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People's United Financial (NASDAQ:PBCT)

Q3 2013 Earnings Call

October 17, 2013 5:00 pm ET

Executives

Peter Goulding

John P. Barnes - Chief Executive Officer, President, Director, 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

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

Collyn Bement Gilbert - Keefe, Bruyette, & Woods, Inc., Research Division

Casey Haire - Jefferies LLC, Research Division

David Darst - Guggenheim Securities, LLC, Research Division

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

James Abbott - FBR Capital Markets & Co., Research Division

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

Mark Vassilakis - Moody's Corporation, Research Division

Thomas Alonso - Macquarie Research

Operator

Good day, ladies and gentlemen, and welcome to the People's United Financial Inc. Third Quarter Earnings Conference Call. My name is Derek 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, Chief Financial Officer; David Rosato, our Treasurer; along with Jeff Hoyt, our Controller, are here with me to review our third quarter results. 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 P. Barnes

Thank you, Peter. Good afternoon, everyone. We appreciate you joining us today. Before we get into the details of the quarter, I'd like to share my views on our current strategic positioning. We are consistent with our conservative approach, building this franchise for the long-term. We are forming new relationships and deepening existing relationships across our geographic footprint while providing our customers with a broad set of solutions to their financial needs. Ultimately, we are shareholders and our choices are designed to maximize shareholder return, not only in the near-term but over the medium and long-term. We feel good about both the progress that we've made and the opportunities for future progress we see ahead. This quarter's results reflect the benefits of investments we've made and continued to make in people, products, services and our expanded geographic footprint.

While the results were solid, given the relatively weak economic environment, we were a bit below our own expectations. We will, of course, be providing more detail in the slides that follow. Generally speaking, we experienced less loan growth than anticipated due to lower mortgage refinancing activity which, in particular, lowered utilization rates and our mortgage warehouse lending business. Excluding the change in mortgage warehouse lending balances, period end loan growth would have been 11% annualized rather than 6%. Still, we know our underlying origination engine is strong as evidenced by a 10% annualized average loan growth during the quarter and 9% average annualized loan growth for the first 9 months of 2013 compared to the prior year.

Now, with respect to our third quarter results, on Slide 2, operating earnings were $60.8 million or $0.20 per share, while net income was $58.5 million or $0.19 per share. The net interest margin declined by 3 basis points to 3.30% compared to 3.33% in the second quarter. The margin for the first 9 months was 3.33%, and we continued to expect our full year margin will be within our guidance range of 3.30% to 3.40%, which we provided in January. End of period loans grew at a 6% annualized rate in the third quarter. This marks our 12th consecutive quarter of loan growth and is a testament to both our relationship managers and our customers. Further, our commercial pipelines remain strong and runoff in the acquired portfolios has settled in at a slower rate as we predicted in January.

The efficiency ratio for the quarter increased to 63.6% from 62.7% in the second quarter, primarily due to marginally higher expenses. We continue to grow both net interest income and fee income while controlling expenses, we anticipate efficiency ratio progress in the quarters ahead. Asset quality remain strong, with net charge-offs of 17 basis points. As mentioned before, we firmly believe that sound underwriting is the only way to confidently grow our balance sheet. We continue to optimize capital through share repurchases and dividend payments. We were once again disciplined this past quarter repurchasing 2.1 million shares at a weighted average price of $14.33. During the first 9 months of 2013, we repurchased 24.5 million shares of common stock at a weighted average price of $13.39 per share.

We believe we continue to capture compelling returns with these repurchases, with a tangible book value dilution earn back period of approximately 5.7 years for the quarter and 5.0 years during the first 9 months of 2013. In addition, the repurchases have improved our future dividend payout ratio, return on average tangible equity and earnings per share. Capital ratios remain solid, especially in light of our relatively low-risk business model and are now close to peer median levels on tangible equity to tangible asset bases.

With that, I'll pass it to Kirk to discuss the quarter in more detail.

Kirk W. Walters

Thank you, Jack. On Slide 3, you can see a breakdown on the elements contributing to our 3.30% margin results for the quarter. As you recall, the second quarter net interest margin was 3.33%. New loan volume impacted our margin by 6 basis points. This was offset by a 2 basis-point benefit from one more calendar day in the third quarter, as well as improved deposit rates and mix, which benefited the margin by 1 basis point. In the quarters ahead, we will be working hard to increase the mix of demand deposit accounts to help offset some of the decline in loan yields.

Slide 4 provides a breakdown of the elements contributing to our net increase in loans. The loan portfolio grew $361 million, or 6.3% annualized. This was achieved through leveraging our expanded footprint, as well as progress in our heritage markets and strengthened product lineup. We experienced acquired loan runoff at $220 million this quarter compared to $201 million in the second quarter of 2013. The acquired loan portfolio runoff is expected to remain at these lower levels for the balance of the year given our resolution of significant problem assets, continued portfolio seasoning and longer duration on the remaining assets. Originated loan growth for the quarter totaled $581 million. As in prior quarters, growth came from a variety of products in geographic areas.

Commercial real estate contributed $464 million of total originated loan growth, including $243 million from New York commercial real estate. The portfolio remains broadly diversified, with most relationships well below $25 million. Despite exhibiting strength across many categories, including asset-based lending and equipment finance, C&I originations declined $120 million. Most of this impact was attributable to mortgage warehouse lending dynamics, particularly lower than expected utilization rates that occurred in conjunction with rising interest rates during the quarter which caused significant contraction in conforming mortgage refinancing activity. Excluding the change in mortgage warehouse lending, C&I would have contributed $155 million of total originated loan growth. And as Jack mentioned earlier, overall loan growth would have been 11% rather than 6%.

Residential mortgages contributed $172 million of originated loan growth in the third quarter. Annualized residential mortgage growth this quarter was 15%, in line with last quarter's 13% growth rate. The residential mortgage portfolio grew because we are adding jumbo arms to the portfolio which reflects a shift in customer preferences toward adjustable-rate products and a rising interest rate environment. Approximately 91% of the residential mortgage originations held for investment were hybrid adjustable-rate mortgages. New home equity commitments totaled $214 million compared to $225 million in the second quarter of 2013. It's important to note that 100% of home equity loans are retail originated, with 62% in a first lien position.

Given the impact of lower mortgage warehouse utilization rates, we feel good about our underlying loan origination engine. You can see on Slide 5 a breakdown of elements contributing to our net increase in deposits. Retail deposits decreased by $299 million, which is driven by seasonal weakness as customers tend to spend more during the summer months. Commercial deposits increased $507 million, supported by strong growth in government banking. We continue to focus on improving the mix of our deposit base. Efforts throughout our franchise, lower deposit costs, particularly in acquired markets, contributed to a further decline in overall deposit cost of 36 basis points.

The larger deposit opportunities relate to acquired deposits, continuing to increase our deposit mix in favor of non-interest-bearing deposits and better utilization of our southern New York branches. Acquired deposits represent 13% of total deposits as weighted average cost of 67 basis points, down 14 basis points or approximately 17% over the past year. We expect the rate, mix of deposits and acquired markets to become more favorable over time as a result of our franchise-wide emphasis on growing demand deposits.

Non-interest income grew 3.2% over the prior year period as business leaders and relationship managers continue to bring our customer focus banking model to our expanded geographic footprint. As mentioned before, we are in the early stages of this process. As shown on Slide 6, on a linked quarter basis, non-interest income decreased $2.1 million. Insurance was seasonally stronger adding $2 million to fee income this quarter. While bank service charges and customer derivative income increased $1.2 million and $800,000, respectively. Gains on acquired loan sales and residential mortgage loan sales decreased by $5.8 million and $300,000, respectively. This quarter, we did not have any gains in sales of acquired loans. These events are discrete and transactional in nature making them very difficult to forecast.

On Slide 7, we illustrate the key components of our changes in noninterest expense. We have invested in our business in order to support revenue growth initiatives, as well as to bolster our operational capabilities and remain ahead of the heightened regulatory requirements. In total, we expect our investments to deliver stronger operating leverage in the quarters ahead. From an operating expense perspective, compensation benefit expenses increased $2.3 million, primarily due to an additional work day in the quarter. Professional and outside services increased $1.1 million, due in part to project-related activities. Net REO costs were higher by $500,000 primarily due to 1 large single family residence in Fairfield County. The net impact was a $3.8 million increase in operating expenses for the quarter. We continue to rationalize our expense base, particularly our branch network. Along those lines, it is worth noting that we closed 7 branches during the third quarter, which represents over $2 million of annual cost savings going forward.

The next slide details our progress on the efficiency ratio since the first quarter 2010. As you can see, we have made significant progress over this time period. Slides 9 and 10 are a reminder of our excellent credit quality. Once again, we did see an improvement in non-performing assets this quarter from already industry-leading levels. Originated non-performing assets at 1.26% of originated loans and REO, remained well below our peer group in top 50 banks and are down from 1.59% in the third quarter of 2012. Acquired non-performing loans are not included in these calculations due to the different accounting model applicable to such loans. However, it is worth noting that we're very pleased with their performance, as we have seen these balances declined $48 million or 24% to $154 million in the current quarter from $202 million a year ago.

Looking at Slide 10, net charge-offs continue to remain low at 17 basis points compared to 19 basis points last quarter and 18 basis points 1 year ago. Excluding acquired loan charge-offs, net charge-offs this quarter was 16 basis points. These levels continue to reflect a minimal loss content in our non-performing assets and are well below peers. Over the last 4 quarters, charge-offs against specific reserves represent approximately 58% of total charge-offs. As such, we understand our credit issues well and typically have very few new credit events each quarter.

Now, I'll pass it back to Jack.

John P. Barnes

Thank you, Kirk. Slide 11 highlights our ability to grow both sites of the balance sheet. We continue to make progress on loan and deposit growth on a per share basis while maintaining excellent asset quality. Over the past 2 years, loans per share and deposits per share have grown at compound annual rates of 16% and 12%, respectively.

Operating return on average assets for the third quarter was 78 basis points compared to 81 basis points in the prior quarter. Our return on average assets continues to be impacted by our larger balance sheet, particularly our investment portfolio. Progress will be driven by loan and deposit growth, fee income growth and a disciplined approach to expenses. As rates begin to return to more historically normal levels, our asset-sensitive balance sheet is expected to positively impact future returns.

Slide 13 illustrates the improvement in our return on average tangible equity from the low levels of 2010. We expect to see continued progress in this metric as we improve profitability and thoughtfully deploy capital. Still, our capital levels remain approximately 60 basis points over peers on a tangible common equity to tangible asset basis. Normalizing our equity base to be consistent with our peers, shows that our return on average tangible equity is 10.5%.

On Slide 14, we see net capital levels at the holding company in the bank remain strong with our tangible common equity ratio at 8.5% and Tier 1 common at 11.4%. It is worth noting that we have recalculated our Tier 1 common ratio in prior periods in accordance with the Basel 3 final rule, which was released in July. We continue to build relationships, increase fee income, and make necessary investments to drive near-term and long-term operating leverage, while returning capital to shareholders. The strength of our platform allows us to attract and retain exceptional talent and provides a sustainable competitive advantage. In addition, we are well-positioned to benefit from increasing interest rates.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Steven Alexopoulos, JPMorgan.

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

I want to start with the efficiency ratio bouncing around in the 63%, 64% range over the past few quarters. Do you think you're still on track to getting down to near 55% by the end of next year 4Q '14?

John P. Barnes

Hey, Steve, this is Jack. We definitely are still committed to our goal of 55% efficiency ratio. As you know, that's very dependent on the pace at which we increase our revenue generation, along with maintaining our control on expenses. We are in the process right now of going through our planning for next year and reexamining our view on that. And kind of consistent with the last few years and giving some guidance in the first quarter, we'd be prepared to address our view once we get through planning and reexamining the dynamics there.

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

Okay. Jack, the pace of buyback slowed a bit from recent quarters, can you give some color on why the slowdown and do you plan on buying back the remaining almost 9 million authorized shares?

John P. Barnes

Sure, let me take a cut at that, Steve. As we know that we bought in a little over 2 million shares and we are focused on the, amongst other things, there's a variety of things we focus on there, but one is the tangible book value earn-back. And so in terms of the remaining shares, we do expect to buy them in, but the pace is going to be dependent somewhat on stock prices and the market.

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

And Kirk, just a final one. How you viewing your ability to protect the margin here, that 6 basis point hit in 3Q from new loan yields seems pretty steep?

Kirk W. Walters

That's pretty consistent with what we had put out there in terms of the biggest impact on our margin was going to be our success at originating new loans and we still are originating at a level that is below where the portfolio yield is partially because of the acquired loans in the portfolio. But when we look at the average yield on newly originated loans, linked quarter, second quarter to third, we did see that actually up about 5 or 6 basis points. When I say the portfolio yields still higher predominantly because of the acquired loans.

Operator

Your next question is from the line of Collyn Gilbert, KBW.

Collyn Bement Gilbert - Keefe, Bruyette, & Woods, Inc., Research Division

Just a follow-up on the quick discussion that's Steve just brought up with you guys on the loan yield, what was the origination yield on your CRE loans this quarter?

John P. Barnes

Collyn, we have historically not given a specific number out there in terms of origination of yields on any specific loan categories. But what we do tend to talk about is breadth in terms of the different categories as we think about the spread and the CRE space what we're seeing as spreads probably somewhere in the 2.45 to 2.50 range in terms of overall spreads.

Collyn Bement Gilbert - Keefe, Bruyette, & Woods, Inc., Research Division

Okay. Well, a way to sort of also ask that question, you might have the slide right in front of you, but if that -- so the 6 basis point decline that we saw this quarter from your attribution of the margin from loan yield, what was that in the second quarter? Do you have that handy? If not, I'll go look it up.

John P. Barnes

I believe it was 5 basis points for the quarter.

Collyn Bement Gilbert - Keefe, Bruyette, & Woods, Inc., Research Division

Okay. And then on the residential mortgage side, you had indicated the amount of the origination this quarter that were in arms, but where does the overall portfolio stand? What percent of the overall portfolio now is comprised of arms? Now I'm talking on the resi side.

John P. Barnes

Yes, on to the resi side, virtually our portfolio is hybrid arms. We have very little fixed or anything in there. So that's all we put in and remember, we pretty well -- we're out of the market from 2006 to 2010. And then we started putting some in there. So there's a little bit of tenured product in there, but the vast majority, 90% plus is hybrid arms.

Collyn Bement Gilbert - Keefe, Bruyette, & Woods, Inc., Research Division

Okay. And then just on the, could you remind us what the strategy is on the FHLB advances that's been a bucket that's been growing quite a bit in the last year, but I would assume the duration is still pretty short there because I guess it's like 37 basis points. The cost was this quarter. Is that the intention, just sort of keep building that out or maybe just -- what's the strategy there?

John P. Barnes

Generally our strategy on that has been because -- in particular because the cash flow coming off the investment portfolio and such is generally we're 3 months or less on the FHLB advances. If you look at the average duration of all of our borrowings it's probably about 1.5 years, something like that.

Collyn Bement Gilbert - Keefe, Bruyette, & Woods, Inc., Research Division

Okay. Okay. And then just one last question, how are you guys thinking about maybe where you can take that the fee, to revenue ratio? I mean, you've done a great job of building out your customer list in relationships and moving into new markets and is that a number that you have in mind as to where you think you can take that, just on the normal course of business?

John P. Barnes

Yes, we're -- Collyn, this is Jack. We've been focused on building that ratio up to 30% of revenue on the fee income side and feel very strongly that we can get there. We've had, as I think you've seen, steady improvement there. And it really is kind of across the board in our various fee income businesses. Naturally some better than others. But we watch it carefully and we're working hard to grow that piece and despite the regulatory headwinds. But banks service charges did well, the insurance did well this quarter. But across the board, it really gets to this phrase we use about introducing underrepresented products into our new markets and taking the foundation that we have, the infrastructure we have, around our fee businesses and then introducing them into markets where they -- sales of those products haven't been offered either at all historically or only, for us, only 2 or 3 years. And we continue to build and penetrate markets with all those products.

Operator

Your next question is from the line of Casey Haire, Jefferies.

Casey Haire - Jefferies LLC, Research Division

So, question on the loan growth outlook. It sounds like you've digested this mortgage warehouse and things can resume at a double-digit pace. I'm just curious, how much mortgage warehouse is left? And then also on the acquired runoff, can we expect a step down from this 200 million per quarter runoff that we're seeing currently?

Kirk W. Walters

So let me -- Casey, it's Kirk, let me go to the first one. If you look at our mortgage warehouse portfolio, it's right at $500 million at this point and what we did see was utilization rates go from in the 60s down to about 37%. So I think, if you think about that in light of what people have probably felt in terms of the pipelines on conforming loans and such in the drop there, you think most of it's in there, but could there be a little more in the downside to it, it's certainly possible. In terms of acquired loan runoff, as we go forward here, I would expect that number to continue to come down. And last year, as Jack mentioned, in January, always give guidance. And that was one of the areas that we gave guidance on and we're really right where we expected to be, but that portfolio continues to shrink down and thus, the acquired loan runoff should continue to slow down.

Casey Haire - Jefferies LLC, Research Division

Okay. But it sounds like it's gradual, not necessary a cliff in 2014?

Kirk W. Walters

No, no. After the FinFed portfolio pretty well ran off. The remaining in the portfolio is typical bank-like assets. It'll step down but it's not going to drop off the cliff, no.

John P. Barnes

And we moved through a lot of the problems that we were working restlessly[ph] to get out faster which is why the pace early, I think, reflected a strong effort to -- particularly, if you remember, Smithtown, larger loans and they were situations where our workout folks were trying to exit because -- as fast as they could. As Kirk said, we've gotten to more of a mature state where you have typical assets, bank assets, that'll amortize in the more normal level.

Casey Haire - Jefferies LLC, Research Division

Got you. Okay. And then just one last one on the expense side. The run rates for professional services you mentioned some projects there and the other line was a little high as well. I'm just curious, what is the right run rate there? Was some of that 4 million of nonrecurring expense in the efficiency ratio recon table that you put out, was that where we -- that end up in this quarter?

Kirk W. Walters

Yes. If we think about the overall run rate without the nonoperating expenses, we had been closer to about a 205 type of run rate on a quarterly basis. As we mentioned in our commentary, this quarter, we are up a little bit and part of it is was in professional fees, it was in a variety of projects, part of us little bumped as we mentioned in other, which would have been down more, but we took almost a $2 million write-down on a residential property which kept the other expense up. And then a little more comp in Benny [ph] because of an extra day. So it was elevated a bit, we would certainly hope and expect to get it more back toward that 205 number.

Operator

Your next question is from the line of Dave Rochester, Deutsche Bank.

Unknown Analyst

It's actually [indiscernible] with Deutsche Bank. First question circles back to the loan yields. I appreciate that you don't provide a specific yield on specific product, but maybe provide the blended origination yield on new production during the quarter?

Kirk W. Walters

We don't really put that one out there either. Like I say, when we tend to think about things. We think, as commercial bankers, we think about them in terms of spreads.

Unknown Analyst

Okay. But you said that was higher than the second quarter just from a directional perspective, is that correct?

Kirk W. Walters

That's correct.

Unknown Analyst

Okay. And then on the arm product that was booked during the quarter, what was the typical duration that clients migrated towards? Was it more 5-year stuff or was it longer?

Kirk W. Walters

I would say it probably average more around 7. More on this 7 ones [ph] on average is where the production came in.

Unknown Analyst

Okay. On the commercial real estate growth, the 300 million plus linked quarter, how much of that was attributed to the multifamily space?

Kirk W. Walters

I think we mentioned in our commentary that those 250 million came out of New York REIT.

Unknown Analyst

Okay, okay. And then going forward for next quarter, should we expect to see similar trends with the majority of the loan growth coming again from the commercial real estate portfolio on the residential portfolio?

John P. Barnes

Well, right now, we certainly do expect on the commercial real estate portfolio that we will see similar activity. And residential was actually very strong this quarter. We definitely saw the consumer look to the arms as the conforming rates and the longer term fixed rates came up. So hard to predict how that will go, but the areas that we're seeing in addition to residential and the commercial real estate particularly this quarter but really through the years been good growth in our ABL group and also equipment-financed units. So I think as Kirk said in the commentary, we're seeing nice diversified contribution, if you will, across the business lines.

Unknown Analyst

Okay, great. And then, I guess, my last question just circles back to the buyback. I think I missed in your prepared commentary what the tangible book value earn-back has been year-to-date.

John P. Barnes

5.0, so 5 years.

Unknown Analyst

5 years, okay. And then just going forward, is there a specific target that you have in mind for book valuation[ph]?

Kirk W. Walters

There's not one that we have out there publicly, no.

Operator

Your next question is coming from the line of David Darst, Guggenheim Securities.

David Darst - Guggenheim Securities, LLC, Research Division

Kirk, would you walk us through the non-performing loan buckets in the acquired portfolios. You had pretty good resolution over the past 6 quarters and it seemed to slow down this quarter. Any timing and what's the opportunity for further cost recovery income?

Kirk W. Walters

Are you looking at the slide, David?

David Darst - Guggenheim Securities, LLC, Research Division

Correct. I guess you still got 90 million remaining at Smithtown. And the markets are recovering.

Kirk W. Walters

Yes. And I think what's happened is, I mean, it has definitely slowed down in terms of the activity there. In the second quarter, we did have some loan sales which you saw the gain on acquired loans, those were all adversely rated credits that we were able to sell out. But it's, I think we're working through it, but we are, at this point, down to a lot smaller pieces and it tends to be a lot lumpier as we're trying to move it out.

David Darst - Guggenheim Securities, LLC, Research Division

Okay, great. And just as you're building out the franchise and you're going to get up market in certain loan categories, are you inclined to go out of market or do any national lending whether it be equipment finance or ABL?

John P. Barnes

Well, David, this is Jack. We do and have historically in the Equipment Finance business, those -- both those businesses are national businesses. PCLC is equipment finance unit that we've operated here at People's for decades and it's been a national business. And it was reacquired FinFed, and that continues to operate again in basically the same business model that they were in when we acquired them.

Kirk W. Walters

I would add to that just as I think we've talked about in the past, there is a portion of the mortgage warehouse business that tends to be out of market as well. But aside from that, the out of market activity we have in any syndicated credits or anything. It's very small and has been something that was historically done just running down.

John P. Barnes

Maybe worth repeating that when we talk about our market, we are talking about Washington, D.C., up through the Northeast corridor. Most of our activity naturally is New York to Boston, if you will. But we certainly operate some of our businesses, commercial real estate group, for instance, in the mid-Atlantic area as well.

Operator

Your next question is from the line of Bob Ramsey, FBR Capital Markets.

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

I might have missed this in the prepared remarks, but with the mortgage warehouse decline, I know you said it's $500 million today, but what was that down from? How much of that portfolio actually shrinked in the quarter?

Kirk W. Walters

The peak of the portfolio was about $760 million. So it's down $260 million.

Unknown Analyst

And how much was it last quarter? What was sort of the quarter change?

Kirk W. Walters

Well, that's what I just said. Last quarter it was $760 million. This quarter, $500 million. So a difference of $260 million.

James Abbott - FBR Capital Markets & Co., Research Division

Okay. I'm sorry, I thought you had said the peak. I wasn't sure that was last quarter. And then I'm curious too with that portfolio, what has happened in terms of yield. And even without providing specific numbers around yields, have yields been stable in that business? Have they risen as mortgage rates have risen, have they narrowed from competition?

John P. Barnes

Well, once again, we don't give yields but we give spreads. [indiscernible] that we talk about spreads. And when you look at the spread in that business, we thought compressed a little bit but the spreads are still over 300 basis points.

Unknown Analyst

Okay, that is helpful. And I wanted to ask a question about efficiency too. I know when you talked about Slide 8, you pointed out there has been considerable progress on the efficiency front and there certainly was for 2011. But it seems to have sort of stagnated over the last couple of years. And I'm just curious, in this rate environment, is there opportunity to continue to sort of push it down from the mid-to low 60s?

John P. Barnes

So I think the observation about the last year or so, the primary driver there in having a level off had to do of course with our margin compressing and the contribution for the net interest income piece on the revenue side was coming down, and you can see that in the numbers. So as we've been talking about, as the margin begins to largely stabilize and we continue to grow loans at a good pace, then we would get back to seeing improvement. All else being equal, of course, all else isn't equal. We're continuing to grow our fee businesses at a steady pace. And that -- continuing that pattern will help as well. And of course, controlling expenses. So I think the key answer to your observation is the first one about the margin and the transition from having the margin begin to compress, if you will, and decline and that contribution pull back and now we're building that back as we move forward.

Unknown Analyst

Okay. So while I know you guys aren't yet sort of ready to talk about 4Q '14, I guess it's fair to say that with the pace of margin contraction slowing, you would expect the material improvement and efficiency in '14 versus '13?

Kirk W. Walters

Again, think of what I just described and you expect loan growth and a greater contribution, net interest income gross dollar, we would expect steady improvement as we work to manage all of those dynamics.

Operator

[Operator Instructions] Your next question is from the line of Matthew Kelley, Sterne Agee.

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

Just kind of sticking on the margins, I'm just kind of curious what you believe will be the drivers to kind of achieve the low end of the 330 to 340 margin guidance range looking at the headwind over the next couple of years, the 12 basis points as the benefits of accretively[ph], yield and deals continues to roll down. So what are the binge [ph] offsets to that to kind of stick in that range, the low end of that range?

Kirk W. Walters

Remember, the guidance we gave was just for this year. And we gave guidance where margin for the year of 330 to 340 and we're right within that guidance. So we haven't given any guidance out as we go forward. And we would, once again, re-up our guidance which we've done the last 2 years in January. So, I mean, what are the drivers of our margin? Obviously, one of the negative drivers, which we do give a lot of information around so people can see it, is the acquired loans, the continued runoff in the acquired loans. Offsetting that, of course, is the acquired deposits that we have which are still on the books at a relatively high rate compared to other deposits. We also, because of the -- largely because of the acquisitions. Have little lower non-interest-bearing deposit ratio than others we're working very hard at in terms of getting that back up to level that we think it should be, which will help on the margin. And the other piece is as new originations come on and get, bit by bit, closer to the overall yield on the portfolio without, if you look at it, without the acquired loans, that will be the other driver in it. So...

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

Okay. On the commercial real estate growth in the multifamily, how much of your production is in terms beyond 5 years?

Kirk W. Walters

I don't have that number in front of me, Matt. But I think the -- it's fair to say that the terms, in general, run from 5 to 10, it's very limited what we do with the 10 end but you do see some of that product from time to time. So...

Mark Vassilakis - Moody's Corporation, Research Division

Okay, okay. And then the Securities portfolio, you've ended the quarter 4.4 billion, down 5% sequentially. What types of changes in the securities books should we expect for the next couple of quarters?

Kirk W. Walters

Right now, part of our securities portfolio, size and everything, really does come down to -- when we go through our planning and exercises, not only our budgeting for next year, but all of our strategic planning for next couple of years. In our general view in loan growth liquidity, et cetera, and the residual component becomes securities. Right now, we are in a process that we have let those run down some as we've continued to have good loan growth. And I think if we're looking between now and year-end, probably the expectation is we continue to see that run down a bit, simply because we're not reinvesting the proceeds that's coming off that portfolio at this point.

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

Okay, got you. And last question, coming back to the loan and deposit ratio, how high would you be willing to see that go before you start to pay up a little bit more in deposits?

Kirk W. Walters

We certainly know and acknowledge that it's up over 100%, something we are working very hard at internally both in particular in raising commercial deposits and getting our fair share in government banking and different things that we've been focused on. We haven't put a specific number out there but, in all candor, we prefer to not say [ph] get a whole lot above where we are currently at. And really, the call as to when we would want to start paying up a little more and really turn on the retail network, which we know is very good at sales, is going to be one when with a really more of a view toward an interest rate call.

Operator

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

Thomas Alonso - Macquarie Research

Good afternoon. Just wanted a real quick hit on the tax rate it was a little bit lower this quarter, is that a good rate going forward for modeling purposes or should we expect it to bounce back up?

Kirk W. Walters

The tax rate for this quarter was just a hair under 30. But if you look at year-to-date, it was 31.5. And that would be a good number for the balance of the year. This is typically the quarter that we do true-up our tax rate. We had a little more in municipal loans and such than what we had originally factored in, and that was the primary item that impacted it.

Operator

Ladies and gentlemen, there are no further questions at this time. I would now like to turn the call back over to Mr. Goulding for any closing remarks.

Peter Goulding

Thank you, again, for joining us today. We appreciate your interest in People's United. If you just have any additional questions, please feel free to contact me at (203) 3386799.

Operator

Ladies and gentlemen, that concludes today's conference. We thank you for your participation. You may now disconnect. Have a great day.

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