Jul 19, 2018
Executives
Andrew Hersom - Senior Vice President of Investor Relations John Barnes - Chairman and Chief Executive Officer David Rosato - Chief Financial Officer Kirk Walters - Corporate Development and Strategic Planning Jeffrey Tengel - President Jeffrey Hoyt - Chief Accounting Officer
Analysts
Kenneth Zerbe - Morgan Stanley Casey Haire - Jefferies & Company, Inc. Jared Shaw - Wells Fargo Securities, LLC Collyn Gilbert - Keefe, Bruyette & Woods, Inc.
Operator
Good day, ladies and gentlemen, and welcome to the People’s United Financial Inc. Second Quarter 2018 Earnings Conference Call.
My name is [Sherry], and I will be your coordinator for today. At this time, all participants are in a listen-only mode.
Following the prepared remarks, there will be a question-and-answer session. [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 Hersom
Good afternoon, and thank you for joining us today. Here with me to review our second quarter 2018 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 statements on Slide 1 of this presentation, which is posted on our website, peoples.com, under Investor Relations. With that, I’ll turn the call over to Jack.
John Barnes
Thank you, Andrew. Good afternoon.
We appreciate everyone joining us today. Let’s begin by turning to the second quarter overview on Slide 2.
Our commitment to enhancing profitability was further demonstrated by reporting record quarterly net income of $110.2 million or $0.31 per common share. These results reflect the continued benefits of investments in revenue producing initiatives, sustained excellent asset quality and recent successful acquisitions.
On an operating basis, earnings were $0.32 per common share, up $0.08 or 33% from a year-ago and operating return on average tangible common equity was 14.2%, an increase of 330 basis points over the same period. Higher revenues and well-controlled expenses generated a second quarter efficiency ratio of 58.4%, an improvement of 100 basis points on a linked-quarter basis.
Total revenues of $396 million increased 3% as a result of growth in both net interest income driven by net interest margin expansion and non-interest income. The margin improved 5 basis points and benefited from an increase in loan yields that continue to outpace the rise in deposit costs.
Operating expenses of $246 million, which includes $4 million in costs related to branch closures, increased only $2 million or 1%. Average loan balances were flat compared to the first quarter, while period-end balances were up $408 million or 1%, reflecting stronger activity in June compared to the first two months of the quarter.
Growth was driven by solid results in middle-market C&I, equipment financing, and mortgage warehouse lending. Year-to-date overall loan growth has been flat and below our expectations.
These results are primarily attributed to continued headwinds in commercial real estate, which have caused balances in this portfolio to decline over $300 million or 6% annualized during the first half of 2018. As we have discussed previously, commercial real estate has been impacted by runoff in the transactional portion of our New York multi-family portfolio, which has totaled $228 million year-to-date, heightened competition and above average payoffs.
Since commercial real estate is our largest portfolio, these headwinds have reduced the rate of growth of the overall portfolio. Additionally, year-to-date loan growth has also been impacted by a decline of over $100 million in home equity balances or 10% annualized, which is consistent with overall industry results.
The reduction in home equity balances was driven by lower originations and lower initial utilization rates. However, exclusive of commercial real estate and home equity, we are experiencing strong results across many of our businesses that are in line with our expectations for the year.
For example, middle-market C&I has achieved a 5% annualized growth this year, while equipment financing is up 10% annualized. Looking forward, the strength of our diversified business mix, the solid period-end pipeline and continued benefits from revenue producing initiatives caused us to be optimistic that loan growth in the second half of the year will be meaningfully better than the first six months.
Moving on to deposits. Balances were lower as a result of seasonal declines in our municipal and retail businesses.
However, we expect deposits to rebound in the third and fourth quarters in line with historical seasonal trends. We did see a pick up in industry deposit cost during the second quarter.
However, in our view the industry continues to behave rationally. While we will remain competitive, gathering deposits in order to protect share and client relationships, we will continue to be disciplined and not lead the market in pricing.
Consistent with our strategy of balancing organic growth with thoughtful M&A, we announced today the all-cash acquisition of Vend Lease, a Baltimore-based equipment finance company established in 1979 that operates primarily in the hospitality industry. Vend Lease shares our client-centric approach, has a highly specialized skill set and is a recognized brand in the markets it serves.
The Company will become a division of LEAF Commercial Capital, enabling it to leverage LEAF’s technology platform, marketing team, and leading automation capabilities creating greater efficiencies across sales and operational functions. Additionally, Vend Lease will also be able to leverage the size and strength of our balance sheet and lower funding cost to further accelerate growth and enhance profitability.
We are excited about the transaction as the strength of our combined expertise will provide an exceptional experience for clients even our network of specialty finance experts and bolsters our nationwide businesses. Additionally, in June, we announced an agreement to acquire First Connecticut Bancorp, the holding company for Farmington Bank.
The transaction continues the momentum generated from our recent acquisitions of Suffolk and LEAF as well as provides us with a classic in market acquisition of a high quality franchise that further strengthens our well established presence in Central Connecticut and Western Massachusetts. The integration process is underway and progressing well as we execute on our time-tested acquisition approach.
As a result of the integration activities, we are even more excited about the transaction, particularly the talented people that will be joining us. This transaction has low execution risks, given our significant knowledge to Farmington Bank and the history of successful integrations.
We are confident that transaction will close in the fourth quarter, pending regulatory approvals. Finally, as many of you know Jeff Tengel was promoted to President during the second quarter and is leading the full complement of business lines at People's United.
Jeff joined the Company in 2010 from PNC Bank to lead the commercial division. Since that time, he has significantly expanded the commercial division and its product offerings with the addition of mortgage warehouse, large corporate banking, international services, health care, and syndications.
He has broadened and grown treasury management, government banking, asset-based lending and the equipment finance businesses. He is also played an important role in integrating the numerous acquisitions completed over the last eight years.
As we continue to grow as a Company, we need to make sure our organizational structure supports the future trajectory of People’s United. Jeff is uniquely qualified to help lead us through our future expansion.
With that, I will pass it to David to discuss the second quarter in more detail.
David Rosato
Thank you, Jack. Turning to Slide 3, net interest income of $301.2 million increased $5.4 million or 2% on a linked quarter basis.
The loan portfolio contributed $12.6 million of the increase, the net interest income due to higher yields on new business and the continued upward repricing of floating-rate loans. Net interest income also benefited $1.9 million from an additional calendar day and $1.1 million from prior yields in the securities portfolio.
The largest offset to these increases was a $5.4 million reduction in net interest income due to higher deposit cost. In addition, net interest income was unfavorably impacted by $4.8 million resulting from an increase in borrowing costs.
Net interest margin of 3.10% was 5 basis points higher than the first quarter. As displayed on Slide 4, this expansion was primarily driven by the loan portfolio, which favorably impacted the margin by 13 basis points, as new business yields remained higher than the total portfolio yield for the sixth consecutive quarter.
Net interest margin also benefited 2 basis points from the additional calendar day, while higher yields in the securities portfolio added the basis point. Conversely, higher deposit and borrowing cost lower the margin by 6 basis points and 5 basis points respectively.
Looking at loans on Slide 5, average balances of $32.1 billion were flat compared to the first quarter, while period end balances of $32.5 billion were up $408 million or 1%. The growth was driven by solid results in middle market C&I, equipment financing, and mortgage warehouse lending.
The increase in equipment financing balances was driven by each of our equipment financing units with particularly strong results coming from LEAF. In addition, the acquisition of Vend Lease which closed at the end of June, added $68 million to the LEAF’s portfolio.
The mortgage warehouse lending portfolio rebound in the second quarter and balances ended the period at $1.1 billion up $95 million from the end of the first quarter. Commercial real estate balances declined on both an average and period end basis as the portfolio continued to be impacted by the factors Jack outlined earlier.
However, excluding the runoff in the transactional portion of our New York multifamily portfolio of $79 million, commercial real estate balances grew modestly from the end of the first quarter. We now expect the runoff in our transactional New York multifamily portfolio to be $350 million to $400 million for the full-year and increased from our expectation in January of $250 million to $300 million.
Average deposit balances for the second quarter were $32.5 billion, down $288 million or 1% linked quarter, while period-end deposits were also $32.5 billion, down $426 million or 1%. The lower balances resulted from seasonal declines in our municipal and retail businesses.
On a period-end basis, municipal and retail balances declined approximately $500 million and $100 million respectively for the quarter. Looking forward, we expect deposits to rebound in the third and fourth quarters in line with historical seasonal trends.
Turning to Slide 6, which displays average deposits by product, you can see the $288 million reductions was driven by a $268 million decline in interest-bearing checking and money market balances and $154 million decline in savings balances. The declines were partially offset by growth in non-interest-bearing checking balances of $76 million and time balances of $58 million.
While deposit costs were up 8 basis points for the quarter, we continue to focus on controlling pricing, as demonstrated by interest-bearing deposit beta of 20% since the beginning of the current cycle of increasing interest rates. In comparison, our loan yield beta is 33% during the same period.
Specifically for the second quarter, our interest-bearing deposit beta was 40%, while the loan yield beta was 76%. Looking at Slide 7, non-interest income of $94.9 million increased $4.5 million or 5% on a linked quarter basis.
The increase in non-interest income was driven primarily by higher customer interest rate swap income of $2.5 million as well as increases in bank service charges and cash management fees. The largest offsets to these improvements were a $1.5 million decline in insurance revenues, reflecting the seasonality of commercial insurance renewals, which are lower in the second and fourth quarters of the year and $1 million reduction in commercial banking lending fees due to the lower loan prepayment fees.
Included in other non-interest income this quarter was $2 million of gains related to certain legacy investments. On Slide 8, non-interest expense of $248.6 million, increased $5.1 million or 2% from the first quarter.
Included in the second quarter results were merger-related expenses of $2.9 million. $2.1 million of the merger-related expenses are in professional and outside services, while the remainder is in other non-interest expense.
Excluding merger-related expenses, non-interest expenses increased $2.2 million or 1% from the first quarter. The primary driver of this increase was $4.1 million in costs related to ten branch closures spread throughout the franchise as we continue to optimize our branch delivery channel.
In addition, advertising and promotion expenses increased $1.6 million. Both branch closure and advertising and promotion costs are located in the other expense line in our earnings release.
The largest offset to these increases was a $5.7 million decrease in compensation and benefits driven by lower payroll related and benefit costs, which are traditionally higher in the first quarter. We continue to enhance operating leverage has evidenced by improvement in the efficiency ratio.
Higher revenues and well-controlled expenses generated a second quarter efficiency ratio of 58.4% and improvement of 100 basis points on a linked quarter basis as shown on Slide 9. On a year-over-year basis, the efficiency ratio was flat.
However, as a reminder beginning last quarter, the efficiency ratio includes the unfavorable impact of tax reform, which results in a lower FTE adjustment to net interest income. As demonstrated on Slide 10, asset quality continues to be exception.
As a result of our strong credit culture and conservative underwriting standards, originated non-performing assets as a percentage of originated loans and REO at 62 basis points was up 4 basis points linked quarter, but improved 5 basis points from an already low level in the prior year quarter. The modest increase from the end of the first quarter was driven by two unrelated C&I credits.
This metric continues to be well below our peer group and top 50 banks. Net charge-offs of 6 basis points was unchanged on the most recent quarter and continues to reflect the minimal loss contest of our non-performing assets.
Moving on to Slide 11, we remain pleased with the progress we have made improving our profitability metrics. Return on average assets of 1% and return on average tangible common equity of 13.9% each improved compared to the prior year quarter and first quarter.
On an operating basis, return on average assets of 99 basis points increased 22 basis points from a year-ago and return on average tangible common equity of 14.2% was up 330 basis points over the same period. As we continue to build the earnings power of the Company, we expect further improvement in these metrics.
Continuing on to Slide 12, capital ratios remained strong, especially in light of our diversified business mix and long history of exceptional risk management. Continuing the Slide 13, we display our interest rate risk profile for both parallel rate changes and yield curve twist.
We remain asset sensitive in spite of rising interest rates and we continue to be well-positioned for further increases in interest rates as approximately 44% of our loan portfolio at quarter-end was either one-month LIBOR or prime-based up from 43% at the end of the first quarter and a year-ago. Before opening the call up for questions, I want to draw your attention to Slide 14.
As we have provided an update for our full-year 2018 goals. It’s important to note these goals did not include First Connecticut, but do incorporate the acquisition and Vend Lease.
Our updated goals are as follows. Acknowledging the impact on first half 2018 loan growth from commercial real estate headwinds and the industry wide slowdown in home equity market, we expect loan growth to finish the year in the range of 3% to 5%, a modest reduction to our original goal.
Deposit growth is expected to be in the range of 2% to 4%. Total expenses excluding merger related costs are now in the range of $975 million to $985 million.
Finally, we have also lowered our provision to a range of $25 million to $35 million. It is important to note that full-year goals or net interest income, net interest margin, non-interest income, effective tax rate and capital remain unchanged.
In addition, the net effect of these changes does not impact to our original full-year earnings expectations. Now we’ll be happy to answer any questions you may have.
Operator, we’re ready for questions.
Operator
Thank you. [Operator Instructions] Our first question comes from Ken Zerbe with Morgan Stanley.
Kenneth Zerbe
Great. Thanks.
Hopefully an easy one to start off. Just in terms of the full-year 2018 goals, I guess what's the missing piece here?
Because if your loan balances are less than what you thought deposits to less, your margin is unchanged though. Why would net interest income also be unchanged?
Presumably are you expecting to make stronger securities growth? Or something doesn't seem to be – or something seems to be missing with that calculation?
David Rosato
Hi, Ken. It’s David.
I would just say, the margin is wide enough in the guidance that a slight reduction and I emphasis that were slight lowered loan and deposit goals by 1%, as well as a slightly different mix of the loan portfolio will provide the offset.
Kenneth Zerbe
Gotcha. Okay.
I understood. I guess with commercial real estate, if CRE and I've heard a lot from other banks talk about the CRE conditions are challenging an aggressive pricing.
But if CRE does get worse from here, are you still able to hit your loan growth guidance like how bad of a – I mean, I know where your runoff, is that 350, 400, but could that runoff be even worse, where it does further pressure your loan growth guidance?
John Barnes
Yes. Sure, Ken.
This is Jack. Yes, naturally in any of the loan categories, but if CRE gets significantly worse that certainly could impact our expectations in that portfolio, the rest of the year.
We had seen a higher pace in payoffs than we expected and a higher runoff in the multi-family portfolio than we expected and that’s – while we’ve had good activity in originations in the commercial real estate portfolio, we still have active customers. Those will higher rates on the downside have outpaced what we had expected for kind of remain end of period and average balances.
Kenneth Zerbe
Gotcha. Okay.
And then just maybe the last quick question. In terms of Vend Lease, can you quantify the amount of earnings accretion or the size of the portfolio, just to be have a sense of the magnitude?
Thanks.
David Rosato
Sure. I'll just tell you, it's $68 million at close.
At the end of the quarter, it was about a $68 million worth of outstandings. So relatively small, [indiscernible] will be accretive to lease yields.
Kenneth Zerbe
Gotcha. Okay.
All right, perfect. Thank you very much.
John Barnes
You’re welcome.
Operator
Thank you. Our next question comes from Casey Haire with Jefferies.
Casey Haire
Thanks. Good afternoon, guys.
So I guess, I wanted to follow-up on the loan growth. So the loan growth guide does factor into Vend, correct?
David Rosato
Correct.
John Barnes
Yes.
Casey Haire
And that's only $68 million?
David Rosato
Correct.
Casey Haire
So doesn’t that still presume a pretty healthy ramp in the back half of 2018 to hit the low end of that guide? I mean what kind of – I'm sorry, I'm just doing the math real quick, but it seems like you're going to need some pretty strong loan growth in the back half with some headwinds in multi-family that you called out as well as I'm assuming mortgage warehouse might be seasonally weak?
So is there something you can do to help us out like on the loan pipelines and what sort of volumes you're expecting?
John Barnes
Sure, Casey. It does imply strong growth in the back half of the year, but our [pipelines] – so we had a very strong June.
Our pipelines are strong. They’re actually up a bit from June 30, relative to March 31, so – and we saw good strength in – as we called out in a traditional middle-market in mortgage warehouse and across all of our equipment financing businesses.
So we feel that lowering our guidance by 1% is appropriate at this point. But even in commercial real estate, our customers are still doing business, it's just been a little bit slower than we expected when we originally gave guidance, and the multifamily has come off a little bit more than we expected as well.
John Barnes
Hey, Casey, this is Jack. Let me ask Jeff Tengel to give us some color on kind of discussions around pipeline and activity in the various markets, so maybe give you some idea where our comfort in our forecast comes from.
Jeffrey Tengel
Yes. Hi, Casey.
It’s Jeff. We have added as David mentioned accelerating growth in the second quarter in a number of our core businesses, middle market C&I being one of them in particular in our legacy Connecticut markets and in our Boston market which are two of our largest businesses.
We've also had really good momentum in growth in some of our specialty businesses. Healthcare being one of them, asset-based lending being another.
They both have very robust pipeline, so we expect a very strong second half with – in both of those businesses. Our equipment finance businesses have all been showing good growth and they're typically stronger in the second half of the year than they are in the first anyway.
So they're coming into the second half with some momentum that we find encouraging. And finally, the commercial real estate business, well they do have good pipeline as Jack and David both referenced it is – the market is challenging.
And I think as we've talked in the past, a lot of our customers are what I would consider middle market, real estate customers are investing their own money, so they tend to be a little bit more conservative. They're not funds, investing other people's money, and so on balance they are less active than maybe some of the recent funds in the market.
But we are still supporting them, we're still very active with our customers and expect to continue to be active in the second half of the year and we're just going to have to battle the headwinds that David [alluded].
Casey Haire
Okay. Fair enough.
And then a question on the loan yields. The loans yields are actually were up quite nicely.
Was that all asset sensitivity? Or was there any discount accretion in there?
John Barnes
There's very little discount accretion in there. Our deals are quite seasoned at this point.
We had spread held up well in the quarter as we referenced at the end of the quarter, 44% of that book is prime in one-month LIBOR, so that’s where you see the asset sensitivity and we also called out that this has been the sixth consecutive quarter where the new business flow has been accretive to the existing portfolio yield. We also picked up, if you go back and look at the timing of the Fed rate hikes.
We basically picked up the whole quarter after the last month.
Casey Haire
Gotcha. Okay.
And just last one for me. I just want to make sure I have the expenses right, so the GAAP expenses of just under 249 and then it appears to be about $7 million in specials between the merger charges and the branch closures.
So is the starting point for 3Q like 242 or so, assuming there's no recurring specialty.
David Rosato
Yes. That’s basically – you're right.
We had the 41 branch closures that we – the 29 to deal our expenses. So it gave us confidence to lower the top end of that guidance by $10 million.
Casey Haire
Gotcha. Thank you.
John Barnes
Thank you. You're welcome Casey.
Operator
Thank you. Our next question comes from Jared Shaw with Wells Fargo Securities.
Jared Shaw
Hi. How are you?
John Barnes
Hi, Jared.
Jared Shaw
Maybe just following up on that expense question, I guess why wouldn't we – was that $4.1 million is that all severance and lease termination things like that for the branch closures?
David Rosato
Yes. It’s the cost associated with closing ten branches.
Jared Shaw
Okay.
David Rosato
Yes, so the equipment write-offs, there some lease terminations in there. It’s not people.
Jared Shaw
Okay.
David Rosato
Those employees round up in other branches.
Jared Shaw
Okay. And then any apart from any branch activity with the Farmington deal?
Any anticipated additional branch closures as we go through the end of the year?
David Rosato
Not out of – no exclusive of what happens with the Farmington integration.
Jared Shaw
Okay. And then is – I’m looking at the linked quarter change in loans and you have $53 million growth of equipment finance, but you said you brought on $68 million from Vend Lease?
What was – and so apart from that I guess we'd see a decline in equipment finance this quarter? Was that repositioning in the portfolio or is that really more just market and customer driven?
David Rosato
Hey, Jared, we just turned you off. We're having trouble hearing you.
Can you repeat?
Jared Shaw
Yes, I'm sorry. If I look at the equipment finance line, it looks like you had $53 million of growth on Slide 5 there, but with the $68 million you brought over from Vend Lease?
Where was the decline – where would the net decline have been without that acquisition? Was that more customer driven or is that more you positioning the portfolio?
David Rosato
Go ahead John.
John Barnes
It looks like you're looking at averages Jared and at the end of the areas where the $68 million came in from Vend. We're actually up in the other business as well, particularly lease.
Jared Shaw
Okay.
David Rosato
Vend Lease came in on the last day of the quarter.
Jared Shaw
Okay, got it. Perfect.
Thanks. And then finally, you talked about the deposit beta 40% this quarter and 76% on the loan beta.
In the past, you've talked about ultimately a deposit beta of around 50%? When do you think you – we ultimately get there?
Is that something that happens you think in 2018 or is it still a little further out as ultimately to the 50% beta?
David Rosato
Yes. It’s a good question and it’s hard to say Jared.
It really has a lot to do with how competitive retail deposits wind up being. The commercial deposit betas have moved up and they’re exactly where we would expect them to be at this point in the rate cycle.
The retail competition is rational as Jack referenced. But you're starting to see more banks running especially in the CD market and the CD rates have gotten to the point where you are seeing balances start to migrate out of some non-maturity deposits like savings accounts and now accounts in the CD, so it just going to be the pace of that.
I’d be surprise that we hit a 50% aggregate beta by the end of this year, but I would not be surprised that occurs in 2019.
Jared Shaw
Okay. And then I guess just if you look at that growth and time deposits this quarter, are you seeing that as a way to attract new customers or you generally seeing it's more existing customers reallocating balances from another account?
David Rosato
Yes. So we have the large book of CDs.
So we are conscious of the schedule of maturities in any period. And we're pricing competitively to attract and keep that money and then where it can generate new relationships and new activity in the franchise we benefit from that.
But where as we talked about discipline pricing, we're pretty thoughtful about where we need to be in order to retain the existing relationships that we have and obviously look to have multiple products with those clients.
John Barnes
And I would just add, during the quarter, we also had some – the checking account acquisition programs that we were running and that's just kind of the way we run the business. We're always looking to onboard and attract new customers and then sometimes that will happen with the CDs, some – but we obviously much preferred if it happens with checking account.
Jared Shaw
Great, thanks a lot.
David Rosato
Thank you.
Operator
Thank you. [Operator Instructions] Our next question comes from Collyn Gilbert with KBW.
Collyn Gilbert
Thanks. Good evening, guys.
John Barnes
Hi, Collyn.
David Rosato
Hi, Collyn.
Collyn Gilbert
First a housekeeping item, David the $2 million or so that you guys saw in those legacy investment gains, I presume you do not anticipate that to recur or just a little bit of background on those?
David Rosato
Generally, they don't occur regularly, but once in awhile in a quarter it will happen and we call it out. What happens in this quarter as well as there's new accounting around equity securities where you have to mark them to market each quarter.
So we have a legacy equity position that appreciated during the quarter and that was the driver for the most part.
Collyn Gilbert
That’s right. Okay.
Thank you. And then just back to the discussion on the loan growth.
What are you guys anticipating for sort of paydown activity to happen? And I’m sorry, I could probably do the math because you did give some color around this.
But just wondering if you anticipating – if you're anticipating paydowns to sort of start to slow here in the back half of the year?
John Barnes
We'd like it to slow. It’s really hard to predict in this market.
I would say, we're expecting a little bit above average compared to where we've been historically just given the nature of what we've seen, not only last six months, even in the last 12 or 24 months. A lot of our long-term holders are being approached with prices that they find hard to refuse.
And in some cases, competitively, we’re getting taking out by life company deals that are just really long and low, but there's definitely been more activity on that front and really hard at this point to see that shifting.
Collyn Gilbert
Okay.
David Rosato
The only thing I would add to that is, so Jack was referencing commercial real estate, which has been the real headwind that we called out, but we are seeing some of our C&I customers, merging or selling and so that's a lot more spotty, but it also happens and now it's been happening a little bit more than usual.
Collyn Gilbert
Okay. That’s helpful.
And then just thinking about the loan size of kind of the dynamics of what's going on here. Is there a big differential between some of the CRE relationships that are running off compared to the middle-market ones that you guys are adding?
I would imagine that there would be, or can you quantify that at all?
Jeffrey Hoyt
Collyn, this is Jeff. Specifics to the multi-family portfolio, those tend to be small balance loan.
So those loans are relatively small. The balance of our commercial real estate portfolio, I’d say that the loans that we’re doing are not any bigger or smaller than the loans that are getting refinance or running off.
Collyn Gilbert
Okay. That’s helpful.
And then just a similar question on the deposit side. Obviously, the drop this quarter, you guys attributed to the municipals.
What’s kind of the average relationship size perhaps within any of those customers? Just trying that again, it's a big swing from a dollar perspective.
So just curious where the concentration might be?
David Rosato
Yes. Collyn, it's really all over the board there.
So we bank a few of the states, if they might want. So if you think about the state of Mass, Connecticut or Vermont, the three larger states that we bank.
They can have sizable swing. But then it’s a very granular portfolio of all those smaller towns throughout New England as well, so there's a real range there.
What I would say is the larger customers are the ones who impacted for the most part in dollars, in the quarter. However, this is very normal seasonal activity and then tax payments come in, in the month of July, we’re already seeing those balances come back.
Collyn Gilbert
Yes. Okay and then just finally on the borrowings.
So big jump in the borrowing cost there, it seems beyond even where we saw rates move? Was there any – were you doing anything spending duration or was there anything else going on with the borrowing dynamics this quarter?
David Rosato
No. There really wasn't.
There was a little bit more borrowing, just temporarily borrowings to cover the deposit runoff, but there was a not a change in strategy on our part.
Collyn Gilbert
Okay. That’s all I had.
Thank you.
David Rosato
Thank you.
John Barnes
You’re welcome. End of Q&A
Operator
Thank you. Ladies and gentlemen, I'm showing no further questions in the queue at this time.
I would now like to turn the call back over to Mr. Barnes for any closing remarks.
John Barnes
Thank you. Strong second quarter was highlighted by our announced agreement to acquire First Connecticut Bancorp and the acquisition of Vend Lease company.
Another quarter of record earnings, net interest margin expansion benefiting from the increase in loan yields, continuing to outpace the rise in deposit costs, improvement in operating leverage, driven by continued revenue growth and well-controlled expenses, stronger lending activity in June and solid period-end pipeline and our continued commitment to a consistent return of capital to shareholders and evidenced by the Board of Directors declaring a common stock dividend for the 100 consecutive quarters. Thank you for your interest in People’s United.
Have a good night.
Operator
Ladies and gentlemen, thank you for participating in today’s conference. This concludes the program.
You may all disconnect and have a wonderful rest of your day.