People's United Financial Management Discusses Q4 2013 Results - Earnings Call Transcript

Jan.16.14 | About: People's United (PBCT)

People's United Financial (NASDAQ:PBCT)

Q4 2013 Earnings Call

January 16, 2014 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

Sameer Gokhale - Janney Montgomery Scott LLC, Research Division

Timur Braziler - Deutsche Bank AG, Research Division

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

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

Casey Haire - Jefferies LLC, Research Division

Thomas Alonso - Macquarie Research

Karti Bhatt

John G. Pancari - Evercore Partners Inc., Research Division

Operator

Good day, ladies and gentlemen, and welcome to the People's United Financial Inc. Fourth Quarter Earnings Conference Call. My name is Jackie, and I will 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, Treasurer; along with Jeff Hoyt, our Controller, are here with me to review our fourth quarter and full-year 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 your joining us today. As has become our custom, in addition to reviewing the fourth quarter and full-year results, I will outline our goals for 2014. Last year, we continued to make significant strategic investments in our business in the form of people, products and services. This included bolstering business lines such as wealth management, private banking, Boston and Long Island commercial banking, government banking, mid-corporate banking, international trade finance and customer interest rate swaps.

Over the past 2 years, we have also invested in several other areas as well, such as the acquired Southern New York branches; the Park Avenue branch in Manhattan, New York; and New York Commercial real estate banking, asset-based banking, mortgage warehouse banking and cash management services. In addition, we've made infrastructure investments to keep pace with the heightened regulatory environment in the form of upgraded IT systems. All of these initiatives are designed to better serve our customers who continue to seek out our relationship-based business model built on outstanding customer service.

As further indications of support of our brand's banking, I'd highlight just a couple of examples. In New York, our Park Avenue branch recently eclipsed the $100 million deposit threshold. It's impressive growth as it has only been open since December of 2012. Additionally, the average in-store deposits per branch of our Southern New York franchise is now approximately $12 million, up from $4 million at acquisition. As a result, we have exceeded our breakeven level of deposits per branch a full year ahead of schedule.

With that background in mind, I'd like to review some of our 2013 results. Loans grew 12% as compared to 2012, while deposits grew 4% during the same time period. We grew loans and deposits on a per share basis by 23% and 14%, respectively, over the last year. Still, net interest income declined $40 million or 4% due to 55 basis points of net interest margin compression. The net interest income decline was primarily driven by a lower accretion from the acquired loan portfolio which was only partially offset by healthy new loan growth given the ultra-low-rate interest rate environment.

Non-interest income grew $19 million or 6%, driven by increases in wealth management fees, customer interest rate swaps, gains on loan sales and commercial banking fees, which are primarily prepayment fees. Our expenses increased just 1%, half of which related to increased REO expenses. While we added key customer-facing and revenue-producing talent and covered higher costs of regulatory compliance in the form of both personnel and IT systems, our efficiency ratio increased to 63.7% from 62.3% due to lower net interest income.

Our asset quality continues to be exceptional. Still, operating earnings declined by 5% year-over-year to $241 million due entirely to lower net interest income. Our operating EPS grew 3% to $0.77 as a result of our share repurchase activity.

On Slide 3, we have provided an outline of last year's guidance compared to our actual results. In general, we were in line with our expectations on every item except net interest income. Even though our end-of-period loan growth was within our range of expectations, average loan balances were lower than planned because our growth was weighted more towards the second half of the year. The primary driver of the net interest income shortfall was lower-than-anticipated average loan balances.

On Slide 4, we provide more detail behind the change in net interest income from 2012. Accretion on the acquired loan portfolio fell $80 million. Average acquired loan balances were down $1.1 billion versus 2012 and represented 8% of the average loan portfolio as compared to 14% in 2012.

At the end of 2013, the acquired loan portfolio represented 6% of the total portfolio. The effective yield on the acquired portfolio has been relatively stable in the 6.5% to 7% range over the past 2 years, which is considerably higher than the originated portfolio. Assuming a relatively constant rate of portfolio runoff in 2014, we expect a decline in accretion on the acquired loan portfolios to approximately $30 million or a $50 million improvement when compared to what we experienced in 2013. Borrowing costs increased by $19 million as loan growth outpaced deposit growth.

Net interest income from the originated loan portfolio increased by $37 million as average originated balances increased $3 billion, which more than offset the effects of a decline in yield of approximately 40 basis points on the entire originated portfolio. Similarly, investment income improved by $12 million as a result of a $1.2 billion increase in average securities balances.

Finally, deposit expenses improved $10 million as the 6 basis point decline in average deposit costs more than offset the 3% or $721 million increase in average deposit balances. We saw an improvement in our deposit mix as time deposits ran off and were replaced with lower-cost deposits. Through continued loan growth aided by a further decline in runoffs within the acquired loan portfolio and less net interest margin compression in 2014, we anticipate -- we are anticipating net interest income gains this year as I will outline in a moment.

Slide 5 provides detail behind the change in noninterest expense from 2012. We experienced $17 million of additional cost from the Southern New York branches that we acquired in June of 2012 and the incremental cost associated with our flagship Park Avenue branch in Manhattan, which opened in December of 2012. Direct compliance costs increased $3.5 million, which is mostly attributable to increased compensation expenses within our risk management, audit and treasury groups.

Improved use of technology lowered our expense base by $4.2 million and includes the impact of cost savings and check processing charges and courier fees from the implementation of a new tele-capture system. Compensation and benefits expense improved $1.9 million due to continued efforts to right size our employee base while at the same time, investing in our business. We also realized $1.7 million in savings through branch optimization initiatives. Franchise-wide, we consolidated 13 branches and opened 4. All 4 of our openings were Southern New York in-store branches.

On Slide 6, we outlined our 6 primary goals for 2014. First is to grow loans at a high single-digit to mid-teens rate. Embedded in this expectation is the belief that interest rates appear to have stabilized, which should produce lower prepayments in both the originated and acquired portfolios. The acquired loan portfolio is expected to decline by $600 million in 2014, down from $713 million in 2013.

Second is to increase deposits at a midteens rate, supported by 7% organic growth and supplemented with approximately $2 billion of broker deposits. Third, is to grow net interest income 5% to 8% to the $930 million to $960 million range. Embedded in that forecast is an expectation for a net interest margin in the range of 3.10% to 3.20%. Fourth, is to maintain fee income at its 2013 level despite weaker mortgage banking and prepayment fee revenue.

Wealth management revenue is expected to grow 10% to $56 million. Insurance and cash management revenues are expected to grow 10% to $34 million, and 13% to $23 million, respectively. Gains on residential mortgage sales are expected to fall 45% to $8 million while commercial banking fees, which are primarily prepayment fees, are expected to fall 24% or $7 million. We are encouraged with the growth of our fee income businesses and I would highlight the momentum we have in our wealth management, insurance, cash management and customer interest rate swap businesses.

Fifth, is to hold full year operating expenses relatively flat within a range of $830 million to $840 million. This reflects continued tight expense control, with an expected expense increase of approximately 1%, half of which relates to higher compliance costs. Meanwhile, we are covering the cost of our previously discussed strategic investments in our businesses. Sixth, is to preserve our fortress balance sheet with continuing excellent credit quality and strong capital levels.

Since we set our 55% efficiency ratio target in the second quarter of 2011, 3 major factors have slowed our progress. First and foremost, we've continued to find large investment opportunities, many of which I referenced at the beginning of my comments, that position us for greater earnings power in the future. While this talent is now in place, several of these initiatives are relatively new efforts and as such, continue to ramp up their productivity. Second, we faced a decline in interest rates across the yield curve as well as tighter-than-expected credit spreads.

While we were never betting on big interest rate increases to achieve our efficiency ratio goal, we similarly were not expecting rates to fall as they did, most notably through the period ending June 2013. Finally, there is no question that this is the most challenging and intense regulatory environment we have ever experienced. And while we have been successful in containing compliance-related costs, the world of heightened expectations has added approximately $10 million in direct expenses since 2011 to our annual expense base from both a people and systems perspective.

We have not attempted to capture an aggregate level of incremental compliance costs, but we have instead isolated the direct costs related to risk management, audit and the treasury groups. The latter group leads our stress testing process. The final impact -- the financial impact of the heightened regulatory requirements is being felt across our organization as we keep pace with the necessary investments.

A 55% efficiency ratio remains our aspirational target. However, given our previously discussed initiatives and the current environment, we now anticipate our efficiency ratio will be in the low 60s by the fourth quarter of this year, with additional progress thereafter.

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

Kirk W. Walters

Thank you, Jack. Now, with respect to our fourth quarter results. On Slide 7, operating earnings were $60 million or $0.20 per share while net income was $59.3 million or $0.20 per share. The net interest margin declined by 6 basis points to 3.24% compared to 3.30% in the third quarter. The margin for the year was 3.31%, which is in line with our 2013 guidance range of 3.3% to 3.4%.

End of period loans grew at a 20% annualized rate in the fourth quarter. This marks our 13th consecutive quarter of loan growth and is a testament to both our relationship managers and our customers. Further, our commercial pipelines remained strong and runoff in the acquired portfolio has settled in at a slower rate as we predicted last January.

Efficiency ratio for the quarter increased to 64.3% from 63.6% in the third quarter, primarily due to lower fee income. Asset quality remains strong with net charge-offs of 18 basis points. We firmly believe that sound underwriting is the only way to confidently grow our balance sheet. During the quarter, we repurchased 8.9 million shares of common stock at a weighted average price of $14.72 per share, completing the repurchase program previously authorized by the board.

In 2013, we repurchased 33.4 million shares of common stock at a weighted average price of $13.74 per share. We captured compelling returns on our 2013 repurchase program with a tangible book value dilution earn-back period of approximately 5.3 years. In addition, the repurchases have positioned us for improvement in our future dividend payout ratio, return on equity metrics 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 a tangible equity to tangible asset basis.

On Slide 8, we provide detail behind the change in net interest income on a linked quarter basis. Originated loan growth caused net interest income to increase by $3.4 million. This was offset by a $3.1 million decline in accretion on the acquired loan portfolio. Growth in net interest income from the originated portfolio outpacing lost accretion on the acquired portfolio is a positive sign for the quarters ahead. Higher average securities balances and a lower deposit cost contributed a further $1.3 million to net interest income, which was partially offset by a $200,000 increase in borrowing cost.

On Slide 9, you can see a breakdown of the elements contributing to our 3.24% net interest margin results for the quarter. As you'll recall, the third quarter net interest margin was 3.3%. Runoff in the acquired portfolio and new loan volume and mix each impacted our margin by 4 basis points. As we've already discussed, we anticipate the effects of the acquired loan portfolio runoff to continue to decline in the quarters ahead.

Slide 10 provides a breakdown of elements contributing to our net increase in loans. The loan portfolio grew $1.2 billion or 20% annualized. This was achieved through leveraging our expanded footprint as well as progress in our heritage markets and strength in product lineup. Originated loan growth for the quarter totaled $1.3 billion. As in prior quarters, growth came from a variety of products and geographic areas.

Commercial real estate contributed 46% of total originated loan growth or $595 million. C&I contributed 38% or $488 million. Within C&I, we saw strength across many categories, including equipment finance. The commercial portfolio remains broadly diversified with most relationships well below $25 million.

Residential mortgages contributed 15% or $198 million of originated loan growth in the fourth quarter. Annualized residential mortgage growth this quarter was 17%, in line with last quarter's 15% growth rate. The residential mortgage portfolio growth was predominantly due to continued strong originations and a slowdown in prepayments. Approximately 94% of the residential mortgage originations held for investment were hybrid adjustable-rate mortgages.

New home equity loans contributed $21 million of originated loan growth. It is important to note that 100% of home equity loans are retail-originated with 61% in a first lien position. We experienced acquired loan runoff of $137 million this quarter compared to $220 million in the third quarter of 2013 and $396 million in the fourth quarter of 2012. As Jack mentioned earlier, we are anticipating continued slower runoff in all of our loan portfolios, including our acquired loan portfolio, which is expected to help support healthy loan growth in 2014.

As you can see on Slide 11, a breakdown of the elements contributing to our net increase in deposits: retail deposits increased $298 million and commercial deposits increased $69 million, supported by annualized non-interest-bearing and savings deposit growth of 6% and 11%, respectively. We continue to focus on improving the mix of our deposit base. Efforts throughout our franchise to lower deposit cost, particularly in acquired markets, contributed to a further decline in deposit cost of 35 basis points.

The larger deposit opportunities relate to continued improvement in our deposit mix in favor of non-interest-bearing deposits and better utilization of our retail footprint, especially in our underrepresented markets of greater Boston and Metro New York. Acquired deposits represent 13% of total deposits and weighted average cost of 64 basis points, down 14 basis points or approximately 18% over the last year. We have a number of initiatives underway to further emphasize the importance of deposit gathering as a way to support funding, profitability and customer retention.

On Slide 12, we take a closer look at non-interest income which decreased $3.8 million on a linked quarter basis. Income from customer interest rates swaps and operating leases each added $700,000 to fee income this quarter, while investment management fees and brokerage commissions both contributed $400,000. Gains in residential mortgage loan sales decreased by $2.9 million, driven by a 58% decline in volume, combined with a 50 basis point decline in margin.

Insurance was seasonably weaker, posting a $2.4 million decline from the prior quarter. As a reminder, most of our insurance renewals take place in the first to third quarters. Bank service charges declined $1.5 million from the prior quarter. This decline was spread fairly evenly between ATM convenience, interchange and overdraft fees.

Slide 13, we illustrate the key components of our changes in noninterest expense. We continue to control expenses tightly. As we've discussed, this is even more notable, considering we have invested in revenue-producing initiatives and are covering the higher cost of compliance. From an operating expense perspective, net REO costs were $2.4 million lower, primarily due to a write-down in the third quarter on 1 large single-family residence in Fairfield County.

Advertising and promotion expenses decreased $1 million from the third quarter due to the timing of television commercials. Comp and benefit expenses increased $1 million, primarily due to incentive accruals related to increased loan production.

Expenses associated with operating leases increased $600,000. The net impact was a $1.5 million decrease in operating expenses for the quarter. As a reminder, payroll taxes and 401K matches are typically higher in the first quarter of the year. As a result, expenses are expected to be approximately $4 million higher next quarter.

The next slide details our efficiency ratio over the last 5 quarters. As we previously discussed, our efficiency ratio has been impacted by lower interest rates, higher compliance costs, investments and revenue-producing initiatives. All of which mask our tight expense control. We continue to focus on improving operating leverage.

Slide 15 and 16 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 1.08% of originated loans and REO remained well below our peer group in top 50 banks and are down approximately 30% from 1.48% in the fourth 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's worth noting that we're very pleased with their performance as we've seen these balances decline $39 million or 22% to $143 million in the current quarter from $182 million a year ago.

Looking at Slide 16, net charge-offs continue to remain low at 18 basis points compared to 17 basis points last quarter, and 19 basis points 1 year ago. Excluding acquired loan charge-offs, net charge-offs this quarter were 17 basis points. These levels continue to reflect 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 the credit issues well and typically have very few new credit events each quarter.

Lastly, while our allowance for loan losses appears relatively unchanged on a year-over-year basis, there are 2 important trends I'd like to highlight. First, we continued to improve our originated allowance for loan losses relative to originated nonperformers. This ratio improved to 82% in the fourth quarter from 75% in the third quarter, driven by an approximately 10% decline in nonperformers. In addition, we are provisioning for our loan growth. In 2013, half of our provision was related to loan growth. Lower non-performers, newly originated loan to better risk ratings, our allowance for loan loss methodology requires less provision expense.

Now, I'll pass it back to Jack.

John P. Barnes

Thank you, Kirk. Slide 17 highlights our ability to grow both sides 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 year, loans per share and deposits per share have grown at compounded annual rates of 23% and 14%, respectively.

Operating return on average assets for the fourth quarter was 75 basis points compared to 78 basis points for the prior quarter. Our return on average assets continues to be impacted by the ultra low interest-rate environment and some recent initiatives which are still ramping up to more normal levels of productivity. Progress will be driven by loan and deposit growth, fee income growth and a continued disciplined approach to expenses.

Slide 19 illustrates the improvement in our return on average tangible equity since the fourth quarter of 2012. We expect to see continued progress in this metric as we improve profitability and thoughtfully deploy capital. Following the completion of our share repurchase authorization, our capital levels are in line with peers on a tangible common equity, tangible asset basis.

On Slide 20, we see that capital levels at the holding company and the bank remain solid with our Tier 1 common at 10.2% and tangible common equity ratio at 7.8%. Again, it is worth noting that we have recalculated our Tier 1 common ratio in prior periods in accordance with the Basel III final rule which was released in July.

We continue to look for ways to best serve our customers and build relationships while maintaining tight expense control and returning capital to shareholders. Our commitment to outstanding customer service, combined with our existing and growing set of capabilities, allows us to attract and retain exceptional talent, all of which provides a sustainable, competitive advantage. This concludes our presentation.

Now, we'll be happy to answer questions you may have. Operator, we are ready for questions.

Question-and-Answer Session

Operator

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

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

Maybe I'll start, looking at the efficiency ratio target going from 55% to low 60s by year-end this year now. So a pretty big shift in only a few quarters. How much of a factor were the investments made in 2013 and do you think you now need higher short-term rates to get there eventually?

Kirk W. Walters

If we look at the shift in the efficiency ratio guidance, I think it's -- and looking at it coming into the low 60s, it really is a reflection on the revenue side and continuing to get the higher average loan balances and continuing to have the strong loan production, the guidance that we have for '14, it looks at the forward yield curves, but that's all that's factored into that guidance.

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

And Kirk, to get to 55%, do you think you need higher short-term rates or can you get there without that?

Kirk W. Walters

I think if we continue to see the metrics that we have in front of us with the stronger -- continued strong loan growths and we continue to build the revenue side, we can get to that number without higher rates. Certainly, higher rates will be helpful but it's more about continuing to get the production out of -- and particularly our lending areas and particularly the newer initiatives that we have been ramping up.

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

Okay. And doing some pretty basic math using your guidance slide here, looks like you're guiding to an efficiency ratio in the 64% to 67% range for 2014. So if you end the year at 65% and you're in the 64%, 67% range for the full year, how do you get to the low '60s by 4Q?

Kirk W. Walters

I think -- and we'll be happy to help anybody in terms of sort of the guidance, but I think -- we believe using the guidance we've given out actually gets you to one in the lower 60s by the fourth quarter.

Operator

And your next question comes from the line of Collyn Gilbert with KBW.

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

I guess my question, I have 2 kind of big picture questions. First, how -- I know you had commented about capital, you're sort of operating now near peer levels. But how should we think about your capital targets as you guys go forward? I mean, you're setting up some pretty aggressive growth goals, I'm just curious to see how much lower you think you can take those capital levels?

Kirk W. Walters

I think now that the repurchases are done and we're down at the current levels of capital, I think they remain approximately where they're at. The ratio that is -- the most challenging ratio for us is total risk-based capital because they do be -- tend to be a generator of 100% risk-weighted assets. And that one, if it does start getting tighter, we can avail ourselves to Tier 2 capital in the form of subordinated debt or some other instruments to continue to augment that.

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

Okay. Okay, that's helpful. And then just how are -- what is your -- as you guys are kind of looking at building out the business this year and next and some of your new investments and guidance and everything. What is your economic outlook? How are you thinking about just the economy in general and where we are in the cycle of rates and risk and all of that?

John P. Barnes

Well, we -- Collyn, this is Jack. Basically, I think our sense right now is that we continue kind of where we've been in this 2% economic growth to something that tends towards 3%. Just like everyone, we are hopeful for improvement and we're a little encouraged by recent signs, but certainly not feeling like we're there. But if you look at how we're growing our businesses, I think it has a lot more right now to do with the people and the talent we have on the ground across our markets and our various business lines and taking market share. If you look at things like our C&I line utilization, they're actually still remaining pretty steady. So it's not showing signs of an improving economy where our commercial customers are going ahead and start using the lines more actively. So we're, I'd say, we're in that range. If you wanted to think of how we think of an economic outlook, it's 2% to 3% growth. We think rates have come up to near 3% on this 10-year rate, and we expect that we'll be in that range and maybe modestly continuing to come up, but certainly no quick movements.

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

Okay. So I guess we shouldn't read into the acceleration of growth at the same time of aggressively lowering capital and aggressively sort of lowering reserves, I guess would indicate that you're very optimistic kind of about the risk profile that you're putting on the balance sheet, but that -- I shouldn't draw that conclusion necessarily, I guess? It's more just a function of what's happening more from a bottoms up standpoint with the people on the ground, as you said?

John P. Barnes

Yes, I'm not quite following you there, but I would -- we are sticking to our discipline in our underwriting across our businesses. We're not in any new businesses. We've expanded our presence in those business lines across our expanded footprint and we've added talent to business lines. But we are fundamentally going at it the same way, I mean our -- the way we approach credit has remained consistent. So I think that addresses part of your question. So we, as Kirk responded in regarding the efficiency ratio, we see continued solid loan growth at the pace that we guided to. And as we -- we definitely feel like we've transitioned, right, from the balanced approach to deploying capital and getting the capital normalized, if you will. Some -- through the last 3 years, right, some acquisitions, a lot of organic growth and the share repurchases have positioned us now to have a more normalized capital level. And now, we're focused on moving forward to continue to improve profitability and grow the business.

Kirk W. Walters

Collyn, I would comment on a -- your comment about "aggressive" capital reduction and "aggressive" provisioning. I think if you look through, and we gave all this information in our commentary, first, all that's happened on the capital is we've brought it down to normalized levels but still, in many cases, higher capital than our peers. And on the loan loss provisioning, which we covered in our commentary, over half of that provision is for loan growth. The reality is we don't have high charge-offs and the charge-offs we do have, 58% of them we'd already established reserves in prior times. So when they come through, that's because that loan has been resolved. So I would respectfully disagree that we're being aggressive in there. I think we gave a lot of details for people to try to understand how we run that and how we calculate it. And we are benefiting from the fact we've had a long history of excellent credit quality.

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

Yes. No, I guess I just meant from a timing perspective, not necessarily of behavior -- but the speed at which this is happening. I understand. I hear you. I understand. And then just one final question, and you guys touched on it. It's just sort of how you are thinking about just the franchise in general, and loan growth is outstripping deposit growth, but it sounds like you have maybe some deposit initiatives underway. And then also just give a little bit of background as to why the option for going after the broker deposit market.

John P. Barnes

Well, so and I think in terms of the franchise and kind of how the loan growth is developing, I think we're on the same page based on where we started. And we do see our loan-to-deposit ratio has come up as that loan growth has outstripped the deposit growth. There's a number of things going on that give us optimism as we move forward, and I'll go back to the New York example of just growing the deposits in those in-stores that we acquired at a much better pace than we had projected originally. And it's the same throughout that actually, that New York market across our traditional and in-store branches. And I mentioned Park Avenue and how well we're doing there. So growing deposits and our deposit base in New York and Boston is a big part of how we bring the funding and the deposits from those areas in line, if you will, with our historic positioning across the rest of the footprints. So we think we're very, very good at retail banking. Our folks are great and they're well trained, and our retail bank will generate deposits. We just happen to have done very well at growing the business, the loan businesses, because of the efforts we've put in there. In the meantime, we recognize that even though historically we've never had broker-type deposits that many of our peers do and it was a lever that we could look to pull. And we did some work on that. And along with some other things that we're looking at on the deposit strategy front and decided that for all the right reasons, it was appropriate to take on some broker deposits.

Operator

And your next question comes from the line of Sameer Gokhale with Janney Capital.

Sameer Gokhale - Janney Montgomery Scott LLC, Research Division

Just firstly, in terms of C&I loans, you talked about utilization rates remaining, I think, fairly unchanged. And that's consistent with commentary from some other banks as well. The puzzling thing seems to be that despite sort of unchanged utilization rates, there still seems to be healthy growth in C&I loans. So it seems that everyone seems to be borrowing more other than each bank's own customers. And that seems a little bit strange, so I was just wondering if you could provide some color on that given that there's growth in C&I loans, just utilization rates for existing customers remain flat.

John P. Barnes

Yes. So, I mean, I think if -- you have to go back to kind of our positioning and what's happened with us over the last 3 years. We've entered new markets where we -- adjacent to where our core franchise has been, I mean Boston and New York. And we are competing in those markets and winning business. And that is allowing us to grow the portfolio. So in the past, I know I'd mentioned C&I lending in New York, and particularly on Long Island. We built a team out there. They continue to build that portfolio at a very steady pace. So we're winning customers from others in those new markets, and we're doing the same thing in Boston. And we also have had a lot of good solid progress this year in our equipment finance businesses. We've had growth in both of those portfolios. They're both national in nature and long-standing, and we just continue to compete and be successful there. And then ABL is the same. We've had very steady, consistent progress, below the 12%, if I recall, but pretty nice and steady. It's something in that 8% to 10% range. So we're building out our multiple businesses across the franchise and within businesses like equipment finance that we've been in for quite some time and we're making progress.

Sameer Gokhale - Janney Montgomery Scott LLC, Research Division

Okay, that's a helpful perspective. And then in terms of the payout ratio and your dividends, you provided some commentary, but I just wanted to flesh that out just a little more. Are we basically saying -- are you basically suggesting that in terms of the payout ratio, given that the capital ratios are now kind of more in line with peers, and I would say your payout ratio has been higher than peers up to this point, that we should expect your payout ratio to come down going forward? Or are you saying that it will remain still at relatively stable levels? I just wanted to clarify that a little bit.

John P. Barnes

Sure. So again, I guess I would encourage you to look back, but if you -- as you -- if you look at how we've run the buyback program and seen how the number of shares has come down while at the same time we've improved profitability, the combination of those 2 things has steadily brought the dividend payout ratio over the last several years down from what had been over 100% to, I believe, it's 80-something, at the current quarter end. And as we look forward and we see improvement in profitability with, again, a lower share count, so lower deposit payout, we see steady improvement in that ratio in the near to intermediate horizon.

Sameer Gokhale - Janney Montgomery Scott LLC, Research Division

Okay. And then just my last question was in terms of deposits, you did talk about the broker deposit market and the fact that you want to raise, I think it was a couple of billion through the broker deposit market. Can you just remind us in terms of online deposits, how much you have and if you plan to expand more within that channel given that, that's where it seems like a lot of folks are focused on these days? So can you give some color on that?

John P. Barnes

We don't have a lot of color there. We don't do a lot of -- we don't go out with a lot of rate and look for online deposits from, say, across the country. I think I'm a little familiar with what others might be doing there. But we -- it's not something that we have actively done and we're not actively pursuing that into this program.

Operator

And your next question comes from the line of Dave Rochester with Deutsche Bank.

Timur Braziler - Deutsche Bank AG, Research Division

This is actually Timur Braziler filling in for Dave. My first question is regarding the accretion runoff. I think you had mentioned it was going to be $30 million in 2014 compared to $80 million this past year. Just the timing on that, is that going to be spread pretty evenly throughout the year or is that going to be mainly front-loaded?

Kirk W. Walters

No, I would say that it's going to be fairly evenly throughout the year. And you can sort of see how the pay downs and such will occur in that acquired portfolio because we've been giving it out there quarterly. And remember, when we say accretion under that accounting model, it includes all income on the loan. So the underlying coupon, as well as any mark on it.

Timur Braziler - Deutsche Bank AG, Research Division

All right. Okay, great. And looking at the commercial real estate balance, a strong quarter for that, I'm just wondering what portion of the quarterly growth was attributed to the multifamily portfolio?

Kirk W. Walters

If you look at the commercial real estate growth this quarter, about 3/4 of that was in relation to what we referred to as New York commercial real estate and probably 80% of that number was "multifamily".

Timur Braziler - Deutsche Bank AG, Research Division

Okay. And then looking into next year, how much of the planned loan growth is going to be attributed to the multifamily space?

Kirk W. Walters

How much -- run that question by me again.

Timur Braziler - Deutsche Bank AG, Research Division

So for the loan growth guidance that you provided for 2014, what portion of that do you think is going to be coming from the multifamily space?

Kirk W. Walters

Well, the -- I would say that the -- what we expect in terms of production out of, if you're referring to the New York commercial real estate, because we do multifamily throughout our franchise.

Timur Braziler - Deutsche Bank AG, Research Division

Right, the New York space.

Kirk W. Walters

Yes. If you're looking at that, it would be very consistent with this year.

Timur Braziler - Deutsche Bank AG, Research Division

Okay. Okay, great. And then...

Kirk W. Walters

So not [indiscernible] increase it.

Timur Braziler - Deutsche Bank AG, Research Division

I'm sorry, what was that?

Kirk W. Walters

We're not looking to increase it.

Timur Braziler - Deutsche Bank AG, Research Division

Okay. Okay, great. And then looking at the securities portfolio, there was a pretty good growth again in the most recent quarter, and it looks like a lot of that was loaded towards the back end of the quarter. I'm just wondering what type of securities were purchased and what type of yield you received on those?

Kirk W. Walters

So the primary reason that we put on -- we put on mortgage backs and the overall yield on it was right around 2, but the primary reason we did that is we are still a thrift charter and subject to the QTL provision to the thrift charter. And as we have continued to have very good growth in our commercial businesses, which is what our focus is, we needed to increase our mortgage backs in order to stay in compliance with that provision. So that's the primary reason that we put on mortgage backs very late in the quarter as we had more clear vision towards '14, what was going to occur in terms of volumes and also the strong loan growth we had in the fourth quarter. We had to put on some more residential-type assets to stay in compliance of that ratio.

Timur Braziler - Deutsche Bank AG, Research Division

Okay, understood. And then just lastly, I guess a bigger-picture question. Looking again into 2014, is there any planned consolidations or planned branch openings?

Kirk W. Walters

I think we're pretty well in a mode at this point that we are pretty well closing the equivalent number of branches to openings. So it seems to be that we will be closing probably 6 or 7, and we'll be opening 6 or 7, just in the normal process of running the branches. But that vast bulk of the ones we have been opening are in-store branches in the -- predominantly in the Southern New York area.

Operator

And your next question comes from the line of Bob Ramsey with FBR.

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

I know you just mentioned that the security purchases reflected the thrift charter requirements. I remember at one time, you guys were sort of talking about converting to a commercial bank charter. Is that still something that is a consideration?

Kirk W. Walters

It remains under consideration, will be something that we will be pursuing here in a reasonable timeframe.

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

Okay. And with the addition of the $600 million-ish of securities at a 2% yield, I mean I have to think that, that will add more pressure on your margin at least in the first quarter or so. Is it right to think about the -- and I know you've given full year guidance, but is much of that compression going to be front-end loaded because of the security purchases at year-end?

Kirk W. Walters

Well, you've got to remember first, just on a pure day count, the first quarter generally costs us about 5 basis points, just the way the calendar works. But there will be some more margin pressure earlier in the year than later in the year, not only from low [indiscernible] securities purchases, but also just how the loan volumes flow. So I think that's true.

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

Okay. Okay, that's fair. And then I just wanted to quickly revisit Collyn's question about capital. I know you guys said the total risk-based capital is generally the constraining factor and you've considered some options there, but I'm curious. In the past, I think you all have sort of talked about keeping your TCE around 8%. You're now at or slightly below that level. I'm just curious if you have targets specific to common equity and how comfortable you are -- or how comfortable you are taking that number lower, if there's sort of a floor on where you'd like that to be?

Kirk W. Walters

I think the general guidance we've given in that area is looking at a TCE in a 7.5% to 8% type range. And if you think about sort of optimizing capital, probably at some point, could bring you Tier 1 common more in a 8% to 9% type of range. And then on the risk-based, I think we've generally given ranges of looking at 10.5% to 11.5% on the risk-based.

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

Okay. Because it seems to me that you guys probably dropped below that 7.5% if you get the kind of loan growth you're talking about in pretty short order.

Kirk W. Walters

Based on our overall projections, I would say that we remain very close within that range. As the loan growth occurs, we also see investment securities continuing to come down a little bit as the year goes and we sort of manage that process there. And of course, we're not running any repurchase activities so that will continue to build as well.

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

Is -- no, that's fair about repurchases. Is a charter conversion necessary to bring the securities balances down though? Because I thought that's the reason you took them up, was for the thrift charter?

Kirk W. Walters

Well, as we go through the year and we continue to see good solid production of residential loans and multifamily loans, which all help us with the QTL test, you do have some opportunity to have trade off there between the securities and the loan portfolio.

Operator

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

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

Just to stay in that -- the subject of the securities portfolio, would the year-end '14 balance be up or down versus the $5 billion you ended '13 at?

Kirk W. Walters

I would expect year-end '14 will be down.

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

Okay, got it. And then looking at your net interest income sensitivity, as you've been adding longer duration fixed-rate assets and then the prospect of adding some broker deposits gets layered in, how much lower do you think you could see your plus 200 basis point NII sensitivity drift? Did [ph] that 7% now came down a pretty good chunk versus 9 30. How much more of a reduction in that NII sensitivity position should we expect over the next couple of quarters?

Kirk W. Walters

The one thing to understand is obviously, this is a projection. It's a 12-month projection going out. So this projection includes the impact of the mortgage backs that we've put on and other activities that are planned in there. And so the mortgage backs and such that we did put on did impact, and more predominantly impacted if you look in the yield curve twist there, some of the short-end in terms of the rates and them going up 100 basis points.

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

Okay, got it. And then the commercial real estate growth during the quarter, what were the origination yields and spreads like, particularly from your New York commercial real estate group and the multifamily focus, how did those compare from 3Q to 4Q yields and spreads?

Kirk W. Walters

Actually, in terms of spreads on the multifamily product quarter-to-quarter, in the case -- what you're referring to, they actually went up quarter-to-quarter.

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

By what magnitude?

Kirk W. Walters

It went up about 14 basis points.

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

Okay, got you. And then in your mortgage banking business, I think you put up 1 million this quarter and guiding to $8 million for the full year. Were there any adjustments to the fourth quarter mortgage banking line item we should be considering, kind of helps you track back to that $8 million full year run rate?

Kirk W. Walters

The -- I think the guidance that we gave was we expect the mortgage marketing gains to pick up [ph] by 45% to that $8 million number. So if you look at the annual numbers, that's the guidance that we gave out.

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

Right. I was just looking at the million this quarter, kind of annualizing that to get to 4, and how are you going to get from 4 to 8?

Kirk W. Walters

The -- if you look overall in terms of this quarter and the activity, we did have some activity this quarter that ended up netting the numbers down in terms of us increasing some of our reserves on repurchases and things of that nature. So I think you really need to look at the third quarter as a much more comparable run rate than what the fourth quarter was.

Operator

And your next question comes from the line of Casey Haire with Jefferies.

Casey Haire - Jefferies LLC, Research Division

I'm all set, guys.

Operator

[Operator Instructions] And your next question comes from the line of Tom Alonso with Macquarie.

Thomas Alonso - Macquarie Research

Just one real fast one for a number that I missed earlier. I think you guys noted that you expected the acquired loan book to decline -- I don't -- I think you gave a dollar amount or a percent this year, I just missed that number. Jack, it was in your sort of beginning comments.

Kirk W. Walters

Yes. The number that we had in the commentary was that we expected the runoff to be around $600 million this year for '14.

Operator

And your next question comes from the line of Kenneth Bruce with Bank of America Merrill Lynch.

Karti Bhatt

It's Karti Bhatt on for Ken Bruce. I apologize, I got on a little late. So if you already addressed this, but I just wanted to look at the CRE average yields. It looks like they dropped 20, 30 basis points quarter-over-quarter. They've been going down, obviously. I just wanted to get a sense of where you're putting the new yields on right now and where do you see that sort of stabilizing?

Kirk W. Walters

Yes. I think the one and third to fourth quarter, the drop that we saw there, part of that was in the third quarter, we did have some loans that were on nonaccrual, return to accrual, that actually popped that yield up a little bit. We did to a question earlier, I mean, when we talk about -- we don't give out yields, but when we talk about, as far as the new originations. When we talk about spreads in general, the spreads on the CRE business is running from the lower side on the high-quality multifamily, maybe down in 175 range over similar maturities, and then that probably runs up to 250 depending on the types of CRE.

Karti Bhatt

Got you. Okay. And then also, I guess on the funding side, you guys are ratcheting up the FHLB advances. Obviously, that's a little bit higher cost of funding. I was just wondering sort of can you maybe talk a little bit about how -- why you guys are doing that and where you expect that to get up to?

Kirk W. Walters

Well, we have been increasing our overall borrowings, and that's primarily the result of having very strong loan growth and having good deposit growth, but not at the pace of our loan growth. And so we have funded the differential via borrowings and also the increase in the securities portfolio. Overall duration of the borrowings is a little over a year that we have on the books. And the cost of those is about -- a little over 60 basis points.

Operator

And your next question comes from the line of John Pancari with Evercore.

John G. Pancari - Evercore Partners Inc., Research Division

Can you talk a little bit about your loan-loss reserve expectation that's implied in your loan growth targets? I just wanted to get an idea about how low that you're willing to let that reserve-to-loan ratio go given the loan growth expectation that you have.

Kirk W. Walters

Yes. I think that -- and we gave -- hopefully, you heard my commentary on the allowance for loan losses?

John G. Pancari - Evercore Partners Inc., Research Division

Yes, I did.

Kirk W. Walters

So that you have a good understanding of it. We're looking at more as to what happened with the flow of loans coming in, all the underlying activities. So if you look at this year, half of our provisioning that we did this year was for loan growth. Every time a loan comes in, we're putting away money for the overall future allowances. And by the same token, a pretty significant part, about 58% of our charge-offs related to loans that we'd set specific reserves on in prior periods. So we have a very detailed process, how we go about this. We have continued to see nonperformers come down fairly significantly, which has impacted all those calculations, and also the new originations coming on are at overall very good risk ratings. And that impacts as well the overall portfolio, and we've had good rating migrations as things have continued to improve. And you need to also remember that the acquired loans have their own mark. So that shouldn't be included. So we haven't put out a specific number on the allowance, but I think we've put out a lot of detail in terms of how we get there and what the coverage is for nonperformers and other things.

John G. Pancari - Evercore Partners Inc., Research Division

So by doing the math, if it's half of your provisions for the growth, then that implies, I guess, that you're reserving at about a 40 to 50 basis point rate or maybe in that ballpark. Does that mean that -- or even a little bit higher, I guess. Does that mean that the reserve ratio could still go lower and possibly near a 75 basis point range?

Kirk W. Walters

Right. I think the reserve could potentially go lower, sure. I mean, because it's all about the underlying calculations in terms of what are the new loans coming on, what are the risk ratings, what kind of risk migration do we see and the stress factors we put in the portfolio. And the fact that we've continued to have decreases in all the nonperformers and such.

John G. Pancari - Evercore Partners Inc., Research Division

Okay. All right. And then secondly, on the QTL requirement in the securities addition, is there likelihood for additional securities purchases to meet the provision or did you pretty much meet it with the fourth quarter additions?

Kirk W. Walters

We think with what we've added in the fourth quarter that we pretty well met it for the year.

John G. Pancari - Evercore Partners Inc., Research Division

Okay. All right. For the full year of '14?

Kirk W. Walters

For the full year of '14.

John G. Pancari - Evercore Partners Inc., Research Division

Okay. All right. And what was the rate and term of the broker deposit put on?

Kirk W. Walters

So far, we've just started putting on broker deposits. But they'll be at -- overnight Fed funds rates less probably -- effective rates, less roughly 2 to 3 basis points.

John G. Pancari - Evercore Partners Inc., Research Division

Okay. And then lastly, the rate in term of the FHLBs that you put on in the quarter?

Kirk W. Walters

Overall, what we've commented to earlier is that in the term side, if you're looking at just the advances, those are 1.5 year to 2 year advances, and I don't have the ratio right in front of me. We did comment on our overall borrowings portfolio, it's about 1.1 years on average.

Operator

And with that, ladies and gentlemen, that concludes our Q&A session. And I will now like to turn the presentation to Mr. Goulding for closing remarks.

Peter Goulding

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

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

People's United Financial, Inc. (PBCT): Q4 EPS of $0.20 in-line. Revenue of $309.7M misses by $1.2M.