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People’s United Financial, Inc. (NASDAQ:PBCT)

Q1 2014 Results Earnings Conference Call

April 17, 2014 8:00 AM ET

Executives

Peter Goulding – Senior Vice President of Corporate Development & Investor Relations

John P. Barnes – President, Chief Executive Officer

Kirk W. Walters – Chief Financial Officer

David Rosato – Senior Vice President & Treasurer

Jeffrey Hoyt – Senior Vice President & Controller

Analysts

David Darst – Guggenheim Securities

Collyn Gilbert – Keefe, Bruyette & Woods

Matthew Keating – Barclays

Casey Haire – Jefferies

Jason O’Donnell – Merion Capital Group

Operator

Welcome to the People’s United Financial, Inc. first quarter earnings conference call. At this time all participants are in a listen-only mode. Following the prepared remarks there will be a question and answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to Peter Goulding, Senior Vice President of Corporate Development and Investor Relations for People’s United Financial, Inc., please proceed sir.

Peter Goulding

Jack Barnes, Kirk Walters, David Rosato, and Jeff Hoyt are here with me to review our first quarter results. Please remember to refer to our forward-looking statements on Slide One of this presentation which is posted on our website www.Peoples.com under investor relations. With that, I’ll turn the call over to Jack.

John P. Barnes

Good morning everyone. As always we appreciate your joining us today. Before we get into the details of the quarter, I’d like to briefly discuss the recently announced transition of Kirk Walters, our Chief Financial officer. Kirk is transitioning out of his role as Chief Financial Officer of People’s United Bank for family reasons. David Rosato who has served as treasurer since 2007 will succeed Kirk as Chief Financial Officer of the Bank. As indicated in our press release, Kirk will continue to serve as Chief Financial Officer of the holding company through December 31, 2014 when David is expected to assume that position.

Kirk will remain as an executive officer transitioning to the role of Senior Executive Vice President of Corporate Development and Strategic Planning. He will also remain a member of the Board of Directors of the company and the Bank. For the past year Kirk has successfully managed the intense responsibilities of his role as Chief Financial Officer and director of this company as well as challenging family health issues.

We are announcing this orderly transition executed according to our corporate succession plan which demonstrates our bench strength. Importantly, Kirk will still report directly to me as a member of the management committee. He will continue to contribute to the company in a role that will leverage his broad experience in the industry and deep operational expertise. We are equally pleased that David, who has contributed significantly to the Bank as treasurer and brings 25 years of experience in banking is well prepared to step into the role of the Bank’s CFO. I feel extremely fortunate to have both of these gentlemen on our management committee.

As part of the transition Michael Ciborowski who has been with People’s United for 20 years and is a long time leader within the treasury group, will become Senior Vice President and Treasurer for both the company and the bank.

Now, I’d like to share my views on our current strategic positioning. We continue to focus on building this franchise for the long term driving revenue growth while tightly managing expenses. To accomplish this, our seasoned bankers are leveraging People’s United’s well regarded brand to form new relationships and deepen existing relationships across our geographic footprint. Consistent with this approach we have recently added a veteran wealth management team based in Hartford Connecticut and an experienced commercial banking team in eastern Massachusetts. Both of these teams join us from other regional banks, demonstrating our continued ability to attract and retain top talent.

This quarter’s results reflect the benefit of investments we’ve made and continue to make in the businesses, products, and services as well as our expanded geographic footprint. Generally speaking, the first quarter tends to be seasonally weaker for many of our businesses and expenses tend to be seasonally higher due to payroll taxes and benefit expenses. We are pleased with our ability to control operating expenses especially given the number of strategic investments that we have made and the increasing costs of regulatory compliance.

Now, I’d like to discuss our first quarter results. On Slide Two, operating earnings were $56.5 million or $0.19 per share while net income was $53.1 million or $0.18 per share. Net interest income on a fully taxable equivalent basis increased to $231.8 million which represents 4% annualized growth during the quarter and 4% growth from the first quarter of 2013. Net interest margin declined by seven basis points to 3.17% compared to 3.24% in the fourth quarter of 2013. We continue to expect our full year margin to be within our guidance range of 3.1% to 3.2% which we provided in January.

End of period loans grew at a 4% annualized rate in the first quarter. This marks our 14th consecutive quarter of loan growth and is a testament to both our relationship managers and our customers. Further, our commercial pipelines remain strong and runoff in the acquired portfolio has settled in at a slower rate as we projected in January. Organic deposits, which exclude brokered deposits, grew at a 10% annualized rate. Success came across our footprint in both retail and commercial growth.

We are stepping up our emphasis on deposits consistent with our long held preference for relationship based banking on both sides of our balance sheet. Our organic deposit mix also improved with solid demand deposit growth and a decline in timed deposit balances from the prior period. We also added approximately $550 million of brokered deposits during the quarter which brings our annualized growth rate for the quarter up to 20%.

The efficiency ratio for the quarter increased to 63.9% from 62.8% in the fourth quarter of 2013 primarily due to marginally lower revenues. It is worth noting that we made two changes that impact our efficiency ratio calculations. The first is related to our operating lease business and the second is related to the new accounting guidance for investments and affordable housing projects. Accordingly, our efficiency ratio has been restated for prior quarters to reflect these changes. As we continue to grow both net interest income and fee income while controlling expenses, we anticipate efficiency ratio progress in the quarters ahead. We remain comfortable with our efficiency ratio guidance provided last quarter.

Asset quality remains strong with net charge offs of 12 basis points and non-performers at 100 basis points, the lowest levels we’ve experienced in five years. As mentioned before, we firmly believe that sound underwriting is the only way to confidently grow a balance sheet. Capital ratios remain solid especially in light of our relatively low risk business model. We believe that we have reached an inflection point following the fourth quarter of 2013 completion of our share repurchase program and anticipate growth in tangible equity in the quarters ahead.

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

Kirk W. Walters

Thank you, Jack. On Slide Three, we provide detail behind the linked quarter change in net interest income on a fully taxable equivalent basis. Fewer calendar days in the first quarter negatively impacted net interest income by $3.4 million. Runoff in the acquired loan portfolio resulted in declines in accretion of $3.1 million. This is more than offset by originated loan growth and higher average securities balances which cause net interest income to increase by $6.7 million and $2.4 million respectively. As we have mentioned before growth in net interest income from the originated portfolio outpacing loss accretion on the acquired portfolio is a positive sign for the quarters ahead.

On Slide Four, you can see a breakdown of the elements contributing to our net interest margin results for the quarter. As we described on the fourth quarter call, fewer calendar days impacted the margin by five basis points which will recover throughout the year as the day count normalizes. New loan volume also negatively impacted the margin by five basis points as new business yields remain lower than the total loan portfolio yield. However, it is worth noting that excluding the acquired loans, new business yields were higher than the non-acquired portfolio yield which is a positive indicator for quarters ahead. Changes in loan mix pressured the margin by a basis point and were offset by lower deposit costs. Lastly, larger average balances and slightly higher yields within the investment portfolio had a three basis point positive impact on the margin.

Slide Five provides a breakdown of the elements contributing to our net increase in loans. The loan portfolio grew $239 million or 4% annualized. This was achieved through leveraging our expanded footprint as well as progress in our heritage markets and strength in product line up. Originated loan growth for the quarter totaled $353 million. As in prior quarters, growth came from a variety of products and geographic areas.

Commercial real estate contributed $75 million of the total originated loan growth while C&I contributed $182 million. Within C&I we saw strength across many categories including traditional C&I, asset based lending, and equipment finance. The commercial portfolio remains broadly diversified with most relationships well below $25 million.

Residential mortgages contributed $100 million of originated loan growth in the first quarter. The residential mortgage portfolio growth was predominately due to solid originations and a continued slowdown in prepayments. Approximately 90% of the residential mortgage originations held for investment were hybrid adjustable rate mortgages. The originated home equity portfolio declined $4 million due to a seasonal slowdown in quarterly advances. It is important to note that 100% of home equity loans are retail originated with 63% of the first quarter originates in a first lien position which has been consistent over the past three years.

We experienced acquired loan runoff of $114 million this quarter compared to $137 million in the fourth quarter and $155 million in the first quarter 2013. We anticipate runoff in all of our loan portfolios including our acquired loan portfolio to remain at low levels. Slow runoff is expected to contribute to healthy loan growth going forward.

You can see on Slide Six a breakdown of the elements contributing to our net increase in deposits. Total deposits increased $1.1 billion supported by annualized organic non-interest bearing and saving deposit growth of 5% and 14% respectively. Retail deposits are seasonally stronger due to tax refund receipts. Similarly, within commercial deposits municipal deposits benefit seasonally from January property tax collections. As you think about commercial deposits net quarter, our municipal business tends to be seasonally lower in the second quarter as their fiscal year end activity negatively impacts loan and deposit balances. The actual business fundamentals within this customer base remains strong, it is merely a timing issue.

Overall, I’m particularly pleased to see growth in commercial deposits. At the commercial bank we are underweight commercial deposits and continue to make changes to further emphasis deposit gathering. We firmly believe that deposits are an important part of the customer relationships.

As we mentioned earlier, we added approximately $550 million in brokered deposits to our funding base during the quarter of which over 80% were money market deposits. Our ongoing focus remains in growing organic deposits and improving the mix of our deposit base. Efforts throughout our franchise to lower deposit costs, particularly in acquired markets, contributed to a further decline in deposit costs of 34 basis points. Acquired deposits represent 12% of total deposits at a weighted average cost of 62 basis points, down 12 basis points or approximately 16% over the last year.

The larger deposit opportunities relate to continued improvement in our deposit mix in favor of non-interest bearing deposits, better utilization of our retail footprint especially in the underrepresented markets of greater Boston and metro New York and emphasizing commercial deposit gathering. These initiatives are expected to support funding, profitability, and customer retention.

On Slide Seven, we take a closer look at non-interest income which decreased $2.6 million on the linked quarter basis. Income from operating leases and insurance added $1.9 million and $1 million to fee income this quarter. As a reminder, most of our insurance renewals take place in the first and third quarters. Cash management investment management grew $400,000 and $100,000 respectively during the quarter.

Lower commercial loan originations this quarter led to a $2.4 million decline in customer interest rate swap income. Bank service charges also decreased $1.3 million from the prior quarter due to seasonally lower overdraft and interchange fees. Loan prepayment fees fell $900,000 due to lower payoffs which helped support future loan portfolio growth. Brokerage commissions declined $500,000 primarily due to weather and an increasing shift to investor advisory relationships rather than commission based transactions. Gain on residential mortgage sales also decreased $200,000 due to higher interest rates.

On Slide Eight, we illustrate the key components of our changes in non-interest expense. As we had mentioned before, we continue to control expenses tightly while investing in revenue producing initiatives and covering the higher cost of compliance. Non-operating expenses increased $4.2 million which is mainly attributable to branch closure accruals. We closed four branches during the first quarter as we continually analyze and optimize our branch footprint.

From an operating expenses perspective professional and outside services declined from the prior quarter by $400,000. Operating lease expenses increased $2.7 million which is partially attributable to a credit loss on a single relationship. As the operating lease business grows, non-interest expense will increase given how this business is accounted for and reported under generally accepted accounting principles. That is, on a gross basis as opposed to a net basis.

Compensation and benefits increased $2.3 million due primarily to seasonally higher payroll related and benefit related and benefit costs. Occupancy and equipment cost increased $1.5 million as a result of higher building maintenance and snow removal costs. The net impact is a $3.8 million increase in operating expenses for the quarter.

The next slide details our efficiency ratio over the last five quarters. As Jack discussed earlier, our efficiency ratio has been restated in prior periods to one that will reflect the impact of our operating business and two, to reflect the adoption of new account guidance pertaining to investments in affordable housing projects. Under GAAP the income from operating leases is reported as a component of fee income while the related expenses, which are primarily depreciation on leased equipment and credit cost are reported as a component of non-interest expense. The change we made in our efficiency ratio calculations are designed to make operating lease income closely resemble net interest income from a loan.

The second item that impacted our efficiency ratio calculation relates to low income housing tax credits. In late 2013 the FASB amended its standards with respect to the accounting for investments in qualified affordable housing projects to allow an investor that meets certain conditions, to amortize the cost of its investment in proportion to the tax credits and other tax benefits it receives and present the amortization as a component of income tax expense. People’s United elected early to adopt this amendment on January 1, 2014.

The change did not have a significant impact on the company’s consolidated financial statement as the amortization previously included non-interest income is now a component of income tax expense. This results in higher fee income and a higher effective tax rate. The effective tax rate for the first quarter is 34.3% which represents an increase of 280 basis points over our previously reported full year 2013 effective tax rate of 31.5%. The increase is primarily due to our adoption of this new accounting treatment for affordable housing investments. Accordingly, our earlier expectation regarding our 2014 effective tax rate of 32.5% has also been revised. We now estimate that our 2014 effective tax rate will be approximately 35%.

Over the past two quarters our efficiency ratio has been impacted by lower non-interest income, higher compliance costs, investments in revenue producing initiatives, all of which mask the tight expense control. We continue to remain very focused on improving operating leverage.

Slide 10 and 11 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 of 1% of originated loans in REO, remain well below our peer group and top 50 bank and are down approximately 30% from 1.42% in the first quarter 2013.

Acquired non-performing loans are not included in these calculations due to the different accounting model applicable to such loans. However, it is worth noting that we are very pleased with their performance as we have seen these balances decline $35 million or 19% to $146 million in the current quarter from $181 million a year ago.

Looking at Slide 11, net charge offs continue to remain low at 12 basis points compared to 18 basis points last quarter and 24 basis points one year ago. Excluding acquired loan charge offs, net charge offs this quarter were nine basis points. These levels reflect the minimal loss content in our non-performing assets and are well below peers. Over the last four quarters, charge offs against specific reserves represent approximately 53% of total charge offs. As such, we understand our credit issues well and typically have very few new credit events each quarter.

Now, I’ll pass it back to Jack.

John P. Barnes

Slide 12 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 compound annual rates of 21% and 19% respectively.

Operating return on average assets for the fourth quarter was 69 basis points compared to 75 basis points in the prior quarter. Our return on average assets continues to be impacted by the ultra low interest rate environment until 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 continued disciplined approach to expenses.

Slide 14 illustrates improvement in our return on average tangible equity since the first quarter of 2013. We expect to see continued progress in this metric as we improve profitability and thoughtfully deploy capital.

On Slide 15 we see that capital levels at the holding company and the bank remain solid with our tier-1 common at 10.1% and our intangible common equity ratio at 8%. 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 allow us to attract and retain exceptional talent as evidenced again this quarter, all of which provides a sustainable competitive advantage.

This concludes our presentation. Now, I will be happy to answer questions that you may have. Operator we are ready for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question is from David Darst of Guggenheim Securities.

David Darst – Guggenheim Securities

Kirk, could you maybe kind of reconcile some of the period end loan commercial balances versus the average for the quarter and is there any change to your outlook for full year loan growth?

Kirk W. Walters

If you look at the end of period end-over-end growth it was annualized about 4%. If you look at averages we were up pretty significantly during the quarter and that’s a reflection of the fact that we had a strong fourth quarter and in particularly in the fourth quarter we had a lot of production that came in in the month of December and so that carried through the averages for the first quarter. In terms of our outlook for loan growth, no, we continue to be very comfortable with our outlook for the overall loan growth. The first quarter tends to be seasonally slower for us and we did see some of that slowness and in particular January/February tend to be a little slower and in March we did see good activity and we overall feel good about our pipelines and where they stand at this point. Jack may want to add a couple of things to that.

John P. Barnes

I agree, we’re encouraged with the activity, particularly in March kind of came back to the pace that we had been experiencing and we’re very comfortable with the guidance that we gave in January in terms of our expectations for the year.

David Darst – Guggenheim Securities

As we look at the acquired portfolio what do you think is the remaining life? I guess based on the repayments this quarter it looks like it will be about three years. Should we assume that that’s the case and the benefit will just be declining or is there any point where you lose some of that margin benefit?

Kirk W. Walters

I think in terms of the acquired loans overall, one we did, as we mentioned, experience a little slower payoff in the first quarter which was a little lower if you annualized that than the guidance we gave which was encouraging. In general, what we have left in the acquired loans are bank type of loans and we would say that the [lives] [ph] probably range three to five years, somewhere in that type of range.

David Darst – Guggenheim Securities

Kirk, is the tax rate change related to the accounting for the affordable housing credits?

Kirk W. Walters

Yes. In essence what happened is under the old accounting the amortization of those credits flowed through non-interest income as a debit or negative to non-interest income and then you had the benefit coming through in the income tax line and now with the new accounting all of that gets netted down in the tax line. So, I think the way to think about it is that non-interest income will run higher and we’ve restated prior periods so you have consistent numbers, and on the other side we are going to have a higher effective tax rate so it’s really a switch in geography.

Operator

Your next question comes from Collyn Gilbert from Keefe, Bruyette & Woods.

Collyn Gilbert – Keefe, Bruyette & Woods

I guess my question is sort of around the balance sheet. Just first, on the funding side, was there a shift there from borrowings to brokered deposits or were those two separate transactions? It just looks like you delevered a bit so I just wanted to get a little bit more understanding of what was happening there?

Kirk W. Walters

As we had indicated in January, we are taking on some brokered deposits as one more lever in overall funding. As those have come on in the pace they came on at, we did use some of those to pay down some borrowings during the quarter and obviously the pace that we take on both of those will be driven a bit by the pace on the loan growth side as well. In terms of deleveraging, in the securities portfolio this quarter there has been opportunities when rates have dipped. We have exited a few of our lower coupon CMOs.

On the other side we are carrying a higher average balance this quarter because as we did build that securities portfolio in the fourth quarter we didn’t necessarily have it on for the entire quarter. So, a little bit like loans, our averages are higher but the difference is end-over-end a little bit lower.

Collyn Gilbert – Keefe, Bruyette & Woods

Sort of the structure of the brokered deposits and the borrowings you swapped, is it the same? You mentioned brokered deposits was money market, is that right?

Kirk W. Walters

That’s the bulk of them but I’ll let David go ahead and answer that question as well.

David Rosato

Yes, the home loan advances is a very short book so think of that as one to three month liabilities and it’s almost been a one-to-one substitution as Kirk said, for brokered deposits which are money markets primarily with a small component of three month to two year CDs.

Collyn Gilbert – Keefe, Bruyette & Woods

You mentioned Kirk the muni deposit flows that we need to be thinking about in the second quarter, how big is your muni deposit base?

Kirk W. Walters

Well, the deposit flows that we tend to reference in the second quarter in terms of the volatility that we see there, it’s probably between maybe $60 million and $90 million. It’s largely an anomaly with the great state of Vermont where the end of the fiscal year, June 30, they have to pay off their debt so they take money out of deposits and they pay off loans and by the middle of July it tends to come back in. So that’s generally the range.

Collyn Gilbert – Keefe, Bruyette & Woods

Then just one last question, I know you had commented that you feel comfortable with the total loan growth outlook that you guys had stated early in the year. How do you think about the mix though? I guess I was somewhat surprised to see the component of resi mortgage growth in the first quarter. Is the mix expectation still going to be the same and this is just an anomaly in the first quarter or how should we think about the components of that growth?

John P. Barnes

I think that what we saw in the first quarter though more modest than the last December quarters, we saw the mix across the board and so we were pleased with the residential growth and the pace there and it was probably a little bit more than we expected but in the commercial book it was pretty much across the board. I think as Kirk said in his comments, different business lines, different loan types, all moving forward and that’s the way we see it happening throughout the year. We had some nice growth in ABL this quarter. That business has a nice pipeline and we seem to be making nice progress there.

The New York commercial real estate was a little slower in the first quarter but the pipeline is back and March was strong. Connecticut has been good. The equipment finance businesses has been very good over the last number of quarters and again, a good solid quarter this time and good pipeline. So, pretty much across the board and continuing to move forward. We also have the new group that we hired in Boston and our new Massachusetts president Pat Sullivan has done a nice job with the existing team. They’ve got a lot of momentum of building pipeline and adding the new team will give all of them additional momentum as they move forward. We’re looking forward to that.

Operator

Your next question comes from Bob Ramsey – FBR Capital Markets.

Bob Ramsey – FBR Capital Markets

I wanted to ask a little bit about efficiency. I know you guys detailed pretty well the changes in the calculation methodology and also said you remain confident with your prior efficiency targets. I think previously you said that by year end you hope to have efficiency in the low 60s. Given that the new methodology sort of helps your efficiency ratio by a couple of hundred basis points, I’m just curious if you’re still comfortable with that low 60s number if you didn’t adjust for the leasing income and expense or whether that’s a part of how you stay in that range?

Kirk W. Walters

I think overall we remain very comfortable with the guidance of being in the low 60s on the efficiency ratio and as we detailed in January, the primary driver of getting that lower efficiency ratio is really going to come through growth in net interest income and so I think our overall comfort level with the pipelines, loan growth, what’s happened on the deposit side which was encouraging, and seasonally first quarter is always tough in terms of expenses particularly payroll taxes, 401k match, and unfortunately we had a lot of snow this year. As we look forward to the balance of the year we do believe all the trends are such that we will end up in the low 60s there.

Bob Ramsey – FBR Capital Markets

I guess maybe asking my question another way, when you all gave guidance for that level to be in the low 60s, it was under the old efficiency calculation given that the new calculation is beneficial by a couple hundred basis points is it possible to get into the high 50s now that you’re using the new methodology?

Kirk W. Walters

It is possible to get into that and when you think about the new methodology, this was something that we had detailed in our K and we had also detailed a couple of other places about it, but yes it is possible.

Bob Ramsey – FBR Capital Markets

We’ve talked about efficiency improvement for a long time and obviously efficiency in the last several quarters has kind of been moving against you given the revenue headwinds. What gives you greater confidence as you look forward today that sort of efficiency is going to turn direction?

Kirk W. Walters

I think the biggest thing is what we’ve detailed over the last few quarters is we believe 90% of the efficiency gains we’re going to have going forward is on the revenue side. We are at this point running a larger balance sheet. We gave a lot of information, particularly in year end, about the headwinds we had last year in terms of accretion run off and certainly those are less this year. If you simply look at the first quarter slide on net interest income and you take out the day count change, you see that the growth in net interest income from originated loans is clearly outpacing the accretion run off and such.

Those are some of the turns that we’ve been looking for and expecting to have. So, it really is going to be topline growth but I think we’ve invested a lot in terms of getting to this point. At the same point, we’ve very tightly controlled expenses to allow us to invest that money and we are feeling very good about the outlook in terms of the guidance we’ve given for the year.

Bob Ramsey – FBR Capital Markets

The last question, and you may have said this earlier, it’s possible I missed it, but are you guys still targeting full year expenses in the range of $830 million to $840 million?

Kirk W. Walters

Absolutely.

John P. Barnes

That is correct.

Operator

Your next question comes from Matthew Keating – Barclays.

Matthew Keating – Barclays

Can you just give us those numbers again on how much seasonal compensation and benefit expenses and the snow removal, what were those in the quarter again?

Kirk W. Walters

Well, what we advertised in the January in the first quarter is typically the higher payroll taxes, 401k match in the first quarter run in the range of $5 million to $6 million. The additional sort of winter costs, if you want to think about winter costs snow removal and different things, probably ran in the number right around $1 million.

Matthew Keating – Barclays

Then on the commercial loan growth that you outline in the [inaudible] here, the $257 million, how much of that was in the New York City multiple family commercial real estate market and what were the pricing trends like in the quarter?

Kirk W. Walters

When we look at the first quarter in terms of the multi business, it was pretty flat in terms of the New York side. Up a little bit but overall pretty flat. My experience in that market there has been that the first quarter there’s always a big rush towards year end to book in a lot of stuff and January/February can be fairly slow and then you see better activity in March. I’d say on the pricing side we overall saw spreads in that business, which is where we tend to think about it, as maybe up just a few ticks from where we saw in the fourth quarter. But like I say, it’s generally my observation has been it’s a little bit of a slower quarter in terms of activity.

Matthew Keating – Barclays

Then going to the balance sheet, are we going to see additional declines in securities portfolios or additional sales of CMOs and repositioning or are we going to be stabilized around the $4.7 billion portfolio?

Kirk W. Walters

I think you can assume that we’ll be generally stabilized around that. We could see a little more run off as we go into the end of the year and some of that is driven by the regulatory side in terms of what we are doing with QTL.

Matthew Keating – Barclays

Can you just talk a little bit more as it pertains on both securities and on the loan to deposit mix and overall liquidity profile, loan to deposit ratio came down but talk about what other actions you might take throughout the course of the year on the liquidity or loan or deposit front?

Kirk W. Walters

I think one, we did see the loan to deposit ratio come down and we were actually pretty encouraged with the organic deposit growth we saw come through and particularly on the commercial side. We are very focused internally on all the different, both retail and commercial, and continuing to get good solid deposit growth and bringing that along as we’ve experienced the solid lending growth we’ve had in a lot of our new initiatives. In terms of our liquidity itself and changes surrounding that sort of mix between brokered borrowings, etc., I’ll have David go ahead and answer that.

David Rosato

I would characterize going forward a general continuation of what we’ve seen. Deposits tend to be seasonally stronger in the first quarter with both commercial and retail deposit growth. Our expectation would be for that to continue. We’re going to continue to layer in brokered deposits and you will continue to see home loan advances come down. So from a liquidity perspective continuation of building of liquidity, building of organic as well as brokered deposits. The net effect on the loan to deposit ratio should be positive. We probably had a little more progress this quarter just because loan growth was a little lighter than expectations.

Matthew Keating – Barclays

Then where do you see the loan to deposit ratio ending for the year?

David Rosato

In the neighborhood of where it is today to slightly lower.

John P. Barnes

We do have a lot of initiatives underway. We’ve talked about some of them in the past, but I do think we’re very encouraged on the commercial side about the focus on cross selling and strongly including deposit gathering and the relationship managers are doing a great job there. Every time we talk about a relationship and a credit need we’re talking about where the deposits are and people are making great progress. We’ve strengthened the incentive programs around that and we also had some additional progress in New York in the old Citizens’ branches. We’ve talked about hitting our target a year ahead of time. We continue to build the averages there nicely and the managers in the New York market are doing a great job of continued progress. It’s all been encouraging.

Operator

(Operator Instructions) Your next question comes from Casey Haire – Jefferies.

Casey Haire – Jefferies

Can you touch a little bit on the fee guidance? I think you guys were calling for fees to be flat with last year’s number and we’re off to a little bit of a weak start here. Are you guys still comfortable with that guidance and if so what do you see as kind of accelerating from here?

Kirk W. Walters

I think we remain very comfortable with the guidance. First quarter is seasonally a lighter quarter for us. We see it in a lot of areas, particularly bank service charges, derivative income, a variety of things. Overall, we remain encouraged regarding the different businesses wealth management in particular but the other businesses cash management, etc. are progressing as expected. The other part is one of the things that even though we’ve given guidance that it was going to be done roughly half year-over-year in terms of mortgage marketing gains, we did experience that being a little lighter in the first quarter but as we look at pipelines and such we’ve seen a nice build in pipelines on that side in late March into April.

Casey Haire – Jefferies

Just to be clear, the cash management and derivatives, does that show up in other?

Kirk W. Walters

Cash management rolls up in bank services charges. The derivative rolls up in other.

Casey Haire – Jefferies

Then apologies if I missed this, but just on the new money yields for loan production, I think it was a five bip drag on the NIM this quarter, it sounded though Kirk as if you were being pretty constructive in where the new money yields are coming on. Should we expect that five bip drag to sort of decrease as the year goes on?

Kirk W. Walters

I think the drag will continue to decrease a bit. The difference is the comments I made was when we looked at the new money yield coming on as compared to the originated portfolios, we were encouraged to see that the rates that we’re coming on at were at or actually above where the originated portfolio yields are. As you know, with the details we give on the acquired loans, that impacts a margin to the tune of about nine basis points so when you do throw that in there, net/net new money is coming in at a lower rate but we try to look at it pound-for-pound against the originated so I think that was an encouraging note.

Operator

Your next question comes from Jason O’Donnell – Merion Capital Group.

Jason O’Donnell – Merion Capital Group

Most of my questions have been answered but I do have one remaining one. With respect to the branch consolidation activities that you’re engaged in, I believe you cited four closures in the first quarter. Do you have an estimate at this point of how many additional branch closings or consolidations we could see later this year and if so, if you could frame out maybe the opportunity here on the cost front that would be helpful?

John P. Barnes

We do have several additional closings planned and in terms of kind of framing out exactly the impact, I don’t have that off the top of my head. I don’t think any of us do around the table. But, we continue to work that equation hard. We’ve obviously, if you look back over the last several years we’ve been pretty active there and continue to rationalize it and watching traffic, consumer behavior, use of all the channels, etc. We generate a lot of assets off of our branch platform as well so we look at the whole picture and we’ll again, as we go forward, continue to be very aggressive at managing that.

Kirk W. Walters

As we go through the year, as Jack mentioned, we will have some additional closings. The other side of the equation is that through the Stop N’ Shop contract we will be opening some additional branches at Stop N’ Shop and like this quarter, typically what we’re closing is traditional branches which are a lot more expensive than our Stop N’ Shop branches in terms of opening it up.

Operator

Your next question comes from Mark Fitzgibbon of Sandler O’Neill and Partners.

Unidentified Analyst

This is actually Matt filling in or Mark. A quick question from you on the core contractual margin. We saw a little bit of compression there this quarter and just assuming the yield curve holds its current shape, do you think we can continue to see this bleed down and maybe crossover into the high twos? Can you give us a sense of how you’re looking at that?

Kirk W. Walters

Well, we gave guidance in January we expect the margin to be between a 310 and 320 for the year. If you look at this quarter 317 and you adjust for the day count, which of course comes back throughout the year, gets you back at around 322 and so we feel really pretty good about the margin guidance that we’ve given and that we will be operating within that guidance this year.

Unidentified Analyst

Then just on the macro level, can you give us a sense where the competition is strongest in the footprint and where perhaps you have some opportunities to garner some share?

John P. Barnes

I would say the competition is strong across the footprint in all the lines of business as it has been historically. There are perhaps kind of growing, although again I don’t think relatively new this quarter or last three quarters, growing competition in places like ABL for instance. There’s been a lot of new entrants into the ABL business in the last few years. But as I think across the different business lines, the competition is strong across the footprint and across the different business lines.

I would say we get back to how we’re positioned, and our size, and our capabilities and we continue to make progress on being a large enough bank to meet the needs of more of our customers across the footprint in middle market and mid corporate levels and we have a relationship based approach and a value proposition that really is very responsive to our customers and very close to them and we can be there. I can meet with customers, senior management of the bank can meet with customers. We’re accessible, we make ourselves available and that differentiates from the very largest players that just don’t have that capability.

Operator

The final question comes from Collyn Gilbert – Keefe, Bruyette & Woods.

Collyn Gilbert – Keefe, Bruyette & Woods

Just a quick follow up question, I know you guys had mentioned in the past at perhaps looking at shifting to a bank charter. Can you comment on that, is that something that is still is getting kicked around or how are you thinking about that?

John P. Barnes

We do continue to kick it around and we’re basically in the same mode if you will that we have been since we withdrew our application, it seems like some time ago now. But the landscape in our view keeps changing and we continue to evaluate the kind of relative strength and weaknesses of the alternatives and haven’t settled at this point. It is certainly not impacting our business in any way.

Operator

Ladies and gentlemen this will conclude the time we have for questions. I’d now like to turn the call over to Mr. Goulding for closing remarks.

Peter Goulding

Thank you again for joining us today. We appreciate your interest in 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. Good day.

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Source: People's United Financial's CEO Discusses Q1 2014 Results - Earnings Call Transcript

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