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People's United Financial (NASDAQ:PBCT)

Q1 2012 Earnings Call

April 19, 2012 8:00 am ET

Executives

Peter Goulding -

John P. Barnes - Chief Executive Officer, President, Director, Member Of Executive Committee, Member Of Treasury & Finance Committee, Member Of Enterprise Risk Committee, Chief Executive Officer Of The People's United Bank, President Of The People's United Bank And Director Of The People's United Bank

Kirk W. Walters - Chief Financial Officer, Senior Executive Vice President, Director and Member of Enterprise Risk Committee

Analysts

Damon Paul DelMonte - Keefe, Bruyette, & Woods, Inc., Research Division

Collyn Bement Gilbert - Stifel, Nicolaus & Co., Inc., Research Division

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

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

David Darst - Guggenheim Securities, LLC, Research Division

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

Casey Haire - Jefferies & Company, Inc., Research Division

Operator

Good day, ladies and gentlemen, and welcome to the People's United Financial, Inc. First Quarter Earnings Conference Call. My name is Stacy, and I'll be your conference moderator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to Mr. Peter Goulding, Senior Vice President of Corporate Development and Investor Relations for People's United Financial Inc. Please proceed, sir.

Peter Goulding

Good morning. And thank you for joining us today. Jack Barnes, President and Chief Executive Officer; Kirk Walters, our Chief Financial Officer; along with Jeff Hoyt, our Controller, are here with me to review our first quarter results. Before we get started, please remember to refer to our forward-looking statements on Slide 1 of our presentation, which is posted on our website, peoples.com, under Investor Relations. With that, I'll turn the call over to Jack.

John P. Barnes

Thank you, Peter. Good morning, everyone. We appreciate you joining us today. On Slide 2, we provide an overview of our first quarter results. For the quarter, operating earnings were $60.6 million or $0.18 per share with net income of $58.6 million or $0.17 per share. As was somewhat expected, the operating net interest margin declined to 4.01% compared to 4.07% operating margin in the fourth quarter. The decline in the margin is the result of lower loan yields due to continued repricing of the originated loan portfolio and deposit growth outstripping loan growth, which was partially offset by lower funding costs.

Total loan growth, including runoff in the acquired portfolios amounted to 1.7% on an annualized basis, which was entirely funded by deposit growth. Originated loan growth was strong and amounted to 7.5% on an annualized basis. Deposit growth for the quarter reached 8.7% on an annualized basis. Deposit rates declined by another 6 basis points to 44 basis points in the quarter. Noninterest income improved compared to the fourth quarter due to growth in the gain on sale of residential loans, investment management fees, brokerage commissions and insurance, which was partially offset by decreases in loan prepayment fees and service charges.

The efficiency ratio rose to 63.2% from 61.8% in the fourth quarter. This is a result of seasonally higher operating expenses and lower net interest income due to slower loan growth and a decline in the net interest margin. Capital ratios remained strong. We continue to deploy capital thoughtfully through organic growth, dividends, share repurchases and our acquisition strategy. The tangible equity ratio stands at 11.7% as of first quarter 2012, which is well in excess of our peers.

On Slide 3, we discuss several recent initiatives. First, we launched our brand messaging, "What know-how can do," during the quarter and have received strong positive feedback throughout our footprint. We continue to roll out this messaging through various media channels including our website, billboards and television commercials. Second, as was announced in our press release, we increased our dividend for the 20th consecutive year. As of yesterday's closing price, and adjusting for the new dividend rate of $0.64 per share annually, the annual dividend yield on our common stock is 5%. Third, we repurchased 4.5 million shares, or $56 million, at a weighted average price of $12.54 per share. This results in approximately $3 million of annual dividend savings. We have 13.5 million shares remaining in our existing share repurchase authorization.

Next, we announced the acquisition of 56 Citizens branches in the New York metro area on February 28. 52 of the branches are situated in Stop & Shop supermarkets and 4 are traditional branches. 29 are located on Long Island, 8 are in Westchester County and 6 are in the boroughs of the New York City. All of which are key areas of focus for People's United. A substantial opportunity exists to expand the acquired deposit base as Citizens branches had average in-store deposits of $4 million. Our current Connecticut in-store franchise averages $29 million in deposits based on the location of the original account opening or $40 million in deposits if you account for where the customers conduct their banking activity. We look forward to closing this transaction in late June and begin to address in earnest the growth potential that exists in our New York metro franchise.

Fifth, and perhaps most importantly, as we discussed and as demonstrated in our originated loan and deposit growth and certain fee income business lines, this franchise has momentum. We are particularly pleased with the momentum across wealth management, insurance, brokerage, cash management and payroll service product lines. We have every reason to believe that the momentum will continue as we attract and retain top talent while remaining completely focused on best serving our customers and maintaining our competitive, conservative credit culture.

Along these lines, we recently hired additional talent to support our New York commercial lending unit. This unit will benefit from the deepening presence afforded by the upcoming acquisition of select Citizens branches in New York metro area. For years now, we have participated in the New York Commercial Real Estate lending market. However, as with our asset-based lending portfolio, it is underrepresented relative to the size and geography of our franchise. Our asset-based lending business has made significant progress and is up 18% on a quarter-over-quarter basis. We also recently strengthened our wealth management team, deepening our talent in both Fairfield County and the Boston market.

Now I'd like to turn it over to Kirk.

Kirk W. Walters

Thank you, Jack. On Slide 4, you can see a breakdown of the elements contributing to our 4.01% reported and operating margin for the quarter. As you'll recall, our fourth quarter operating net interest margin was 4.07%, and the GAAP margin was 4.16%. The difference was attributable to 9 basis points of cost recovery income related to Bank of Smithtown as a result of our fourth quarter reassessment. The effects of lower loan yields further reduced the margin by 9 basis points. Finally, we had one less calendar day in the quarter, which adversely affected the margin by 3 basis points. Partially offsetting these negatives was a benefit of 6 basis points due to lower funding rates.

On Slide 5, you can see that our operating net interest margin declined to 4.01% in the quarter. The decline was somewhat expected and is primarily a result of the continued low interest rate environment where loan repricings are outpacing our ability to lower deposit costs. We also experienced increased deposit growth alongside slower loan growth.

Our strong margin is a product of our low-cost stable funding, good loan mix and solid capital levels, all of which means that we do not need to stretch on credit. In addition, our margin is and will continue to be supported by $1.3 billion of accretable yield resulting from 5 acquisitions closed within the last 2 years. Let me provide a little more detail on the next slide.

Slide 6 links closely with our discussion of the net interest margin. For the quarter, interest accretion on acquired loans totaled approximately $60 million, down from $68 million in the fourth quarter. And the carrying amount of acquired loans at period end totaled $3.4 billion.

Slide 7 provides a breakdown and the elements contributing to our net increase in loans. As Jack noted earlier, the loan portfolios produced 7.5% quarter-over-quarter annualized originated loan growth or total loan growth of 1.7% quarter-over-quarter annualized. We believe we operate in the best commercial banking market in the United States and are one of the few banks that can credibly offer the full product suite of a large bank while maintaining our outstanding customer service standards.

Originated loan growth for the quarter totaled $314 million. As in prior quarters, growth came from a variety of products in geographic areas. Originated commercial loans increased $187 million quarter-over-quarter, which included increases of $153 million and $73 million from C&I and equipment financing, respectively and a $39 million decline in commercial real estate originated loans.

Within C&I, we saw strength across all categories, but I would highlight 2 businesses. In particular, PCLC, one of our equipment financing businesses, grew originated loans $19 million in the quarter. And encouragingly, People's United Equipment Finance grew originated loans $54 million. With strong pipelines, we feel loan growth momentum will continue to build in the second quarter.

Originated residential mortgages grew by $156 million, or 20% annualized. Of the residential mortgage originations, approximately 87% were hybrid adjustable-rate mortgages. 64% of the pipeline is jumbo product. First quarter 2012 origination to average loan size was $599,000. The average FICO score for the first quarter originations was 754 with an average LTV of 62%. Originated Home Equity loans declined by $11 million. We are in the market with a promotion right now and are seeing good traction.

Loan closings totaled $126 million in commitments compared to $150 million in the fourth quarter of '11. In terms of recent originations, the average line size of the first quarter '12 originations was 121,000. The average FICO score for the first quarter was 759 with an average combined loan-to-value of 57%. 100% of Home Equity loans are retail originated.

You can see on Slide 8 a breakdown of the elements contributing to our net increase in deposits. We break out the deposits into retail and commercial, which reflects the way we manage the business. In any given quarter, one segment may be more volatile than another, but we feel good about our deposit base and our ability to grow from here, especially given overall growth of 8.7% for the quarter. Deposit growth was partially impacted by bringing $275 million in deposits onto the balance sheet. This balance consisted of $135 million from a new cash suite product, $57 million from checking accounts and $83 million from customer credit balances of people's securities, all of which impacted commercial deposits.

Our consumer deposit base grew $310 million while the commercial deposit base increased $142 million. All of this occurred while overall deposit costs fell by 6 basis points to 44 basis points. This decrease was experienced across all product lines. In addition, we continue to manage a mix shift from time to demand and savings or money market deposits within the acquired institutions. Deposit mix improved as non-interest-bearing and savings deposits represented 74.8% of total average deposits in the first quarter versus 73.7% in the fourth quarter of 2011. Average total deposits were up $246 million quarter-over-quarter. Annualized deposit growth was greater than annualized loan growth.

As you heard me say before, loan growth funded entirely by deposit growth is the best way to drive earnings. We believe the second and third quarter will be seasonally stronger from a loan origination perspective, making good use of the additional deposit funding we gathered this quarter.

Slide 9 is an important lens for us as we think about the growth that has occurred in the company and will occur in the quarters ahead. We have managed to successfully grow loans and deposits while maintaining excellent asset quality. We know that if we grow loans and deposits per share, increase the income and continue to reduce costs, we will produce greater recurring earnings per share. It is really very simple. Over the past 2 years, loans per share and deposits per share have grown at compound annual rates of 16% and 18%, respectively.

Slide 10 provides a breakout of noninterest income. Our noninterest income increased slightly from the fourth quarter. Loan prepayment fees and bank service charges declined by a total of $3.2 million, which was offset by higher gain on sale of residential loans of $1.9 million, increased insurance revenue of $1.2 million and increased trust and brokerage fees of $900,000. Additional fee income areas that have demonstrated momentum are cash management and payroll services, which increased 20% and 68%, respectively on a quarter-over-quarter annualized basis. Some seasonality was noted in the insurance business. The first and third quarters are always seasonally stronger.

On Slide 11, you can see that our noninterest expense base improved to $209 million from $230 million last quarter. The largest part of this decrease was in non-operating expenses, which declined $20 million to $3 million in the current quarter. This quarter, non-operating expenses including -- included $2.4 million of severance and $600,000 of other one-time charges. In addition, as part of our ongoing effort to maximize that work, we recently announced the sale of our Leominster branch at a reasonable deposit premium.

As we think about noninterest expense, we're focused on the operating noninterest expense base. The first quarter run rate expense base was $205.6 million, down from $207.2 million last quarter. We expect that during the course of 2012, we will be steadily walking the quarterly run rate down such that are targeted full-year operating expense base should be in the range of $800 million to $830 million, which includes the impact of the Citizens branch transaction.

Going forward, positive expense reduction initiatives include a favorable trend in fraud-related charges, lower-than-anticipated rent expense, reduced depreciation expense, savings and check processing charges and courier fees due to negotiated contract reductions and a reduction in core processing IT expense.

On Slide 11, we provide a historical perspective of our efficiency ratio. As you may have noted in our non-GAAP reconciliation contained within the earnings release, we have made a change in the calculation of the efficiency ratio in order to treat purchase accounting related fair value adjustments more consistently. In recent years, total noninterest expense, the numerator, was adjusted to exclude the effects of fair value adjustments related to acquired premises and equipment while total revenue, the denominator, was suggested to exclude the effects of fair value adjustments related to liabilities assumed.

Prior to the adoption of FASB statement 141R in 2009, total revenue was also adjusted to exclude the effects of fair value adjustments related to acquired loans. This practice, however, became impractical under the accretable yield accounting model for acquired loans, which has been applied to all portfolios acquired since that date. In the interest of simplicity and transparency, beginning this quarter, the efficiency ratio will no longer reflect any purchase accounting-related adjustments other than normal amortization of intangibles. All prior periods have been adjusted so as to be presented on a comparable basis. The impact of this change in the efficiency ratio for each of the periods present was a favorable 80 to 90 basis points.

The efficiency ratio rose to 63.2% for the first quarter compared to 61.8% in the fourth quarter, but was down from 65.4% in the first quarter of 2011. This is essentially the result of seasonally higher operating expenses and lower revenue growth driven by slower loan growth and a declining net interest margin. However, loan pipeline turns significantly stronger this quarter than last quarter, and we are seeing higher utilization rates on commercial lines consistent with improved borrower confidence. We remain on track to reach our 55% efficiency rate, run rate goal in 2013.

Slides 13 and 14 are a reminder of our excellent credit quality. We did see an improvement in nonperforming assets this quarter. NPAs decreased from $336 million to $316 million, a $20 million decrease. Nonperforming assets at 1.85% of originated loans and REO remained well below our peer group and Top 50 banks.

Looking at Slide 14, net charge-offs improved to 22 basis points compared to 29 basis points last quarter and remain at approximately 30% of our peers. These levels continue to reflect the minimal loss content in our nonperforming assets. Over the last 4 quarters, charge-offs against specific reserves represent approximately 45% of total charge-offs. As such, we understand our credit issues well and typically have very few new credit events each quarter. The largest component to this quarter's charge-offs relates to one out-of-market real estate Shared National Credit, which represents approximately 40% of net charge-offs for the period.

On Slide 15, you can see the detail for the allowance for loan losses by loan category. A few items of note. Our allowance for loan losses to commercial loans is 1.34%, with a coverage ratio of 79% of commercial NPLs. As we have stated previously, we have a strict loan loss allowance methodology, which is consistently applied. That said, mixed shift and new originations can result in modest changes in the overall coverage ratio in any given quarter. Provision for loan losses reflects $11.2 million in charge-offs, including $4.8 million with previously established specific reserves, $4.8 million of additional allowance build in response to loan growth and $300,000 of impairment associated with acquired loans.

Now I'll pass it back to Jack.

John P. Barnes

Thank you, Kirk. On Slide 16, you can see our operating return on average assets for the first quarter was 0.88%, up slightly from the fourth quarter. As we've talked about earlier, we have momentum. We expect that momentum to accelerate as we continue to attract and retain top talent while remaining focused on best serving our customers and maintaining our conservative credit culture. Additionally, progress on our expense initiatives for the year will result in improved return profile for the franchise.

On Slide 17, we expect to see an increase in return on average tangible equity as we improve profitability and thoughtfully deploy capital. Our significant capital levels remain approximately 370 basis points above peers, which produced below industry return on average tangible equity. Normalizing our equity base shows that the core bank is performing well at 11.7% when we turn on average tangible equity. On Slide 18, consistent with the outline of our financial targets, we expect to see our operating dividend payout ratio to trend lower through 2012.

On Slide 19, we have updated our capital ratios for both the holding company and the bank. Capital levels remain very strong with our tangible common equity ratio at 11.7% and Tier 1 Common at 14%, which compares well to our peers at 8% and 10.9% as of the fourth quarter, respectively.

The group -- excuse me, the GAAP narrows as we deploy capital and our peers build capital. While our tangible common equity ratio remains much higher than our peers, on a total risk-based capital basis, we are much closer to peers. We really are a commercial bank and as a result, have a large amount of 100% risk-weighted assets.

And on Slide 20, our robust pipelines and strong originated loan growth contribute to our continued momentum with the franchise, which we expect to accelerate in the coming quarters. The strength of our platform continues to allow us to attract and retain exceptional talent and provide us a sustainable competitive advantage. This concludes our presentation.

And now, we'll be happy to answer any questions that you may have. Operator, we're ready for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Damon DelMonte with KBW.

Damon Paul DelMonte - Keefe, Bruyette, & Woods, Inc., Research Division

Could you guys talk a little bit about your -- the loan pipeline? I think you made a couple of comments, you thought second and third quarter were shaping up pretty good. Could you talk a little bit about what you're seeing and in which asset classes?

Kirk W. Walters

Well, we're actually seeing a very strong pipeline in the residential area continuing, and the pace of that seems to have been building through the year. And we don't see any change right now in that area at all. In the C&I area, we continue to see strengthening and feel very good about the general pace of activity. We mentioned the ABL group and the growth during the quarter. We feel good, that, that component of it is growing very well. We're seeing a lot of deal to flow there. And the commercial real estate area, there's, I'd say, a consistent flow in terms of the pipeline and -- but a very competitive environment.

Damon Paul DelMonte - Keefe, Bruyette, & Woods, Inc., Research Division

Yes, it looks like -- Jack, it looks like the yield on commercial real estate loans decreased pretty substantially quarter-over-quarter upwards to almost 50 basis points but the balances were kind of flat there. Could you talk a little bit about the pricing and what you're seeing?

John P. Barnes

Yes, Damon, let me take a crack at that. You need to remember, in the fourth quarter, we had the cost recovery income that came in via Bank of Smithtown. And that's the whole deal under the acquired loan accounting, to the extent that you have individually accounted for loans and you recover more when you dispose them than what you mark them at that, in fact, it goes through the margin. And all of that went through the commercial real estate side.

Damon Paul DelMonte - Keefe, Bruyette, & Woods, Inc., Research Division

So it kind of inflated the yield in the fourth quarter then?

John P. Barnes

Right, right. And we reported, if you look back at all of our notes within the K and such, we reported the impact of that. So when you look at quarter to quarter on pricing, I'd say certainly, the area that we see being the most competitive on pricing continues to be the commercial real estate arena, with a lot of players in including the life insurance companies. Otherwise, I'd say overall, pricing has held in pretty well in terms of our C&I books and the other lines of business that we have. But certainly, the area we feel it most in is commercial real estate. And I'd once again reemphasize that anybody that's looking at fourth to first that the fourth quarter number is inflated.

Damon Paul DelMonte - Keefe, Bruyette, & Woods, Inc., Research Division

Okay, that's helpful. And then Kirk, with respect to expenses, did you say that you'd be whacking the expense base down to an annual rate of $800 million to $830 million?

Kirk W. Walters

Right.

Damon Paul DelMonte - Keefe, Bruyette, & Woods, Inc., Research Division

Is that for 2012?

Kirk W. Walters

That's for 2012.

Damon Paul DelMonte - Keefe, Bruyette, & Woods, Inc., Research Division

Okay. And is that different than what you had said last quarter?

Kirk W. Walters

It is because we've included in that the Citizens branches. Yes. When you look last quarter, we gave a range of $790 million to $810 million, and we've upped that because we are expecting to close in the Citizens branches the end of the second quarter. And if you look at the range, that's consistent with the guidance that we put out that the time of the announcement of the branches.

Operator

Your next question comes from the line of Collyn Gilbert with Stifel, Nicolaus.

Collyn Bement Gilbert - Stifel, Nicolaus & Co., Inc., Research Division

Just following up on the question on expenses. So Kirk, with the new -- the $800 million to $830 million, does that change -- and I know you put it in the slide deck, that 55% efficiency target, but does that change the timing of getting to 55%? Or how does the dynamic look there?

Kirk W. Walters

I think the dynamic there is that originally, we are looking more toward mid-2013 and now, we're looking toward the latter part of 2013 because as we discussed when we announced Citizens, we do end up with a slight negative impact tune of about $0.01 a share for '12 and '13 in the transaction until we can get the average deposits up in those branches.

Collyn Bement Gilbert - Stifel, Nicolaus & Co., Inc., Research Division

Okay. Okay, that's helpful. And then you talked about the momentum that you guys are seeing on the fee side, which is great. So there's not -- there wasn't anything in particular in terms of seasonality in this first quarter that would have elevated any of those line items?

Kirk W. Walters

Well, we end up with seasonality going both ways, but I mean, the one business that clearly has seasonality we reported on in previous quarters is the first and third quarters are the biggest quarters for the insurance business, the way the renewals run. On the other side, we tend to see fourth quarter stronger on bank service charges and quite often loan prepayment fees than the first quarter. So if you look at the table as we walked fourth to first, you see loan prepayment fees down, bank service charges down and of course, fourth and first had the full quarters of Durbin in it. And then on the other side, you see insurance up some.

Collyn Bement Gilbert - Stifel, Nicolaus & Co., Inc., Research Division

Okay, okay. And then just looking at -- trying to sort of reconcile the direction on net interest income. Obviously, you guys talked about the margin and the impact of the recovery in the fourth quarter. But just in terms of overall dollars, can you talk a little bit about that? I know you -- it sounds like you're pretty optimistic about the loan pipeline coming in, in the second and third quarters, but maybe how the securities, kind of your tolerance for growing the securities book fits into all that?

Kirk W. Walters

Sure, let me take a crack at this. First, I think in terms of net interest income, on the loan side, we need to remember that we are fighting, and you can see it easily in our charts, the continued heavy prepayments on the acquired loans. And part of that relates to the old Fin Fed book, which really had an average life of about 3 years. And we're in the third year of that at this point. And so that is something that continues to come through, and that obviously is that continues to pay down and impacts the accretion that we're able to book quarter-over-quarter. So that's a couple of things on the acquired loans that I think we've talked about in the fourth quarter. And certainly, we have a lot of detail out there on. In terms of the originated books, I think we continue to see good loan growth there, probably a little slower than what we did on the latter part of last year. We are optimistic with the pipelines we have as that kicks in to more of the seasonally stronger periods for us of the second and third quarter. But overall, I think we face the same challenges as others in terms of the low interest rate environment. Some level of loan repricing is continuing on in the book that we're continuing to manage through. To your question on the securities portfolio, I think we've by and large held it pretty flat, maybe up a bit. And we had some stuff to settle in the fourth quarter that's increased in averages. But by and large, I think it's pretty flat.

Collyn Bement Gilbert - Stifel, Nicolaus & Co., Inc., Research Division

And your anticipation is keeping it flat for the remainder of the year? Or is that going to be...

Kirk W. Walters

It'll probably pretty well be flat, but it depends a little bit on deposit growth. We did have a really good first quarter on deposit growth. And as that comes in, if we continue to see stronger numbers there, we may do a little bit of what we're doing right now, which is very short duration CMOs as a placeholder until we're able to put it into loan growth.

Operator

Your next question comes from the line of Steven Alexopoulos with JPMorgan.

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

Maybe I'll start, in terms of the previously announced cost savings right there, a lot of moving pieces here. To keep it simple, Kirk, maybe could you give how much cost has already been taken out of the company? And what are the dollars that's left?

Kirk W. Walters

Well, I think if you look at sort of a run rate including all the acquisitions, different things that have come in from last year, there's probably been $60 million to $70 million taken out. And the general goal is to continue to drive that number down. We had originally, I think, advertised the number probably in the -- between $750 million and $800 million in terms of run rates. That number's a little higher now because of the Citizens transaction, it's probably $20 million to $30 million higher.

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

Okay. So are we talking another $30 million or so to come out of in terms of just expense cuts outside of deals?

Kirk W. Walters

I would say a range of probably $20 million to $30 million in there.

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

Okay. And then, on the buybacks, there's been quite a bit of variability quarter to quarter. I'm curious what are you guys looking at that's dictating the pace of buybacks as certain stock price that you're more active? Just wondering what's going on there.

Kirk W. Walters

Yes. I think the guidance that we've given is that we expect it to be -- the buybacks to occur pretty evenly throughout the year against our 5% authorization. If there's particular weakness in the stock in a given quarter, we may buy back a little more. But I think last year was more of an anomaly and that we started the buybacks after Danvers, but heavily required in the fourth quarter. But I think first quarter is much more consistent with how you'll see the year.

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

That's very helpful. And then, one final question. Kirk, can you talk about maybe expectations for margin the rest of the year? And is there any big headwind from accretion benefit running out that we should be thinking about?

Kirk W. Walters

Sure. I think as you look at the margin for the rest of the year, the original guidance we gave was that we were hoping to hold it above 4% through the second quarter and then see it slipping under 4% in the last 2 quarters. The primary difference between the consensus estimates out there in the margin of the 4.04% and the 4.01% that we reported primarily relates to the loan volume and loan activity in the first quarter and also the fact that we brought in a lot of deposits and in fact put it into -- left it at the Fed until the loan growth catches up in the second, third quarter. As we look forward, we would expect, I think, in the second quarter that we are going to slip a bit below the 4% handle. And then as we go through the third and fourth quarters, continue down a bit more. The primary -- to your question on accretion, the primary factor that's impacting us on accretion quarter to quarter as we go through this year, will be the Fin Fed accretion, which will effectively run out and be done at the end of the year.

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

Okay. So once we get to the end of the year, then we'll take this pressure off the margin, theoretically?

Kirk W. Walters

Yes. I mean, you still have -- under the accretion for Bank of Smithtown and Danvers, you'll still see it come down a bit but not at the pace that it does with Fin Fed. I mean, those tend to be much longer duration assets.

Operator

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

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

On your bank service charges, what are you anticipating for growth over the course of the next year? Maybe just talk about how you process transactions. You are high to low, sequential low to high and your thoughts on that subject something that regulators have been taking a closer look at and just talk about bank service charges, deposits and checking account fees?

Kirk W. Walters

I think overall, on bank service charges, we tend to find the first quarter to be one of the more seasonally low periods on bank service charges and then building a bit as we go through the year. So I think from the number you see here, I would expect to see subject to any other regulatory changes and such. So I'll get to the second part of your question then, we would tend to see that number increase as we go through the year, just from a seasonality standpoint. On the question of, do we sort high to low, we do sort high to low. And as far as that particular issue, we know there's proposed guidance out there, but there has been nothing finalized on it.

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

If you processed on a sequential basis, what would the change be just versus current levels?

John P. Barnes

We're looking at approximately $1.5 million in income based on the analysis that we've done to date on that.

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

Annually?

John P. Barnes

Correct.

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

Okay, got you. And then, can you just talk real quickly about what you've sold on the mortgage book, the mortgage loans, the gain on sale, margins you're experiencing, the types of assets you are selling and what you think we should expect going forward there?

Kirk W. Walters

That, what's flowing through that line is just a normal mortgage banking activity and we have not reached anything into the portfolio and folded out. So the first quarter, we did see volumes up in terms of, anything that's fixed-rate, the 15 and 30 years stuff we originate, whether it's conforming or jumbo, we sell through. And so this quarter, we saw better volumes in the for-sale product, and we also saw better spreads, to be honest.

Operator

Your next question comes from the line of David Darst with Guggenheim.

David Darst - Guggenheim Securities, LLC, Research Division

Could you go back over to some of the details on the acquisition and the cost of funds, and what to expect that to contribute to the margin? And then, what's the horizon you think that'll take to mature those branches up to what you see in your current in-store branches?

Kirk W. Walters

Sure. On the Citizen's acquisition, which we expect to close at the end of the quarter, their overall cost of funds is 42 basis points. And so we have a cost of funds of 44 basis points. So that initially coming in out of the chute will be a bit of a push in there. As we grow those, you may see their costs, the cost of funds in those branches go up a little bit as we run promotions and different things. On the other side, we are still bringing down the cost of funds on the Bank of Smithtown, Danvers acquisitions, which still hover around 1%. So we'll have a little bit of effect on both sides. In terms of the branches themselves, we would need to get them to about $10 million on deposits for a breakeven. The guidance we've given is that we felt that it'd be a negative to the tune of $0.01 a share for this year and next and a breakeven in '14. So effectively, by '14, we'd expect they're paying the freight and then we'd leverage from there. I would remind you that the -- our average brand size, if you look at where our customers branch or Stop & Shop branches, it's a little over $40 million. And so we think the opportunity is significant. We've been in this business a long time, and we feel very optimistic about growing -- having these branches and being able to grow them both on the deposit side as well as the loan side.

David Darst - Guggenheim Securities, LLC, Research Division

Okay. And did you mention that you had added some lenders to that market, Long Island?

Kirk W. Walters

We have been continuing to add into our commercial lending teams on Long Island, as well as in Westchester County recently opening an office in White Plains, both in the C&I and the CRE side. And actually in White Plains, we have an ABL person, too.

John P. Barnes

So -- and just to amplify that a little bit, and I think the context, a way for everybody to be thinking of that, as we've mentioned before, following the Smithtown acquisition closing, we've built C&I and commercial real estate teams on the island, and they've been these experienced folks, very long time in the market. And they continue to make progress. And as Kirk referenced, we've been working Westchester market from Connecticut for a number of years and now we have people on the ground there. And in addition, what we did mention in the narrative was that we've recently hired several more people in the commercial real estate market lined up with New York Metro. So we are, as we've indicated, putting a lot of focus there and building -- continuing to build our teams and efforts out.

David Darst - Guggenheim Securities, LLC, Research Division

Will the group in New York focus on traditional commercial real estate? Or will they have any focus on their multifamily or regulated properties?

Kirk W. Walters

I think because of the nature of that market and the fact that we are underrepresented in our commercial real estate book in multifamily, there will be some emphasis on multifamily as we go into that market.

Operator

[Operator Instructions] Your next question comes from the line of Bob Ramsey with FBR.

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

I was just curious if you could maybe tell me, with the in-store branches that you all already have that are sort of at that $40 million deposit mark, if you ran a P&L for that business, what would the efficiency look like?

Kirk W. Walters

I don't have the numbers right in front of me. But the overall cost of operating an in-store branch is about 1/3 less than a traditional branch. And I think the other item to note, which most people don't understand, is we do get a nice chunk of loan volume through those branches. If you look at our Connecticut operation, which is a very strong operation, in which we have a little over 80 in-store branches, about 1/2 of our consumer checking accounts that are opened in Connecticut are opened in those branches. But interestingly enough, if you look on the loan side, 30% of our Home Equities, 30% of our mortgage loans and almost 30% of business banking loans come through those branches, including about 30% of our investment sales. So we've had a good mix of business that tends to come into those that overall makes them profitable and a real plus. The other item I would note is, we do see -- which we don't capture in these numbers, we do see when we open the in-stores, a lift with our business banking in the small end of middle market commercial because we're open 7 days a week, and it's very convenient for them.

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

Okay. And if the cost of the in-store branches are 1/3 less on traditional, how does the revenue compare?

Kirk W. Walters

Well, I can say in terms of the revenue overall, certainly, I'd say bank service charges, those kind of things, are very similar. And I would say on the loan side, as we just went through here, we're looking at 30% to -- depending on market, 30% to 40% of our retail loan volume and small-business volume coming through the in-stores versus the traditional.

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

Okay. I guess what I'm trying to get at is if the expenses are 1/3 less than a traditional branch, what are the total revenues on a per branch look like compared to a traditional. Are they 1/3 less as well, so you'd have sort of a similar revenue expense mix?

Kirk W. Walters

No. I would say that on the revenue side, they may be slightly less, but not a lot.

John P. Barnes

I think that, that gets to the point I think Kirk was trying to make, when you think of the products that we're selling through the in-store branches, we very much operate the in-store branches similar to the offering in the traditional branches, which we've been able to establish over a long-term here our success in doing that. And it's one of the very strong reasons why we pursued the Citizen's transaction. The other thing is that in the New York Metro area, in those Stop & Shops, we're expecting to see 900,000 visitors into those stores weekly. So our brand awareness, our access to other people's customers and ability to engage them is significantly enhanced with the Stop & Shop relationship.

Operator

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

Casey Haire - Jefferies & Company, Inc., Research Division

Jumped on a little late, sorry, I apologize if you guys covered this. But just on the efficiency ratio, it sounds like you guys pushed out the 55% target towards the back half of '13. I was just wondering, what -- any thoughts on what that does for the 125 ROA target?

Kirk W. Walters

In our commentary, we have not moved the 125 target moving out the efficiency ratio a little bit in '13, it's just a reflection of the Citizen's acquisition.

Casey Haire - Jefferies & Company, Inc., Research Division

Okay. So what happens between late '13 and '14 to get the ROA lift up to 125?

Kirk W. Walters

It's a combination. As we said and the 125, we've advertised is hitting that number in '14, not for the year of '14, which I think we've been pretty clear on that. And I think that it's very consistent with what we outlined in the first quarter. It's continuing to grow loans and deposits. It's continuing to work the margin as best we can, certainly, the continuation of the good strong credit quality we have and reducing related foreclosure, different expenses and such to flow through in relation to that, and overall, continuing to crank our overall level of expenses down. So -- and the other component is certainly continuing to have good growth in our fee income products. So it's -- basically, if you take the goals that we outlined in the first quarter and the ranges that we gave them and work it through, that's the primary drivers of getting us to that number in '14.

Casey Haire - Jefferies & Company, Inc., Research Division

Okay. And then, just lastly on M&A, can you just talk a little bit about what you're seeing in the market in terms of sellers' willingness to come to the table and your appetite on that front?

Kirk W. Walters

I think in terms of the M&A environment, it remains very quiet. And overall, from our standpoint, we remain very focused on the task at hand in terms of growing loans and deposits and expect to be opportunistic if situations do arise.

Operator

[Operator Instructions] Ladies and gentlemen, since there are no further questions in the queue, 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 have any questions at all, please feel free to contact me at (203) 338-6799.

Operator

We thank you for your participation in today's conference. This does conclude your presentation. You may now disconnect, and have a great day.

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