FirstMerit Management Discusses Q4 2013 Results - Earnings Call Transcript

Jan.28.14 | About: FirstMerit Corporation (FMER)

FirstMerit (NASDAQ:FMER)

Q4 2013 Earnings Call

January 28, 2014 11:00 am ET

Executives

Thomas O'Malley - Investor Relations Officer

Paul G. Greig - Executive Chairman, Chief Executive Officer, President, Member of Executive Committee, Chairman of FirstMerit Bank N A, Chief Executive Officer of FirstMerit Bank N A and President of FirstMerit Bank N A

William P. Richgels - Chief Credit Officer and Senior Executive Vice President

Terrence E. Bichsel - Chief Financial Officer, Chief Accounting Officer, Senior Executive Vice President, Chief Financial Officer of Firstmerit Bank NA and Senior Executive Vice President of Firstmerit Bank NA

Mark N. DuHamel - Executive Vice President and Treasurer

Analysts

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

Terence J. McEvoy - Oppenheimer & Co. Inc., Research Division

R. Scott Siefers - Sandler O'Neill + Partners, L.P., Research Division

Stephen G. Geyen - D.A. Davidson & Co., Research Division

Christopher McGratty - Keefe, Bruyette, & Woods, Inc., Research Division

Stephen Scinicariello - UBS Investment Bank, Research Division

Matthew J. Keating - Barclays Capital, Research Division

Jon G. Arfstrom - RBC Capital Markets, LLC, Research Division

Thomas Alonso - Macquarie Research

Andrew Marquardt - Evercore Partners Inc., Research Division

Operator

Good morning. My name is Kimberly, and I will be your conference operator today. At this time, I would like to welcome everyone to the FirstMerit Fourth Quarter 2013 Earnings Conference Call. [Operator Instructions] Thank you, Mr. Tom O'Malley, you may begin your conference.

Thomas O'Malley

Thanks, Kimberly. Good morning. Welcome, and thanks for joining us on our fourth quarter 2013 earnings call. On the call today, we have Paul Greig, the Chief Executive Officer of FirstMerit; Terry Bichsel, the Chief Financial Officer; Bill Richgels, our Chief Credit Officer; and Mark DuHamel, our Treasurer and Director of Corporate Development. We are happy to take your questions following our prepared remarks.

Please note that the press release issued this morning regarding our financial results, along with supplemental slides, are available on our website at firstmerit.com under the Investor Relations section. I would like to remind you that our comments today may contain forward-looking statements that are subject to certain risks and uncertainties that could cause the company's actual future results to materially differ from those discussed. Please refer to the forward-looking statement disclosure contained in the fourth quarter 2013 earnings release materials and our SEC filings for a full discussion of the company's risk factors. Also, please note that our comments and supplemental slide deck refer to non-GAAP financial measures. A reconciliation of all non-GAAP reference measures can be found in the supplemental deck.

I would now turn the call over to Paul Greig.

Paul G. Greig

Thank you, Tom, and good morning, everyone. Our fourth quarter and full year 2013 results reflect 2 important factors. The first is a transformational effect the acquisition of Citizens Republic Bancorp had on our company, and the second is our continued execution of our successful banking strategy. Together, they contributed to solid performance in 2013 and keep us well positioned for 2014 and beyond.

Today, we reported record net income for the full year of $184 million, which is up 37% versus last year's net income of $134 million. Total revenue for the year was also a record $998 million, up 42% over the year-ago level.

Reported earnings per share in 2013 were $1.18 per share, down 3% from last year. ROA for 2013 was 85 basis points, and return on equity was 7.6%.

Overall, 2013 results include the impact of Citizens' onetime merger-related charges and $1 million of branch consolidation costs or a pretax total of $76 million. Adjusting for these onetime costs, earnings per share increased 21% versus 2012. Return on average assets was a solid 1.08%, and return on average equity was 9.7% on an adjusted basis.

We grew our balance sheet due to the acquisition and organic growth throughout the year. Period-end total gross loans were up $4.6 billion, or 47%, despite a $427 million or 42% decline in gross covered loans.

In 2013, we increased gross originated loans by $1.5 billion, or 17%, and ended the year with $3.5 billion of gross acquired loans in our portfolio.

During the year, we added $5.7 billion in average deposits for a 50% increase. More importantly, almost 90% of that increase came from core deposit growth, up $5 billion, also a 50% increase over the year-ago level.

At the end of 2013, core deposits account for 87% of total deposits. Our ongoing core deposit strategy positions us well relative to our peers, who hold 80% of core deposits.

Our credit metrics have surpassed industry performance for several years and continued to do so in 2013. Full year net charge-offs were 17 basis points versus 53 basis points in 2012. And I would note that our net charge-off levels in the second half of '13 were below this low full year level.

We continued our consistent return of capital to our shareholders, paying $102 million in common and preferred stock dividends. For the year, we added $1.1 billion to our overall capital levels. A successful capital raise prior to the close of the Citizens acquisition contributed $350 million to that total.

Now I'd like to discuss our fourth quarter results. Our performance was strong this quarter. Net income was $57 million, or $0.33 per share, up $0.10 per share from the previous quarter. Adjusting for onetime costs this quarter, our return on equity was 9.2%, and our return on assets was 1.02%.

Average total loan growth was $175 million in the fourth quarter, up an annualized 5% from last quarter. We continued to grow our overall portfolio despite runoff in our average covered loan portfolio, which declined $80 million.

Turning to deposits. Average deposits were $19.5 billion, up slightly from the prior quarter. Average core deposits were $17 billion, up an annualized 6% from the third quarter, again reflecting focus on core deposit growth. Our success in executing this strategy has been vital in maintaining deposit costs at the lower end of the industry.

Net interest income was down from last quarter primarily driven by lower levels of discount accretion. Recall, accelerated discount accretion is a function of customer behaviors, which are difficult to predict.

We are seeing stability in our originated loan and investment portfolio yields. This reflects our disciplined approach to structure, pricing and overall returns as we attract and develop new client relationships. We have a robust process to ensure relationship returns are appropriate.

Non-interest income increased $1.3 million, or 2%, from the third quarter. Capitalizing on revenue synergy opportunities in our expanded markets will be a priority for us in 2014.

Our credit quality performance continues to be exceptional with net charge-offs at 13 basis points and nonperforming assets at 60 basis points.

Our focus on efficiency continues to produce results. In addition to completing the acquisition and conversion on schedule, we also met or exceeded financial goals related to the merger. I'd like to give you some highlights.

We originally targeted $88 million in onetime merger-related charges when we announced the transaction. However, our experienced integration team reduced those costs by $10 million.

As noted on the last call, we identified and achieved $59 million in cost saves from the merger. We continued to examine the combined organization for additional efficiencies. As a result of this work, we will consolidate 26 branches during the first half of 2014.

We have been a leader in actively managing our branch network by looking at traffic patterns, customer channel trends, costs of operation and other considerations. We're not exiting any markets through these consolidations. Customers who bank at affected branches will have access to other nearby locations.

Recall that we consolidated 13 branches in 2011 and 2012. When complete later this year, along with the 8 branches closed in 2013, we will have reduced our post-acquisition branch network by approximately 8%.

We expect to see the same high level of customer retention as we have after past consolidations.

The branch consolidations will result in a cost savings of $4.3 million in 2014, equating to a full year run rate of $9.5 million in cost saves. We also are targeting $5.3 million in other cost savings in '14 related to enterprise sourcing efficiencies. These 2 cost save items, along with several others, total additional expense reduction of $18 million on a full year run rate and raise the total merger cost savings from $59 million to $77 million or an increase of 31%.

We initially forecast merger-related cost savings of 22% of Citizens' expense base. These additional expense reductions increase the total cost savings to 29% of their original expense base.

While we have no control over the economy and its impact on general business conditions, we continue to execute on our business strategy in an expanded footprint. Our total -- our local delivery and prompt response on credit decisions is well received and is a cornerstone of our success.

In my talks with business owners across our footprint, I'm encouraged by what I see as steady economic improvement. Businesses are generally producing stronger financial results than in past years. Uncertainty over the economy is abating, and our customer base is more confident.

Loan utilization rate, at 58% as of 12/31, increased 160 basis points over the linked quarter and were up almost 500 basis points from the prior year level. We believe this translates into more opportunity, however with increased competition. We have a solid track record of competing effectively in all of our markets.

Our liquidity and capital positions are strong, providing our bankers with the ability to serve our customers' needs throughout the Midwest. Our pipeline of new business opportunities remains robust. We will not waver, however, from our disciplined pricing practices. We will continue to profitably make loans and grow the value of the company based on the overall return of each customer relationship. We remain active in our calling program and have support from a vast referral network of centers of influence and clients.

We continue to win more than our fair share of opportunities. We remain selective and disciplined, balancing growth and profitability to generate long-term relationships.

To recap, I'm pleased with our quarter as well as our full-year results. I'm confident that our accomplishments in 2013 place us on a solid footing for 2014 and beyond.

I'll now turn the call over to Bill Richgels for a discussion on credit. Bill?

William P. Richgels

Thank you, Paul, and good morning, everyone. I am pleased with the continuing quality of the loan portfolio and its credit performance this quarter, as well as the positive results achieved for 2013.

As Paul has recounted, we had a lot on our plate this year, and I want to thank my colleagues and team members for producing these results. Our model and discipline was tested and proven through the cycle, and we will continue to apply our best-in-class credit management and framework within our new footprint and with our new customers.

Back to this quarter. Our results include non-covered net charge-offs at an annualized 13 basis points of average loans, an increase of 1 basis point from link quarter and a decrease of 21 basis points, or $4 million, from the year-ago quarter. Year-to-date non-covered net charge-offs were roughly $16 million or 17 basis points of average originated loans, representing a significant improvement from $43 million or 53 basis points of average loans as reported at last year end.

Within the consumer portion of the loan portfolio, non-covered charge-offs were roughly $5 million, up $1.2 million from the link quarter and up $1.4 million from the year-ago quarter. We did see an increase in fourth quarter bankruptcy filings and had suppressed recoveries, which normally offset the charges in this quarter. While an increase at our absolute low levels of consumer charge-offs, this is an excellent result.

Our consumer loan book had average home equity utilization rates of 46%, stable with prior periods. FICO scores within the consumer book are consistent with prior periods and represent a high-quality portfolio currently running at credit scores of 773 for consumer real estate and 741 for installment credits. Average FICO outstanding of the acquired indirect marine and RV book at quarter end is 751. Average FICO of new production within this book has been consistent this year at 763. Our strong performance reflects our discipline in buying at the high end of prime FICO scores.

Fourth quarter bankcard net charge-offs totaled $0.9 million, or 242 basis points, superior in comparison to industry bankcard performance. Bankcard delinquencies were low at 1.31%, down 2 basis points from link quarter and down 41 basis points from the year-ago quarter.

Our legacy non-covered commercial loan portfolio has experienced absolute low levels of charge-off, in fact reporting a $1.3 million net recovery for the quarter and a $513,000 net recovery last quarter. We had a $3.9 million net charge-off in the fourth quarter last year.

Commercial delinquencies increased this quarter from 71 basis points to 90 basis points, and nonperforming assets increased $5.5 million, representing 60 basis points of period-end loans plus other real estate, excluding acquired loans. Within that book, we had 2 credits aggregating $8.5 million that we moved to NPL status late in the quarter due to a weakening financial profiles with likely liquidation or sale profiles within the next 2 quarters. We are collateralized or reserved on these credits. Recall our proactive management of deteriorating credits and the significant benefit our performance received through the cycles. We are not observing a trend within the commercial portfolio.

Within our portfolio, we have a $2.3 million decrease in originated TDRs from the link quarter to $79.5 million, of which $61 million are accruing and performing and $18 million are classified as non-accruing, of which $9.3 million are current on contractual payments but remain on non-accrual.

The allowance for credit losses, which include the reserve for unfunded commitments, totaled $104 million for the fourth quarter and represents 1.02% of originated loans or roughly 2.5x the level of nonperforming loans. This ratio continues to be significantly strong within our industry. Taking into consideration the high quality of the portfolio, the current economic conditions and our disciplined approach to underwriting and portfolio management, we believe these reserves are comprehensive in nature and appropriate given the information available.

I will now turn the call over to Terry Bichsel. Terry?

Terrence E. Bichsel

Thank you, Bill, and good morning, everyone. This morning, I'm going to give you a little more detail on the fourth quarter financials, and then provide input on the drivers of balance sheet and income statement performance for 2014.

To start, as noted in our press release, the fourth quarter included $6 million of onetime merger-related expense and $1 million of costs associated with branch closures. The detail of where these costs are recorded is as follows: $1.8 million in salary and benefits, $3.1 million in professional services and the remaining $1.1 million spread through the other categories. The branch closure cost is recorded in other operating income as a capital cost to sell. Since the acquisition announcement, $78.1 million of onetime costs have been recorded of an expected $79 million total.

Please turn to Slide 7, an aid of the press release supplement, where you will find changes to the net interest margin and asset yields and liability costs.

The net interest margin in the fourth quarter was 3.89%, down from 4.05% last quarter. The rate volume effect on net interest margin from acquired loans was 18 basis points, covered loans 3 basis points, offset by a positive 5 basis points on originated loans.

Acquired loan income was $69.3 million in the fourth quarter and included $13.3 million of scheduled accretion, $3.8 million from payoffs and $2.7 million from accelerated payments.

Acquired loan income in the third quarter was $77.8 million, a $13.6 million of scheduled accretion, $7.3 million from payoffs and $4 million from accelerated payments.

The net interest margin without the paid-in-full and accelerated payments accretion was 3.77% compared to 3.83% last quarter calculated on a similar basis.

On Slide 4, tax-equivalent net interest income was $202.1 million, down $4.9 million from the prior quarter. At a high level, this is explained by the change in payoffs and accelerated payments accretion from the prior quarter.

Before moving on to the other components of the income statement, let me provide some additional information on acquired and covered loans.

Remaining discount accretion on acquired noncredit-impaired loans and investments totaled $154 million at year end, with an average loan and investment life of 2.2 years. Additionally, the reestimation of acquired credit-impaired loans this quarter resulted in the reclassification of $46 million of cash flow from non-accretable to accretable. At year end, $137 million of accretable yield remained to be recognized in net interest income over the remaining average loan life of 3.2 years. Reestimation of the covered loans resulted in $6 million of additional cash flow being similarly reclassed to be recognized in net interest income, net of FDIC indemnification amortization. And at year end, $67 million of accretable yield remained on the covered portfolio, with an average life of 1.5 years.

Returning to Slide 4, provisions for originated, acquired and covered loans totaled $10 million. The provision for originated loans at $1.6 million compares to net charge-offs at $3.4 million, reflecting the strength of originated loan credit metrics. The $5.5 million provision for acquired loans are gross charge-offs net of mark on non-credit-impaired loans and the reestimation of cash flows on credit-impaired acquired loans.

Of note, recoveries on acquired loan charge-offs prior to the merger date are included in other operating income totaling $1.8 million.

The reestimation of cash flows on covered loans resulted in a provision of $3 million. Recall that I previously detailed the reclass to accretable income for both acquired and covered loans.

Fee income is outlined on Slide 5. Fee income of $72.4 million compares to $71.1 million last quarter and includes $1 million of onetime costs in anticipation of branch closures in other operating income. Within the categories, lower service charge income was offset by increase in other operating income. Deposit service charges reflect 2 fewer business days in the quarter and synchronizing products and mapping through the integration. As previously noted, $1.8 million of loan recoveries on acquired loan charge-offs taken prior to April 12 was recorded within other operating income. Additionally, strong swap fee, letter of credit, commitment fees, asset-based lending fees and a gain within our Community Development Corp. investments helped move the level higher.

Expense detail is provided on Slide 6. Expenses were $173.4 million compared to $178 million last quarter, excluding onetime expenses. Salaries and loan processing expenses were down significantly, excluding onetime expenses, reflecting the completion of the data processing conversion in October. Reflected within the fourth quarter is 77% completion on the path to achieving the announced merger-related cost synergies with 100% completion launching into 2014.

Turning now to our expectations for 2014. Guidance is given with the assumption of an improving economy. First, we expect to reinvest back into the investment portfolio, maturing cash flows. Over the next 12 months, $863 million of cash flow is expected from the portfolio at a yield of 2.08%. The reinvestment yield is expected to be between 2.2% and 2.5%, maintaining the portfolio in a duration range of 4.3 years. We will evaluate additional investments based upon cash levels and deposit and loan growth, consistent with our goal to maintain an asset-sensitive balance sheet. The near-term assumption would be to add $200 million.

Our commercial pipelines have remained strong with exceptional 2013 production in our legacy markets, specialty businesses, Chicago and Michigan, Wisconsin, gaining momentum going into 2014. Additionally, the expanded footprint will afford continued opportunity for consumer loan growth. Loan growth in the 5% range is expected. Within this growth, we expect the amortization of the covered book to occur, drawing down toward the expiration of the covered commercial loan component of the FDIC agreement during the first half of 2015. Similarly, the acquired loan portfolio should roll over into the originated portfolio, consistent with the second half of 2013 observations. Detail on the acquired and covered loan portfolios was previously provided on this call.

Emphasis remains on our strategy to originate low-cost deposits in all of our businesses. We believe we can continue to build upon demand in non-maturity deposit categories while rationalizing interest rates paid to the low level of prevailing market rates.

Within the CD portfolio, further opportunity to reprice exists with $1.6 billion in balances maturing over the next 12 months at 68 basis points. 75% of the balances are expected to remain in place at a rate of 20 to 25 basis points. Margin pressure will remain as we move through this low interest rate environment.

The provision for organic loans should match charge-offs unless improvement in delinquency and criticized and classified loans outstrips a required provision for loan growth. In this event, the provision could be less. As we move toward the expiration of the FDIC agreement on commercial covered loans, $35 million of the $44 million of the allowance for covered loans relates to commercial and commercial real estate loans and will be utilized, along with the non-accretable component of this portfolio and the FDIC indemnification asset. Thus, the provision for covered loans should decline over the course of the year.

The need for a provision for acquired loans will continue to be evaluated with the quarterly re-estimations of cash flows on the credit-impaired portfolio. On the non-credit-impaired loans, a provision will be recorded if a charge-off exceeds the remaining unamortized discount on that loan or if the reserve requirement on the remaining portfolio exceeds the remaining unamortized discount.

As noted this quarter, recoveries on acquired loans charged off prior to the merger date will be recorded in other operating income. After all is said, we expect the aggregate quarterly provision to remain within a range around the fourth quarter level.

Our fee income expectations include growing mortgage revenue as we enter the buying season with penetration into the expanded footprint. Additionally, commercial treasury fees, wealth management, card and merchant sales are expected to progress in both the legacy and new footprint.

Excluding onetime expenses, non-interest expense should be down about 4% from the fourth quarter to the first quarter as we recognize a full quarter's impact of the cost synergies from the system conversion. The second quarter should see a slight uptick of about 1.5%, as is normal. With the branch and enterprise sourcing initiatives, expenses in the fourth quarter should be under the first quarter level, having absorbed merit increases, investments and volume-related increases.

As has been our practice, we will continue to examine our organization for enhanced efficiency. This guidance excludes onetime costs associated with the branch closures.

The effective tax rate anticipated should approximate 29.5%.

In summary, we indicated that the low interest rate environment would induce margin pressure. A mitigator to this pressure is the expectation for strong loan and deposit growth. Diversification of revenue will continue with fee-based products and services penetrating the new footprint. Achieving the announced merger-related expense savings and expanding beyond that level should allow stability and growth to pretax, pre-provision income. Our strong credit metrics and ongoing discipline will allow us to preserve this income.

That concludes my remarks. I will now return the call to Tom O'Malley. Tom?

Thomas O'Malley

Thanks, Terry. Kimberly, at this point, we are now ready to take questions.

Question-and-Answer Session

Operator

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

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

Can I start on the expense side? Terry, could you just give us the base? I want to make sure we're on the same page -- the base of expenses in 2013 that you're guiding that 4% reduction in 2014?

Terrence E. Bichsel

Yes. It would be the fourth quarter expense minus the $6 million of onetime expense.

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

So you're annualizing that amount? That's correct?

Terrence E. Bichsel

No, I'm taking that number, and I'm reducing it by 4%.

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

So, but was the guidance for -- maybe I'm confused on the guidance. Was it for full year 2014 to be 4% below full year 2013?

Terrence E. Bichsel

No, it's not. It's to say that it will go down 4% in the first quarter, tick up a little bit in second. And then as the branch closures and the other efficiency initiatives take hold, to get us back down below the first quarter level.

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

Oh, okay, got you. Okay. And then with the cost saves moving pretty nicely, right, up to $77 million, at this stage have you done a full evaluation of Citizens? Or is there still more analysis to do there, which could lead to even additional cost saves?

Terrence E. Bichsel

We do have additional analysis. And it would not necessarily be totally focused on the Michigan-Wisconsin footprint. It would be throughout the organization more generally, looking at straight-through processing, eliminating paper out of our company, enabling the front office by taking transactions out of the front office and moving them into a lower-cost type of channel through automation. So those things will continue and -- as we move out through the year and go into 2015.

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

Okay. And maybe just a final question. Can you help me understand the yield on originated loans, which went down from 3.86% to 3.80% -- that's on Slide 8? But then you have the originated loan yields added 5 basis points to the fourth quarter NIM, Slide 7? Can you just reconcile those 2 items?

Terrence E. Bichsel

Yes, what we do there is we calculate the income off the portfolio as a function of earning assets. So it's a rate-volume effect as opposed to just a straight yield effect. I think the designation on the slide does show it as originated loan or -- originated loan yield as opposed to originated loan rate yield -- or rate-volume effect.

Operator

Your next question comes from the line of Terry McEvoy with Oppenheimer.

Terence J. McEvoy - Oppenheimer & Co. Inc., Research Division

I just wanted to circle back to the $59 million original cost save estimate. Did you say that 77% of that had been achieved through the fourth quarter of this year?

Terrence E. Bichsel

What I mean by that is within the fourth quarter, because we did the conversion in October, then we suspended the need for the outsourced data processor, and throughout the course of the quarter, personnel left our employ, the full effect of that conversion was not experienced in Q4. But launching into the first quarter, the full effect is there.

Terence J. McEvoy - Oppenheimer & Co. Inc., Research Division

And then all 26 branches referenced earlier, those were former Citizens branches, and that helps us get to the $77 million new cost save number?

Paul G. Greig

It's a blend of some legacy branches as well as Citizens branches with a heavier focus on the former Citizens branches. But at this point in time, we really -- it would not be appropriate to talk beyond that because we have not notified our employees and really discussed internally which branches have been identified for closure.

Terence J. McEvoy - Oppenheimer & Co. Inc., Research Division

Understood. And then just, Terry, the 5% loan growth, is that originated or originated net of the runoff portfolio?

Terrence E. Bichsel

That would be the entire loan file that -- so that the amortization of the covered book and the movement of the acquired loans into the originated category, it's all-inclusive and both commercial and consumer.

Operator

Your next question comes from the line of Scott Siefers with Sandler O'Neill.

R. Scott Siefers - Sandler O'Neill + Partners, L.P., Research Division

Let's see. I guess, Terry, maybe first question is most appropriate for you. I was just hoping you could help me bridge the gap on the cost savings. It sounds like on an annual basis you've just got under $10 million that you're expecting from the branch closures, but you noted the other $5 million from some other initiatives. And then I guess there must have been another roughly $3 million or so to get to the $18 million number that you talked about. Can you just maybe chat a little bit about what's in that all-in number that is in excess of the $9.5 million plus the $5.3 million?

Terrence E. Bichsel

The effect within 2014 -- as we begin to implement the branch closures, the effect on 2014 is $4.3 million. And then once complete, the full year effect going into 2015 would be $9.5 million. On the -- what we have for enterprise sourcing would be the principal activity for the remainder. The effect on 2014 would be $4.5 million, and the annual effect once we exit 2014 would be approximately $7.3 million. And then we have a group of other productivity initiatives that the effect's $800,000, but the annual full year effect of it would be $1.950 million. So that rounds it up to the $18.8 million or $19 million.

R. Scott Siefers - Sandler O'Neill + Partners, L.P., Research Division

Okay, perfect. And then now within the branches that you're closing, are you just going to shutter those branches? Or are some of them or all of them going to be sold? How are you thinking about that dynamic?

Terrence E. Bichsel

We really haven't identified for purposes of this call onetime costs associated of that -- with that, but it could range between $5 million and $6 million, Scott. And as you know, the branches that would be in Wisconsin, we would have put a fair value mark on those loans when we opened the balance sheet. So depending on how that stands up against the actual execution to sell would determine the amount of onetime charge associated with that. And then we would have just a smaller component of the present value of the remaining lease terms on some of the branches.

R. Scott Siefers - Sandler O'Neill + Partners, L.P., Research Division

Okay. And then I guess just a separate question just on the securities portfolio. The expected reinvestment yield potentially is significantly higher than what's going to roll off just in terms of natural cash flows. I mean, is it just as simple as the high end of the curve having moved up on average from what's running off? Or are you making any changes into the kinds of things that you're reinvesting in? Or what are all the dynamics at play there?

Terrence E. Bichsel

We're really not making any changes to the expectation on our duration of the file. But Mark, do you have something further you'd like to add?

Mark N. DuHamel

Scott, there's -- we don't expect any changes in the portfolio duration. It'll remain right around 4.3 years. We'll continue to invest in the same securities that we did throughout 2013, principally 15-year MBS and short CMO packs.

Paul G. Greig

Scott, let me go back to your branch question for a second. There is not an expectation that we will be selling the business of a branch, i.e. a branch with loans and deposits. The branches that are consolidated or -- that are targeted will be consolidated into another nearby branch with the expectation that a very high percentage of the business will be retained, as has occurred in the other branch consolidations over the last several years. So the expectation is not to sell a branch as an ongoing business. The real estate may be sold, but the deposits and loans will be transitioned to another branch nearby.

R. Scott Siefers - Sandler O'Neill + Partners, L.P., Research Division

Okay, terrific. So ideally, no -- well, minimal loss of either loans, deposits, et cetera?

Paul G. Greig

That is a goal.

Operator

Your next question comes from the line of Stephen Geyen of D.A. Davidson.

Stephen G. Geyen - D.A. Davidson & Co., Research Division

Bill, a question for you on the kind of pulling different pieces of the whole conversation this morning about credit provisions, expecting -- well, just looking at the quarter results. Acquired loans -- a significant jump in provisions for acquired loans, on, I guess, net recoveries. And then also, somewhere else in the conversation, you talked about the provisions matching the charge-offs. So are we -- putting it all together, are we expecting net charge-offs to be a little bit higher in 2014?

Terrence E. Bichsel

I think what I would direct you to is the commentary in the prepared remarks. We said expect the aggregate quarterly provision to remain in the range around the fourth quarter level. And that would include all 3 components: the originated, the covered and the acquired. And as far as the charge-offs on the acquired, I tried to make the point that the recoveries were being recorded in other operating income this quarter for a total of $1.8 million.

Stephen G. Geyen - D.A. Davidson & Co., Research Division

Got it, okay. Very -- that's helpful. And maybe a couple of questions on non-interest income. A couple of line items down quarter-to-quarter. Specifically, if you can talk about deposit service charges and credit card fees?

Terrence E. Bichsel

On the deposit service charges, as I noted, we had 2 fewer business days in the quarter. And then we synchronized the account mapping and product offerings for both companies through the integration, matching our competitive and the regulatory landscape. So we'll be focusing upon growing our liquidity services, which is a key focus of our businesses, and growing that category over the remainder of 2014. On the credit card fees, the -- a little bit of that found its way on a variance into the ATM and other category. And so if you'd add the 2 of those together, they're still down a little bit just based on the activity in the business days between the quarters.

Stephen G. Geyen - D.A. Davidson & Co., Research Division

Okay. And last question. The equipment expense up a bit. Is that kind of a onetime event or some onetime associated costs or...

Terrence E. Bichsel

Yes, it is. Yes, it is. The expenses for equipment maintenance, we caught it up in the fourth quarter from the prior periods for about $500,000, and we caught up equipment depreciation. As we were going through the conversion process, we had some assets that needed to get on to the fixed asset system and rolled the depreciation forward. And that was another $400,000. So that would not be moving into the future.

Operator

Your next question comes from the line of Chris McGratty with KBW.

Christopher McGratty - Keefe, Bruyette, & Woods, Inc., Research Division

Just to follow up on the service charge question. Obviously, first quarter is tough for the industry. But is the -- I understand the changes that were made in the fourth quarter. But there's a $19 million service charge line for 4Q, is that -- will that exhibit seasonality from here in the first quarter? Or are you saying that there's other things that are in the works?

Terrence E. Bichsel

I think that we always -- as the industry does with fewer business days, you'll see some seasonality. But we're looking to grow that as we move out through 2014.

Christopher McGratty - Keefe, Bruyette, & Woods, Inc., Research Division

Okay. And the -- and I may have mentioned -- on the size of the securities portfolio, did you say it was going to grow by about $200 million for the year?

Terrence E. Bichsel

Yes, we said dependent upon the excess cash that we had on the balance sheet and our loan and deposit growth, you could see us making additional investments.

Christopher McGratty - Keefe, Bruyette, & Woods, Inc., Research Division

Okay. Just last one on the Citizens promised cost saves. Can you help me -- maybe I misunderstood. The $59 million of cost saves that you previously promised, how many of those have already been realized?

Terrence E. Bichsel

What we said was that 100% of them would have been achieved by the time we got to the end of the fourth quarter.

Operator

Your next question comes from the line of Steve Scinicariello with UBS.

Stephen Scinicariello - UBS Investment Bank, Research Division

Just a couple of quick ones on loan growth. First up, I was just curious what the number is on the pipeline. I think it was like $2.5 billion last quarter. Just kind of curious what it was this quarter.

Paul G. Greig

Yes, it's substantially the same as the last quarter.

Stephen Scinicariello - UBS Investment Bank, Research Division

Got you. And then as you kind of look out across your different geographies, especially now that Citizens has been integrated, just kind of curious, where do you see kind of the best opportunities for loan growth in 2014 maybe by geography and by segment, too?

Paul G. Greig

Yes, we really have not -- we've shied away from reporting by geography as we're a line-of-business reporting company. But the pipeline, if you were to look at the spread across the geography, is pretty consistent across the geography. We have built a significant pipeline in both Wisconsin and in Michigan. Chicago continues to be very strong and our legacy market of Ohio and the bit that we touch in Pennsylvania is strong. There's no one area that would clearly be dominant over the balance.

Operator

Your next question comes from the line of Matthew Keating with Barclays.

Matthew J. Keating - Barclays Capital, Research Division

My first question would be for Terry. Terry, if you adjust for the $1 million branch closure, your other operating income line was up considerably. I know you mentioned the $1.8 million loan recovery was in there. But I think you also mentioned there was a gain on Community Development Corp. investment. Can you size the magnitude of that gain in the quarter?

Terrence E. Bichsel

Yes, it was probably $0.5 million. And typically, those get recorded in the fourth quarter.

Matthew J. Keating - Barclays Capital, Research Division

Okay. So, I mean, I think that number you adjust for the branch charges is up like almost -- it seemed like $6 million linked quarter. So you have $2 million from the loan recoveries. Do you think the other things you mentioned, I guess it was swap fees and letters of credit, commitment fees, is that a sustainable run rate? Or those tend to be a little bit more elevated in the fourth quarter generally?

Terrence E. Bichsel

The other thing that I would note is periodically, we do experience some gain on resolving covered loans. And so that will find its way in there. As well as, again, the business-related fees, yes, that's an area of focus for us in terms of offering those business services.

Matthew J. Keating - Barclays Capital, Research Division

Got you. And then my last question would be for Paul. I think you mentioned in your prepared remarks that originated loan growth in the full year of 2013 was up about 17%. That's a pretty remarkable number. Can you just talk about the drivers of that? Is that primarily just a function of hiring new commercial lenders and then seeing that grow? And while we talked about sort of the 5% total loan growth expectation for 2014, how do you feel about sort of the trend in the originated loan portfolio? Can that continue at the pace in '13? Or was there something significant about this year that's unlikely to repeat?

Paul G. Greig

Yes, the loan growth we had was certainly a function of being effective in our new markets and continuing our effectiveness throughout our legacy markets. There also was the impact of some of the loans moving into the originated bucket. And Terry, if you can comment on that? And then as well, we had increased utilization. As I talked about in my comments, we were 500 basis points up over the year-end at '12, and we were a little over 1.5% up in the fourth quarter versus third quarter. So there certainly was that positive impact as well.

Terrence E. Bichsel

And following on your commentary, Paul, there is approximately $167 million that moved from the acquired to the originated portfolio during the course of the quarter. I should note that there was about $67 million of that movement in the acquired portfolio where it moved down quarter-to-quarter that was a reduction in the credit-impaired portfolio during the course of the quarter. So that, in effect, was part of why we had the reclassification from non-accretable to accretable that I noted in my prepared remarks for the go-forward period.

Operator

Your next question comes from the line of Jon Arfstrom with RBC Capital Markets.

Jon G. Arfstrom - RBC Capital Markets, LLC, Research Division

Terry, I hate to do this, but I have another expense question. The Q4 of '14 expense number that you were talking about in your prepared comments, how much of the branch closure expenses would be in that run rate?

Terrence E. Bichsel

The Q4 of '13?

Jon G. Arfstrom - RBC Capital Markets, LLC, Research Division

You talked about Q4 of '14 coming back down to around the Q1 levels.

Terrence E. Bichsel

Okay, and how much of that cost savings would be embedded in there before [ph]? It would be about $2.4 million.

Jon G. Arfstrom - RBC Capital Markets, LLC, Research Division

$2.4 million? So call it roughly half of the total expected run rate from those?

Terrence E. Bichsel

The run rate exiting 2014 is $9.5 million. So if you take the $2.3 million and multiply it x 4, which -- that's the quarterly savings from the branch cost savings.

Jon G. Arfstrom - RBC Capital Markets, LLC, Research Division

Okay, I see what you're saying. Okay, got it. That is helpful. Paul, in terms of the core loan yields, I know in the past you talked about the clients deserve better pricing because credit is better, and that makes sense to me. I guess the question is how much more severe is the pricing? Or is that pressure easing at all in your mind?

Paul G. Greig

There's continued competition, without a question. And we talked in general about the economy improving. With an improving economy, you are getting improving credit quality. So there certainly is a pressure both from competition as well as from the improvement of a client's cash flow and a client's balance sheet.

Jon G. Arfstrom - RBC Capital Markets, LLC, Research Division

Okay. So this is something that you expect to persist for a bit at least?

Paul G. Greig

We see it persisting into 2014, yes.

Jon G. Arfstrom - RBC Capital Markets, LLC, Research Division

Yes, okay, okay. And then any updated acquisition thinking? What's the corporate view at this point?

Paul G. Greig

Well, 2013, the focus has been on the seamless integration of Citizens and a smooth transition, maintaining customer service levels and customer retention. With that being completed in the October time frame, we're ready to look at additional opportunities to enhance the value of the franchise. We're going to stick to the disciplined approach that we've used to evaluate M&A opportunities. If you'll recall, we've looked at over 40 transactions over the last few years and remain highly selective. I think we're well positioned to grow organically. It's our first priority, but we're also going to look at M&A opportunities as they emerge in our Midwestern markets.

Operator

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

Thomas Alonso - Macquarie Research

Just real quick, a follow-up on that other operating income line just to make sure that I understand sort of what you guys are saying there. So if we look at that x all kind of the onetime items that were going on in the quarter, that's a good run rate on a go-forward basis?

Terrence E. Bichsel

Yes, it is. I think so.

Operator

Your final question comes from the line of Andrew Marquardt with Evercore.

Andrew Marquardt - Evercore Partners Inc., Research Division

And just to put a number on that, that's on the other income from Tom's question, that's 12.5 kind of x the onetimers if I've followed your math correctly. Is that fair?

Terrence E. Bichsel

I don't want to give you a precise number on that. Fee income, as it flows from our clients, ebbs and flows, but we would be growing that category as we move out through the year.

Andrew Marquardt - Evercore Partners Inc., Research Division

Got it. And were there -- did you mention earlier that there were -- that included in there are some resolutions related to covered loans that were separate from the $1.8 million recoveries that were cited earlier? Or is that kind of one and the same?

Terrence E. Bichsel

No. In the quarter, there was $800,000 from gain on covered loans that were resolved. That's in the -- actually, that's in the body of the press release this quarter.

Andrew Marquardt - Evercore Partners Inc., Research Division

And that's separate from the $1.8 million recoveries?

Terrence E. Bichsel

It is.

Andrew Marquardt - Evercore Partners Inc., Research Division

Got it. And then in terms of the branch consolidation, that's helpful color in terms of the savings. Did you mention, maybe I missed it, in terms of what any related onetime costs to kind of shut those down would -- might be?

Terrence E. Bichsel

Yes, we had indicated earlier -- $5 million to $6 million, I believe, is the number that I said earlier. And that depends on the valuations that we applied to many of the branches that we had at Day 1 -- our opening balance sheets. So to the extent that those fair market values that we established hold up, there wouldn't necessarily be the level of onetime costs associated with the closures. There would be some associated with the present value of the remaining lease terms.

Andrew Marquardt - Evercore Partners Inc., Research Division

Got it. And then lastly just on capital. Can you just remind us what -- kind of the target you have for capital, your Tier 1 kind of Basel III, about stable 9.5; TCE 7.7%. What level is -- are you guys most comfortable with internally in terms of a goal or a hurdle rate?

Paul G. Greig

Yes, we don't have a specific goal or hurdle rate. We feel that the -- let's talk TCE, the tangible capital equity level of 7.71%. It's up from 7.44% at September 30. We think it gives us a strong and stable capital position. And capital management strategy is really aligned with maintaining these tangible levels that can support organic growth and other profitable strategies such as the recent acquisition of Citizens Republic. So we certainly feel that we have, going into the Basel III, alignment of capital across the industry. We feel that we're at acceptable levels for the fully phased-in. And as you know, part of our capital strategy has been paying a reasonable dividend throughout the whole economic crisis and throughout the history of the company. Dividend is important both to our retail as well as to our institutional shareholders. So that, obviously, is an important component of our overall capital strategy.

Operator

There are no further questions. I would like to turn the call back over to Mr. O'Malley for any closing remarks.

Thomas O'Malley

Thank you. Thanks for all participating on the call, and we look forward to talking with you next quarter. Have a great afternoon.

Operator

Thank you. That concludes today's conference call. You may now disconnect.

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!