the upcoming election. The cumulative year-to-date allowance build is approximately $177 million, which increased the allowance to total loans ratio by 37 basis points since year-end 2019 or 42 basis points excluding PPP balances.

Moving to Slide 4. Net interest income of $391.4 million, decreased $14.2 million or 4% from the second quarter, primarily due to a smaller average balance sheet and lower margin. The loan portfolio unfavorably impacted net interest income by $21.6 million. In addition, lower average balances in the securities portfolio reduced net interest income by $2.2 million. These headwinds were partially offset by lower deposit costs and an additional calendar day in the third quarter, which benefited net interest income by $5.7 million and $2.5 million, respectively. The reduction in borrowings also favorably impacted net interest income by $1.4 million as average balances decreased $1.6 billion from the second quarter. Year-to-date, we have reduced borrowings nearly $4 billion on a period-end basis as a result of $6 billion of deposit growth since the beginning of the year. Of note, net interest income benefited $14.7 million from PPP during the quarter, which reflects $9.9 million in related fees and $4.8 million in net interest income.

As displayed on Slide 5, net interest margin of 2.97% was 8 basis points lower than the second quarter. The loan portfolio unfavorably impacted the margin by 15 basis points, primarily driven by new business yields remaining lower than the total portfolio yield and downward repricing of floating-rate loans. The largest offset to this negative effect was our continued discipline managing deposit pricing, which benefited the margin by 4 basis points. Average deposit costs were 29 basis points in the third quarter compared to 34 basis points in the second quarter, marking the fifth consecutive quarter of lower deposit costs. In addition, one more calendar day in the third quarter and reduced borrowing benefited the margin by a collective 3 basis points. PPP had a 3 basis point unfavorable impact on the margin in the third quarter. As you will recall, the impact in the second quarter was negligible as the loans were not only for the full three months.

Turning to loans on Slide 6. Average balances were down $300 million or 1% from the second quarter, while period-end loans decreased $221 million or 1%. Both average and period-end loans benefited from record mortgage warehouse balances and solid growth by LEAF. Mortgage warehouse period-end balances close the quarter at $3.8 billion, up $768 million from June 30th, as strong results continue to be driven by robust mortgage origination activity and the addition of new customer relationships. LEAF average and period-end balances grew 3% and 5%, respectively, in the second quarter, primarily driven by customer demand for technology, hardware and software. These favorable results were more than offset by lower retail balances and continued low loan demand in our commercial real estate and middle market C&I businesses due to subdued economic activity and funding provided by PPP loans. The $643 million decrease in retail period-end loans was mostly attributable to our planned reduction in residential mortgages, which drove balances down $528 million from the close of the second quarter. Balances in the transactional portion of the New York multifamily portfolio which is in runoff mode ended the quarter at $559 million, down $62 million linked-quarter and $178 million year-to-date. In addition, the period-end balance for the United loans, we have chosen to runoff was $905 million, a decline of $57 million from June 30th and $208 million since year-end. Our expectation for each of these portfolios to runoff between $200 million to $300 million for the full year is unchanged. Finally, quarter-end PPP balances of $2.6 billion were up modestly from $2.5 billion at June 30th. On an average basis, PPP loans were $2.5 billion, up approximately $700 million linked-quarter as these loans were not on the books for the full three months of Q2.

Moving on to deposits on Slide 7. Average balances were up $1.1 billion or 2% from the second quarter, while period-end balances declined $298 million or 1%. The modest decline in period-end deposits resulted from the runoff of higher costs, wholesale funding and lower municipal balances, partially offset by strong commercial deposit growth, particularly in mortgage warehouse. Both average and period-end balances grew across all deposit categories with the exception of time. Average time balances decreased nearly $1.4 billion from the second quarter, while a period -- while on a period-end basis, balances were down more than $1.2 billion. The decrease in time deposits is a reflection of customer preference for liquidity during this uncertain economic and low interest rate environment. Notably, period-end non-interest bearing deposits increased for the sixth consecutive quarter. Balances were up $445 million from the end of the second quarter to $14.1 billion. Non-interest bearing deposits now account for more than 28% of total period-end balances, up from 22% at year-end.

Looking at Slide 8, non-interest income rebounded in the third quarter to $101.1 million, up $11.5 million or 13% from the second quarter and reflected improved results across most business. The largest increase was bank service charges, which grew $4.2 million due to higher levels of customer activity. Commercial banking lending fees were up $2.1 million, primarily driven by increased C&I loan prepayment fees. Higher investment management and cash management fees collectively benefited non-interest income by $2.1 million. Insurance revenues increased $700,000, while operating lease income grew $600,000. In addition, other non-interest income was up $3.3 million. The primary driver of the increase was $1.5 million in higher gains on the sale of residential mortgage loans. The largest offset to these increases was a $1.5 million reduction in customer interest rate swap income, which continues to be unfavorably impacted by subdued demand for commercial real estate loans.

On Slide 9, non-interest expense of $293.6 million decreased $10.4 million or 3% linked-quarter. The third quarter included $4.6 million of non-operating costs, a reduction of $13.9 million compared to the second quarter and we're in the following categories, $2 million in other non-interest expense, $1.4 million in professional and outside services, $900,000 in occupancy and equipment and $300,000 in compensation and benefits. Excluding non-operating costs, non-interest expense of $289 million increased $3.5 million or 1% compared to the previous quarter. The modest increase was primarily attributable to $2.9 million in higher other expenses, $600,000 in higher professional and outside service costs, $500,000 in additional operating lease expenses. The largest offset to these increases was $600,000 in lower compensation and benefit.

Briefly on Slide 10, you can clearly see the 300 basis point improvement year-over-year in the efficiency ratio. As Jack referenced earlier, the 53.8% efficiency ratio is a product of our ability to generate positive operating leverage, and in particular, realize projected cost savings from acquisitions. We will remain very diligent in our management of expenses and continue to be focused on enhancing operational leverage as we move forward in the current low interest rate environment. Our asset quality remains excellent.

As displayed on Slide 11, non-performing assets as a percentage of loans and REO of 71 basis points was up slightly from 69 basis points in the second quarter, but remains below our peer group and top 50 banks. Net loan charge-offs to average total loans of 15 basis points were up 7 basis points linked-quarter. The increase was primarily driven by two accounts, one represented a C&I account, which was experiencing difficulties prior to the pandemic, and the other was an acquired pre-loan.

Turning to Slide 12, the 43% increase in operating earnings linked-quarter generated a significant improvement in returns for the third quarter. Operating return on average assets of 94 basis points increased 36 basis points from the second quarter, while operating return on average tangible common equity of 13.4% was up 530 basis points.

Finally on Slide 13, we remain comfortable with our capital structure and balance sheet strength. Capital ratios continue to be strong given our diversified business mix and long history of exceptional risk management. It is again important to note, adjusting for PPP loans, the pro forma Tier 1 leverage ratio at quarter-end is 8.6% for the Holding Company compared to 8.2% and 9.1% for the Bank compared to 8.7%. Additionally, the TCE ratio, excluding PPP is approximately 7.9% versus the reported 7.5%.

This concludes our prepared remarks. We'll be happy to answer any questions you may have. Operator, we're ready for questions.

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from Mark Fitzgibbon from Piper Sandler. Your line is now open.

John LaViola -- Piper Sandler -- Analyst

Good evening, everyone. It's actually John LaViola on for Mark. Hope everyone is well.

John P. Barnes -- Chairman of the Board and Chief Executive Officer

Hi, John.

David Rosato -- Senior Executive Vice President and Chief Financial Officer

Hey, John.

John LaViola -- Piper Sandler -- Analyst

I was wondering if we could just start on the expense outlook. Obviously, you've been able to drive your efficiency ratio down over the past couple of quarters. Where do you think this can go over the next couple of years? Do you have a target?

David Rosato -- Senior Executive Vice President and Chief Financial Officer

We don't have a target that we're going to share publicly up for the next couple of years. What I would would say is both Jack and I talked about it in the prepared remarks, we've been highly focused for many years at this point on operational improvements and decrease in the efficiency ratio and we think we have a very strong record that we also think we will be able to continue to work down from here. It's all -- in this environment, it's tougher to do, as you know. But the -- at this point in the year, we're -- we won't be sharing any targets come January, but more talking about year-end, we hope to be back into the business providing targets and guidance.

John LaViola -- Piper Sandler -- Analyst

Okay. I appreciate the color there. Maybe just switching over to the margin, I know there are a lot of moving parts at your end. Could you maybe share your outlook for that for the remainder of the year and maybe into 2021?

David Rosato -- Senior Executive Vice President and Chief Financial Officer

Again, I would go back to a question on the last quarter call about the margin from a long-term perspective. So it really wasn't the back half of '20 or '21, but just if we stayed in this interest rate environment for an extremely extended period of time, what we shared was we could conceive of the margin going down to 2.80% to 2.90%. I wouldn't back away from that outlook. But again, that's not specific to any timeframe, most notably 2021, just if we stay here for multiple, multiple years. I think that can happen. And what I would do is I'd look at what we've been doing to protect the margin in this environment this year and I think we've had a pretty good track record year-to-date at being able to move deposit costs down, being able to maintain yields in our securities portfolio and then to offset as much as possible the floating-rate loans that are on the balance sheet, which is about 45% of that book. I would also add that as we called out in the script about nice performance, loan growth in LEAF, our equipment finance businesses are great generators of short-term fixed rate assets and the remixing of the balance sheet has been a real positive for us in the last couple of years of protecting the margin.

John LaViola -- Piper Sandler -- Analyst

That's very helpful. Appreciate it. And David, correct me if I'm wrong, I believe you mentioned that PPP balances did tick up a little bit quarter-over-quarter, where the -- was that primarily due to new customers or existing customers, could you maybe provide a little bit of color on that?

David Rosato -- Senior Executive Vice President and Chief Financial Officer

Sure. On an ending balance basis, they were only up $100 million on the ground, but on an average balance basis, they were up $700 million. That was more just the volume of that went on in the second quarter, it's the thing up as well it was more back-end loaded. So we had a more modest average balance in Q2, but we did do PPP loans right up until the end, but frankly the volumes really trailed off as the program got extended.

John P. Barnes -- Chairman of the Board and Chief Executive Officer

We did make PPP loans to both existing customers and new customers as well.

John LaViola -- Piper Sandler -- Analyst

That's all I had. Thank you everybody.

David Rosato -- Senior Executive Vice President and Chief Financial Officer

Thank you.

John P. Barnes -- Chairman of the Board and Chief Executive Officer

Thanks, John.

Operator

Thank you. Our next question comes from the line of Ken Zerbe from Morgan Stanley. Your line is now open.

Ken Zerbe -- Morgan Stanley -- Analyst

Great, thanks. Some of the banks that we've heard from this quarter have been adding, I may say, qualitative reserves based sort of above and beyond the Moody's baseline just given the uncertainty over whether not fiscal or federal stimulus actually gets passed. Can you just talk about like how are you balance and where you are in terms of your reserve between the baseline in a more adverse scenario and have you moved it more toward the adverse recently? Thanks.

John P. Barnes -- Chairman of the Board and Chief Executive Officer

Yeah. Hi, Ken. Yes. So this, as you know, baseline economic scenarios were more favorable in Q3 than Q2 and the two parts, two answers to your question. So we did weigh the -- a more adverse scenario more highly in Q3 versus Q2 to compensate in some respects to what you're alluding to. We also in each quarter have a qualitative overlays that are part of the CECL process and those reflect management judgments about lots of different things, level of deferrals, upgrades and downgrades in the loan portfolio as well as economic uncertainty and so we did increased qualitative overlays this quarter as well.

Ken Zerbe -- Morgan Stanley -- Analyst

All right, great. And then just as a follow-up, in terms of your higher cost borrowings, obviously, you've been paying off a lot of or running off a lot of those, how much more room do you have, like what percentage or how much in terms of dollars are still sort of those less desirable higher cost funding deals that one might seeing runoff?

David Rosato -- Senior Executive Vice President and Chief Financial Officer

Good, good question, Ken. What I would say-- I'd point you to the kind of the remarks that we said we have really significantly been able -- about $4 billion of wholesale borrowings came off year-to-date, because we had little over $6 billion of deposit funding. The -- a couple of points, because most of those borrowings were relatively short they -- we were able -- we didn't really have a balance sheet that got ballooned, right, a little different than some of the peers that we've seen. We are able to just, as the deposits came in, have the balances come off. The -- if you look at the margin page in the press release, what -- you will see the drop in balances, but what you will also see is the cost in the quarter of the wholesale borrowing lines has gone up a little bit. That's kind of the remaining term debt that's outstanding on a very low balance at this point, but that's going to be with us. And so there's fairly marginal room to bring that piece of our funding cost down, where the real opportunity is is what we've been doing in the last couple of quarters, which is the continued downward repricing of our CD book and getting more and more surgical on deposit costs across retail, commercial and our municipal business.

Ken Zerbe -- Morgan Stanley -- Analyst

All right, great. Thank you.

David Rosato -- Senior Executive Vice President and Chief Financial Officer

You're welcome.

Operator

Thank you. Our next question comes from the line of Dave Rochester from Compass Point. Your line is now open.

Dave Rochester -- Compass Point -- Analyst

Hey, good afternoon, guys.

John P. Barnes -- Chairman of the Board and Chief Executive Officer

Hey, Dave.

David Rosato -- Senior Executive Vice President and Chief Financial Officer

Hey, Dave.

Dave Rochester -- Compass Point -- Analyst

Just wanted to start with your expectations on the loan trends going forward. Definitely appreciate your update on the one-off book and then the New York City multifamily book. It sounds like you did not change the outlook there at all. But you've got -- your resi piece running down as well maybe $500 million equivalent last couple of quarters. So just curious what's your outlook is from that portfolio's perspective? And then if you expect to see potentially C&I start to bottom here and maybe grow a little bit going forward, any thoughts on any of that would be great.

John P. Barnes -- Chairman of the Board and Chief Executive Officer

What's the first part on the multifamily?

David Rosato -- Senior Executive Vice President and Chief Financial Officer

Yeah, just...

Dave Rochester -- Compass Point -- Analyst

On the resi p is coming down.

John P. Barnes -- Chairman of the Board and Chief Executive Officer

Sorry, yeah. So we do expect that the resi portfolio will continue to go down modestly over time. And obviously, heavily dependent on pipelines have been very busy and then very active off-late, but how long that continues is uncertain right now. Regarding C&I, my take is that basically what I see with commercial customers in middle market businesses and end consumers actually is a pretty cautious approach to kind of what the uncertainty that's out there from the pandemic and it's showing itself in kind of a deleveraging and not any kind of push to expand or take on the next project. So I think that there is some caution right now, generally, out there in taking on the next new thing until people have a better sense of where things are going from the economy and their customers, right. So, I think that's why our line utilization is down a little bit. I think you see it in some of the national consumer reports about general demand. So I don't know if it needs to get to a point where we have a vaccine, but it definitely has to turn a corner in terms of kind of a more comfort with how things are going economically and from a health perspective.

Dave Rochester -- Compass Point -- Analyst

Okay, great. And then, I guess just on that resi piece, is there a target you have in mind for concentration where a 20% of loans now? And maybe if I could ask the question about the warehouse as well. You've had some great growth there is, this is large as it's been. Can you hold this year with market share gains? You expect a little bit of a downtick there potentially as we go into the slower months and maybe what your targets are for that piece as well?

David Rosato -- Senior Executive Vice President and Chief Financial Officer

Yeah. So, Dave, on the residential mortgage, the -- if you'll recall, the Belmont, the Farmington transaction those banks had over 50% of their loan books were in residential first mortgages. So, we had almost 25% of the loan book of those acquisitions in residential mortgages, not quite as United's concentration, was more like ours. As you just referenced, we're down to about 20% right now. That's getting in the ballpark of where it's been historically. Historically, we call it 18% to 20%. So, as Jack said, I think we'll still see that portfolio to come down modestly going forward. But the pace of decline of $0.5 billion or so each quarter should start to moderate, which is what Jack was saying. On the mortgage warehouse, I'll just turn it over to Jeff.

Jeff Tengel -- President

Yeah, sure. So, if you think of the mortgage warehouse business, it's really grown due to three factors, increased line utilization with our existing customers, we've been providing incremental credit to our existing customers and we've had a lot of new customers, particularly over the last three to six months. And so as we sit here today, I think, it's likely, I don't not ready to say is at its peak, but it's getting pretty close. If you think about how much further can rates go down to continue the refi market that we've been experiencing, that's really what they've been writing to some extent. So, I think half of it will depend on rates, but line utilization is pretty high by historical standards. And so, I wouldn't -- I don't think it's going to go down dramatically between now and year-end, but I think as you look out over the course of 2021, 2022, it's likely to sort of drift lower.

Dave Rochester -- Compass Point -- Analyst

Okay. And maybe just one, last quick one on the margin. I just noticed the yield on the securities book was pretty stable quarter-over-quarter around 2.65%. I know you've bought some securities at quarter-end. I was just curious, what the overall yield was on those purchases? And then how you're thinking about managing the book going forward if you're going to allow it to potentially runoff here a little bit if you have to reinvest at lower rate? Just curious what your thoughts are on that.

David Rosato -- Senior Executive Vice President and Chief Financial Officer

Sure, Dave. The -- what I would say is the reason the portfolio yield has held up so well this year is mostly about the portfolio strategy and composition of the existing portfolio. So, as you remember, we have a -- we've historically run a longer duration municipal bond portfolio. So it has a very strong call protection in it. Over the last couple of years, we've been moving our mortgage back holdings from MBS pass-throughs to CMBS again to achieve call protection. It's kind of a lesson learned from 10-years ago. And then in the mortgage backspace, we've always only bought 10 and 15-year mortgage backs. So, our portfolio has held up because of the long duration and we're not getting those bonds bought away from us for the most part.

But then secondly because we have very little premium in the pass-throughs, so we're not suffering high levels of premium write-off each quarter. It was only up modestly for us just slightly over a $1 million linked-quarter. You're right that buying bonds at these levels are dilutive to the portfolio yield. Our average purchases in the quarter were about 1.5%. We were able to achieve that because of the mix of munis relative to mortgage-backs. Our strategy going forward and has been is to reinvest cash flows. We've been doing that not each month the kind of periodically as rates -- as we get opportunities. I think that will continue to do that. And then probably in the next year we'll have more clarity come January. But I think, yeah, we'll see some modest growth in that portfolio as well. What would drive that is more asset liability management, right. If you look in the appendix, you've seen our asset sensitivity move up because of all the deposits that have flowed into the bank. So I think we will offset a little bit of that liquidity in the securities portfolio over time.

Dave Rochester -- Compass Point -- Analyst

Okay, great. Thanks for the color. Appreciate it.

David Rosato -- Senior Executive Vice President and Chief Financial Officer

You're welcome.

Operator

Thank you. Our next question comes from the line of Chris McGratty from KBW. Your line is now open.

Christopher McGratty -- Keefe, Bruyette & Woods, Inc. -- Analyst

Great. Good afternoon.

David Rosato -- Senior Executive Vice President and Chief Financial Officer

Hi, Chris.

Christopher McGratty -- Keefe, Bruyette & Woods, Inc. -- Analyst

Quick question on fee income. It seems like -- you like most on -- the activity levels were depressed in the second quarter, anything that you've seen unusual in terms of that hasn't rebounded yet or maybe expectations for back-end of the year?

David Rosato -- Senior Executive Vice President and Chief Financial Officer

Yeah. The big driver has been interest rate swap income for us. It's that business is really tied for the most part to new loan originations and then mostly commercial real estate loan volumes, there is some amount, because that book associates and some amount of two way flow as loans come off, but it's really an origination business. You -- we have swap income of over $8 million fourth quarter of '19, first quarter '20. It was only a $1.2 million to this quarter. So that's a very large change for us. The $8 million quarters, we're probably a little inflated, but because they were a record quarters and the $1.2 million is quite a headwind right now. But away from that, one line item, we really experienced pretty nice fee income and it was broad based, it was in cash management, it was in bank service charges, it was in our investment management business as well.

Christopher McGratty -- Keefe, Bruyette & Woods, Inc. -- Analyst

Great. And if I could ask one more, a popular topic is obviously tax rates. Could you make a couple of comments on whether you expect the same proportional change in your tax rate if we do get the Biden plan that you saw on the way down after the '16 election? Thanks.

David Rosato -- Senior Executive Vice President and Chief Financial Officer

Most likely. We haven't really spend a lot of time thinking about under the Biden plan. The impact and quantified it, but it's pretty simple exercise once we know what the ultimate tax rates are. But there is not anything really on the tax item, but I think was materially -- that's materially different now from when we benefited from the drop. So it should be proportional with the our expectations.

Christopher McGratty -- Keefe, Bruyette & Woods, Inc. -- Analyst

Great. Thank you very much.

David Rosato -- Senior Executive Vice President and Chief Financial Officer

Your welcome.

Operator

Thank you. Our next question comes from the line of Steven Duong from RBC Capital. Your line is now open.

Steven Duong -- RBC Capital Markets -- Analyst

Hi. Good afternoon, guys. I apologize, I got cut off before. So this is a repeat question. But just on the loan yields you're at 3.49%. What do you originating at currently?

David Rosato -- Senior Executive Vice President and Chief Financial Officer

Well, so there is a differential between new business going on and the total portfolio yield. That's approximately 25 basis points, 25, call it, to 30 basis points. So, a little over 3% to 3.05% as far as the aggregate yield in the quarter. I would say, loan spreads have held up nicely for us in the quarter, but benchmark interest rates came down a bit as you know.

Steven Duong -- RBC Capital Markets -- Analyst

Right, right. And just historically, are loan spreads in line with where you guys have had them or are they still a little stretched?

David Rosato -- Senior Executive Vice President and Chief Financial Officer

No, I would say loan spreads have improved especially in the third quarter. Part of that is, I mean the bad news and that is, we're just not doing enough loans, right. The ones that we are doing, we're getting better spreads on. And a call out to our commercial ORMs, we've been able in this environment to embed floors in a larger portion of our loans than we, let's say, year-over-year our ability stronger now. So that's helped a bit as well.

Steven Duong -- RBC Capital Markets -- Analyst

Great. And then just on the liability side, your CD book, where do you think that could ultimately get down to as far as the cost go?

David Rosato -- Senior Executive Vice President and Chief Financial Officer

Yeah. That's a difficult question. What I would say is it's -- the average CD books for most banks that's included loan about 11 to 12 months. So you really in a year you turn the thing over. The issue is just going to be where you're pricing those roles. We have very successfully this year, each month, each quarter, been able to bring CD cost down. There is more to go there, but I said this last quarter, it's -- the move in lower deposit cost is getting more surgical than broad based at this point. I mean we're already down at 29 basis points.

Steven Duong -- RBC Capital Markets -- Analyst

Alright, great. I appreciate the color. Thank you.

David Rosato -- Senior Executive Vice President and Chief Financial Officer

You are welcome.

Operator

Thank you. Our next question comes from the line of Brock Vandervliet from UBS. Your line is now open.

Brock Vandervliet -- UBS -- Analyst

Thanks. Just turning to I guess, Slide 3, the -- and this ties back to an earlier question on reserving and provision methodology. Because as we look at the reserved NPLs for a couple of these categories, CRE, C&I kind of closing in on 100%, how should we think about that because a number of your peers are well above that?

David Rosato -- Senior Executive Vice President and Chief Financial Officer

True, but we're the one almost every one of those peers in historical net charge-offs and you can go back and look at that for over a decade and you will see that. So they may be adequately reserved at those higher levels, but we would say we're adequately reserved at our levels.

Brock Vandervliet -- UBS -- Analyst

Would you be comfortable letting those ratios go under 100%?

David Rosato -- Senior Executive Vice President and Chief Financial Officer

If the -- if our entire CECL offsets, which means economic environment, management judgment, qualitative overlays etc. warranted that, yes.

Brock Vandervliet -- UBS -- Analyst

Okay. And as far as the deferrals go, the $1.6 billion, appreciate the color in your prepared remarks. What do you think is the end game there as the final deferrals kind of rolloff between now and at year-end? Do you get most of those back to performing and modify the rest with a little breakage, how does that -- how do you think that shakes up?

John P. Barnes -- Chairman of the Board and Chief Executive Officer

Yeah. So we are definitely feeling good about the conversations that we described in the prepared remarks with the customers. The circumstance around all the business including the hospitality pieces that are left the individual owner operators and based on conversations we have had, which is a great bulk of all of those borrowers, we've already kind of reach agreement framework to look at how we do go forward and we're feeling really good about it, including our part of helping them get to the other side of this.

Brock Vandervliet -- UBS -- Analyst

Got it. Okay. Appreciate the color.

John P. Barnes -- Chairman of the Board and Chief Executive Officer

You are welcome.

Operator

Thank you. Our next question comes from the line of Matthew Breese from Stephens, Inc. Your line is now open.

Matthew Breese -- Stephens Inc. -- Analyst

Good evening.

David Rosato -- Senior Executive Vice President and Chief Financial Officer

Hi, Matt.

John P. Barnes -- Chairman of the Board and Chief Executive Officer

Hi, Matt.

Matthew Breese -- Stephens Inc. -- Analyst

Hey, just curious on the insurance agency sell. What's the impact to go forward fees and expenses? And as we think about the sell itself, was that driven more from a capital management standpoint with the gain or was that more from a -- was that more done to optimize the P&L and simplify?

David Rosato -- Senior Executive Vice President and Chief Financial Officer

So, let's talk for a second about the EPS impact.

John P. Barnes -- Chairman of the Board and Chief Executive Officer

Yeah. It's incredibly modest. But the revenue was about $32 million a year. It was profitable. Cost base was about $26 million to $28 million a year.

David Rosato -- Senior Executive Vice President and Chief Financial Officer

And so we saw a very strong agency, long-term in nature, lot of long-term producers in the business and very well respected. The industry has been going through a pretty aggressive consolidation for a number of years now. And in terms of valuation, it was very solid and it was an opportunity for us as you suggested to realize on that long-term investment that we've made and to put that capital to work elsewhere and grow the business.

Matthew Breese -- Stephens Inc. -- Analyst

Understood, OK. And then just turning to the reserves and really the provision. I mean, from all the commentary, it sounds like you feel really good about the where deferrals are and in the conversation with the borrowers there. Is it fair to assume that the reserve built at this point is largely over in that provisioning should reflect more reserve maintenance at this point?

John P. Barnes -- Chairman of the Board and Chief Executive Officer

Well, let's going to get back to what David just described in terms of the components of CECL process and in order to kind of say that you have to be able to predict what the economic in the modeling is going to produce in the periods going forward and we certainly are not in a position to do that. We -- there is way too much uncertainty right now. Where those economic forecast will come as we roll forward, I think it's still anybody's guess, I mean, I -- we said we are cautiously optimistic by some of the progress. I think we are cautiously optimistic, but we're not ready by any means to say that the pandemic is -- does leave us with a tremendous amount of uncertainty across our businesses.

Matthew Breese -- Stephens Inc. -- Analyst

Understood, OK. And then I know we have a number of or a few different portfolios in runoff mode, but just considering how much has changed in the slowdown in the environment in the economy. Could we see a change in the thought process around running those books often and maintain the earning assets that you have there?

David Rosato -- Senior Executive Vice President and Chief Financial Officer

I would say no. The -- so we've been running off the New York multifamily portfolio for a couple of years now, the transactional New York multifamily. Very good asset yields 3% and 3.25% or so, that's why we haven't sold it, because we're comfortable with it. And we -- I can't see us changing our thought process around the United loans at this point. They are loans from the get go that were purchased that didn't fit our business model. So it's hard to think we're going to wake up one day and say, yeah, we want to grow that -- those types of portfolios.

Matthew Breese -- Stephens Inc. -- Analyst

Understood, OK. That's all I had. Thanks for taking my questions.

John P. Barnes -- Chairman of the Board and Chief Executive Officer

Thank you.

David Rosato -- Senior Executive Vice President and Chief Financial Officer

You're welcome, Matt.

Operator

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

John P. Barnes -- Chairman of the Board and Chief Executive Officer

Thank you. We're pleased with the company's third quarter financial and operating performance which is reflected in the strong execution throughout the franchise and the resilience of our workforce. We continue to be focused on generating positive operating leverage and making further strategic investments, particularly in our digital capabilities. These investments will continue to move the company forward in the rapidly evolving banking landscape and deliver value to shareholders. Clearly, the impact of the pandemic on the long-term economy is unknown. However, we remain confident that our long-held conservative underwriting philosophy approach to supporting customers and diversified loan portfolio will once again differentiate People's United throughout these uncertain times. Thank you all. Stay healthy. Have a good evening.

Operator

[Operator Closing Remarks]

Duration: 63 minutes

Call participants:

Andrew S. Hersom -- Senior Vice President, Investor Relations

John P. Barnes -- Chairman of the Board and Chief Executive Officer

David Rosato -- Senior Executive Vice President and Chief Financial Officer

Jeff Tengel -- President

John LaViola -- Piper Sandler -- Analyst

Ken Zerbe -- Morgan Stanley -- Analyst

Dave Rochester -- Compass Point -- Analyst

Christopher McGratty -- Keefe, Bruyette & Woods, Inc. -- Analyst

Steven Duong -- RBC Capital Markets -- Analyst

Brock Vandervliet -- UBS -- Analyst

Matthew Breese -- Stephens Inc. -- Analyst

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