People's United Financial, Inc.
Q4 2017 Earnings Call Transcript

Published: 19 Jan 2018

[Operator:]

Good day, ladies and gentlemen, and welcome to the People's United Financial Inc Fourth Quarter and Full Year 2017 Earnings Conference Call. My name is Sandra, and I will be your coordinator for today. 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 Mr. Andrew Hersom, Senior Vice President of Investor Relations for People's United Financial Inc. Please proceed, sir.

[Andrew Hersom:]

Thank you. Good afternoon and thank you for joining us today. Here with me to review our fourth quarter and full year 2017 results are

[Jack Barnes:]

Thank you, Andrew. Good afternoon. Appreciate everyone joining us today. Let’s begin by turning to the full year overview on slide 2. 2017 was a noteworthy year for the company. We reported operating earnings of $346 million or $1.04 per common share, the highest in the bank's 175-year history. In April, we successfully closed and integrated the acquisition of Suffolk Bancorp, which further strengthened our presence in the New York metro area. In August, we also successfully closed and integrated the acquisition of LEAF Commercial Capital, which diversified our national equipment finance portfolio into the small ticket leasing segment. We celebrated our franchise’s 175th anniversary with a variety of volunteer and charitable activities, highlighted by $175,000 donation to Junior Achievement, our Community Foundation’s single largest one-time grant ever. And we were once again recognized for our exceptional service by Greenwich Associates, who awarded People’s United with eight awards, including a national best brand award in middle market banking for ease of doing business. We were very pleased with our strong financial performance for the year. Results benefited from a $138 million increase in revenues versus the prior year to $1.5 billion, driven both by recent acquisitions and organic growth. These increases, excuse me, this increase was due to improvements in both net interest income and non-interest income. In addition, results were highlighted by an 18 basis point improvement in net interest margin to 2.98%, the strongest level in three years and the first year-over-year increase since 2011. During the year, we continued to make revenue producing investments across our franchise. Such investments include further building out commercial lending capabilities in the health care vertical and FDA lending as well as strengthening fee income generating infrastructure by improving our loan syndications capabilities and international services. We also implemented a leading edge customer relationship management system, which has begun to enhance the company's sales processes and increased referral and prospecting activity. We also continued to thoughtfully manage expenses. From an operating perspective, expenses of $930 million were up $66 million from a year ago and were at the low end of our mid-year guidance. We are pleased with these results, given the inclusion of Suffolk and LEAF into the franchise during the year and having Gerstein Fisher on the books for a full 12 months. Loans ended the year at $32.6 billion, up $2.8 billion or 10% from 2016, marking the eighth consecutive year of growth. This increase was driven both by recent acquisitions and organic growth. Excluding Suffolk and LEAF balances, loans grew 3% year-over-year, primarily driven by solid production in residential mortgages, equipment financing as well as middle market commercial and industrial lending, highlighting the importance and impact of our diversified business mix. Commercial real estate balances were unfavorably impacted by slower market conditions, higher payoff activity, a competitive environment and continued run-off of the transactional portion of our New York multi-family portfolio. From our perspective, some of our privately held owner operator clients have tended to be net sellers in this environment. Period end deposits of $33.1 billion were up 3.2 billion or 11% from the prior year, driven by continued success, gathering organic deposits as well as the addition of Suffolk’s attractive deposit base. As a result, non-interest bearing deposits now comprised 24% of total deposits, up from 22% a year ago. Finally, wealth management discretionary assets under management reached $9 billion, after achieving 14% growth during the year, due primarily to the new client inflows and strong market performance. Moving to slide 3, we have included a scorecard of our 2017 goals, which were updated mid-year compared to actual results. We were in line with all of our goals with the exception of loan and deposit growth. As we guided on our October call, attaining the full year loan growth goal would be challenging in light of the market conditions I previously described within the commercial real estate, our largest portfolio. These market conditions continued during the fourth quarter and unfavorably impacted growth. Before discussing the year ahead, I want to take a moment to reflect on the progress that we have made, improving operating leverage and enhancing profitability in recent years. Slides 4 through 6 illustrate this progress over the last five years, as evidenced by an improvement of 350 basis points in the efficiency ratio to 57.7%, 44% growth in earnings per common share to $1.04 and the 360 basis point increase in the return on average tangible common equity over this period. As we continue to build earnings power of the company, we remain focused on further improving these metrics. Moving forward, we are excited by the opportunities in front of us to further strengthen and grow the company. In the year ahead, we will continue to enhance technology and marketing capabilities to better serve existing relationships and develop new ones. We will also provide new and refreshed products as well as align technology based offerings with our expert bankers to drive a unique client experience. We are confident revenue producing investments along with synergies created by the recent acquisitions will result in continued improvement in operating leverage and further create value for shareholders. In addition, we remain very hopeful that the Industry Regulatory Reform will occur this year. Based on my involvement in the midsized bank coalition and the meetings I've attended on the issue, the $50 billion SIFI designation, it is front and center with many legislators in Washington and there is a bipartisan effort to pass the reform. We will continue to move toward our readiness to cross this threshold if legislation is not enacted and remain confident in our ongoing preparation. With that background in mind, let me outline our goals for the full year 2018 as listed on slide 7. The first goal is to grow our loan portfolio in the range of 4% to 6% on both a period end and average balance basis. Secondly, our continued focus on gathering deposits is expected to drive deposit growth in the 3% to 5% range on both a period end and average balance basis. The next goal is for our net interest income to increase in the range of 10% to 12%. Embedded in this goal is the expectation of net interest margin to be in the range of 3.05% to 3.15%. This net interest margin range is derived from many different factors, one of which is an assumption of 25 basis point rate increases in fed funds during the year. In addition, the net interest margin range includes the unfavorable impact of tax reform on our municipal bond and IRB portfolios of approximately 5 basis points. We expect non-interest income on the operating basis to grow in the range of 3% to 5%. Operating non-interest expenses for the year are anticipated to be in the range of 975 million to 995 million as compared to 930 million in 2017. This includes full year impact of the two acquisitions completed in 2017. We expect to maintain excellent credit quality with a provision in the range of $35 million to $45 million. We anticipate our effective tax rate for the year to be in the range of 21% to 23%. Finally, we also plan to maintain strong capital levels with an expectation that at year end, holding company common equity tier 1 capital ratio will be in the range of 9.5% to 10%. With that, I’ll pass it to David to discuss the fourth quarter in more detail.

[David Rosato:]

Thank you, Jack. We closed out 2017 with another quarter of strong financial results. Record quarterly operating earnings of $104.5 million increased 17% on a linked quarter basis and generated an operating return on average tangible equity of 14.1%. On a common per share basis, operating earnings were $0.31, up $0.05 from the third quarter. These results benefited from further improvement in net interest margin, higher fee income and well controlled expenses. The quarter was also favorably impacted by a lower effective tax rate. It is important to note the quarter included the following items, which were deemed non-operating, given their non-reoccurring nature, security losses of $10 million pretax or 7.2 million after tax incurred as a tax planning strategy in response to recently enacted tax reform; a tax benefit of $6.5 million, resulting from a revaluation of our net deferred tax liabilities and finally, merger related expenses of 1.6 million pretax or 1.1 million aftertax. Turning to slide 9, net interest income of $292.3 million increased 3% on a linked quarter basis. The loan portfolio contributed 7.1 million to the increase in net interest income due to higher yields on new business, repricing of floating rate loans and higher average balances linked quarter. Net interest income also benefited $4.3 million from higher yields and average balances in the securities portfolio. These increases were partially offset by higher deposit costs and volumes. Results in the fourth quarter benefited from further improvement in net interest margin, which increased 3 basis points linked quarter to 3.07%. This expansion as displayed on slide 10, was driven by the loan portfolio, which favorably impacted the margin by 6 basis points as new business yields remained higher than the total portfolio yield. A higher securities portfolio yield also increased the margin by 1 basis point, while higher deposit costs had an unfavorable impact of 4 basis points. Linked quarter loan growth continued to highlight the impact and importance of our diversified business mix, as shown on slide 11. Period end loans increased 2% annualized, driven by strong results across each of our equipment financing units and solid production in middle market commercial and industrial lending. This growth was partially offset by lower commercial real estate balances due to the reasons Jack outlined earlier in his remarks. Mortgage warehouse lending balances ended the quarter at 1.045 billion, a decrease of only $22 million from September 30. However, average balances for this business were down $107 million in the quarter. As such, while the total loan portfolio increased 4% annualized on an average balance basis, growth, excluding mortgage warehouse, was 5% annualized. Turning to slide 12, period end deposits of 33.1 billion were up 509 million or 6% annualized for the quarter. The largest driver of this increase was higher non-interest bearing balances of 347 million, primarily driven by our retail and municipal businesses. Deposits also benefited from a $218 million increase in time balances due in part to a successful two year 1.75% CD offering, celebrating the company's 175th anniversary. On an average balance basis, total deposits increased 10% annualized. Fourth quarter noninterest income totaled 87.3 million. During the quarter, we sold approximately 290 million of four year duration securities, yielding 1.28% to take advantage of 2017’s higher marginal tax rate. 150 million of sales proceeds have been reinvested in two year duration securities, yielding approximately 190 and in the first quarter, we intend to further add securities to fully replace loss carry income. As I referenced earlier, the 10 million pretax or 7.2 million aftertax loss, as a result of these sales, was deemed non-operating and was offset by $6.5 million tax benefit associated with tax reform. On an operating basis, as displayed on slide 13, non-interest income of 97.3 million increased 8% or -- $8 million or 9% from the third quarter. Higher noninterest income was primarily driven by a $3.3 million improvement in customer interest rate swap income as well as a $1.8 million increase in commercial banking lending fees, largely due to higher commercial real estate prepayment income. Noninterest income also benefited from higher operating lease income and investment management fees. The largest offset to these improvements was a $2.8 million decline in insurance revenues, reflecting the seasonality of commercial insurance renewals, which are higher in the first and third quarters of the year. On slide 14, we display the components driving the increase in noninterest expenses on a linked quarter basis. Included in this quarter's results were merger related expenses of 1.6 million, with 1 million in professional and outside services and 600,000 in compensation and benefits. As a reminder, third quarter merger related expenses were $3 million, of which 2.7 million were included in professional and outside services and the remainder split between occupancy and equipment as well as other. Excluding merger related costs, noninterest expenses were 238.1 million, an increase of $4 million or 2% from the third quarter. The largest driver of these results was a $1.8 million increase in compensation and benefit, primarily reflecting higher incentives and healthcare costs. Expenses were also unfavorably impacted by a $1.6 million increase in regulatory assessments, resulting from higher average assets as well as a $1.2 million increase in professional and outside services. As a reminder, payroll taxes, 401(k) matches and winter related operational costs are highest in the first quarter of the year. Accordingly, based on historical experience, these expenses are expected to be higher in the first quarter compared to the fourth quarter. As Jack mentioned earlier, we continued to enhance our operating leverage as evidenced by the ongoing improvement in the efficiency ratio. As displayed on slide 15, the efficiency ratio for the fourth quarter was 56.1%, which marks an improvement of 120 basis points on a linked quarter basis and 320 basis points from a year ago. Going forward, even with the significant progress we have made, we will continue to emphasize improving our operating leverage through revenue growth and effective expense management. Our strong credit culture and conservative underwriting standards continue to drive exceptional asset quality as demonstrated on slide 16. Originated non-performing assets, as a percentage of originated loans and REO, at 56 basis points is once again well below our peer group and top 50 banks. Net charge-offs of 8 basis point remain at a very low level and continue to reflect the minimal loss content in our non-performing assets. As displayed on slide 17, return on average assets and return on average tangible common equity were 96 basis points and 13.8% respectively. Both metrics increased for the second consecutive quarter and were significantly higher than a year ago. We are pleased with the progress we have made improving these metrics over recent periods and remain focused on executing on our strategy to further enhance returns. Continuing on to slide 18, capital ratios at the holding company ended the year either improved or unchanged from September 30th. Capital levels remain strong, especially in light of our diversified business mix and long history of exceptional risk management. The final slide on page 19 displays our interest rate risk profile for both parallel rate changes and yield curve twists. We remain asset sensitive, but slightly less so than at September 30. However, we remain well positioned for further increases in interest rates as approximately 44% of our loan portfolio at quarter end was either one month LIBOR or prime based, consistent with both the previous quarter and a year ago. Now, we'll be happy to answer any questions you may have. Operator, we're ready for questions.

[Operator:]

[Operator Instructions] And our first question comes from the line of Ken Zerbe with Morgan Stanley.

[Ken Zerbe:]

What is the right tax rate? I know, this is kind of a moot point, right, because we know what it is for 2018, but for this quarter alone, if I back out the tax adjustments that you guys have on, it looks like page 18 of your press release, I still come up with sort of a very unusually low tax rate this quarter. Is there something else in there or something that we're not seeing? Thanks.

[David Rosato:]

Ken, it’s David. The -- we had -- the IRS allowed the filing of 2016 taxes to be delayed one month. So rather than filing them by September 30th, we had until October 31. Normally, in the third quarter, we true up our tax line. And then that true up is spread over the back half of the year. This year, it was all in the fourth quarter. So we -- it’s a growing portfolio of low income housing tax credits that we've been growing over the last couple of years and just as that portfolio seasons, we continue to get more tax credit off of that portfolio and that was the driver in the quarter.

[Ken Zerbe:]

So that item -- the true up I guess in theory shouldn't -- there should be no corresponding impact next year, it's just [indiscernible] your new lower tax rate? Okay. I think I got that. And then just in terms of your guidance that you've provided for next year, the base number that we're talking about, like the growth in fees or the growth in expenses, is that off of reported, because I’m thinking of like that $10 million of security loss this quarter, is it based on reported numbers or is it based on sort of operating items?

[David Rosato:]

It’s operating for both fee income as well as expenses. And so Ken, just to go back for a sec, so the guidance that we provided around the effective tax rate of 21% to 23%, there is a lot implicit in that that runs through the tax line as you know, but we will plan to continue growing that portfolio. So it is -- as it's grown over years, that true-up impact has grown, but we would expect it to be generally consistent with what happened this year. So, it is embedded in the guidance.

[Ken Zerbe:]

And sorry, just to be clear though, the way you explained it, it sounds like the true-up is sort of always a positive item, is it ever a negative?

[David Rosato:]

No. From that piece, it will always be a positive.

[Ken Zerbe:]

Got you. Okay. So as long as we build in that positive true-up in the back half of next year, that gets us to the 21% to 23% on a non or GAAP basis?

[David Rosato:]

Yes. Our expectations around that line item are for the full year are in the guidance we provided.

[Operator:]

Thank you. And our next question comes from the line of Steven Alexopoulos with JP Morgan.

[Steven Alexopoulos:]

Wanted to start on expenses, if I annualize the fourth quarter, which included the prior acquisitions, the upper end of this 975 to 995 range you’re guiding to for 2018 seems on the high side, particularly, given all of the focus on the efficiency ratio. Is this tied to you guys planning to spend some of the benefit from lower taxes or is something else driving this?

[David Rosato:]

Steve, it’s David. So, if you use the middle of the guidance of $55 million off of the 930 base, you come up with 6% expense growth. But if you back out the full year impacts of both LEAF and Suffolk, that number is about 4% expense growth. That's consistent with expense growth that we experienced this year. So, in our comments, you saw very positive operating leverage this year. And you should expect to see that going forward. So we are continuing to make expenses -- investments. Jack referenced some of those, we've talked about them on past calls as well. But you have seen the revenues coming off of that, those investments that we’ve made and further leading to the operating leverage we've experienced.

[Jack Barnes:]

And Steve, it’s Jack. Just remember as well, not to annualize the fourth quarter because the first quarter is always higher, right, with the comps impact primarily.

[Steven Alexopoulos:]

Okay. I just wanted to ask on the loan side, just two questions there. On the New York City multi-family portfolio, which I know remains a bit of a drag, what's the size of that portfolio and how should we think about that headwind in 2018?

[David Rosato:]

Sure. That portfolio –

[Jack Barnes:]

1.4 billion at the end of this -- of the year.

[David Rosato:]

And well that portfolio probably will come off next year about $250 million to $300 million over the course of the year.

[Steven Alexopoulos:]

That's helpful. And then just one more, on the equipment finance, you guys had 200 million of growth this quarter, which included the full quarter with LEAF, how do you think about that 200 million? Is that a good quarterly growth rate? Thanks.

[David Rosato:]

I’ll take it. We were very pleased with the growth there. The level of activity at our largest equipment finance company, PCLC had – they had a very strong fourth quarter. We think a lot of that had to do with the tax reform and the acceleration for the 100% write off of LEAF expenses.

[Jack Barnes:]

But, they always have a strong –

[David Rosato:]

And they always have a strong fourth quarter as well. And then, the only other comment is we had very nice performance out of LEAF as we expected.

[Steven Alexopoulos:]

Okay. But it sounds like 200 million is maybe a bit optimistic in terms of a run rate?

[David Rosato:]

Yes. As you grow -- as we look to last year, I would expect LEAF to grow in the neighborhood of about 25% to 30% and the other two historical companies to grow at about 5%.

[Operator:]

Thank you. And our next question comes from the line of Casey Haire with Jefferies.

[Casey Haire:]

First of all, I just wanted to follow up on the operating fees, just the guidance. I have as a starting point in 2017 about 362.2, is that the correct base?

[David Rosato:]

Yes.

[Casey Haire:]

Okay. Great. And so the other income line in the fourth quarter looked, was really big, what was the driver there and what is a good run rate going forward.

[David Rosato:]

I'm sorry. Can you repeat the question, Casey?

[Casey Haire:]

So, the other income line within fees was very strong, was up 6 million or so. So, what was the driver there and what's a good run rate going forward? I'm assuming it comes back down?

[David Rosato:]

Yeah. There were a couple of one-timers in there, Casey. The two largest would be, we had $2.6 million gain on the sale of two acquired loans. One goes back to the Smithtown acquisition and one goes back to Danvers. We also sold the headquarters building from Suffolk out on Riverhead and Long Island. That produced a gain of about 1.3 million. So, you should back that out. Other than that, it was just a few pushes and pulls on that line item.

[Casey Haire:]

And then just switching to loans, obviously, CRE has got some headwinds still. So, what are the -- what's going to pick up that slack to get you to that loan growth guidance? Is it, I mean, Reg E mortgage has been a good story for you. Is that going to continue or is there, what's sort of the drivers to pick up the slack on the CRE side?

[Jack Barnes:]

Casey, this is Jack. So, we would say resi mortgage will slow. That has slowed, the pipelines are slower. So we won't get as much out of there next year, but we are expecting good solid growth across our commercial middle market and small business lending. We have good expectations around the ABL, not so much warehouse lending, again given the changes in the market. And then in the equipment finance areas, we expect that case that David reference the LEAF to continue and the other two units to do in that range that he mentioned. So you’ve got the combination of the commercial lines and the different businesses, we expect to make good solid progress and make up the difference for some of that slow weak demand that we see in CRE at least right now. And so, that's what we're putting in the plan. We're not expecting that to turn around in a very fast way.

[David Rosato:]

The only thing I would add to that is probably 5% to 6% growth across our business banking portfolios. And then as Jack referenced in his comments, the investments that we're making in our healthcare vertical will flow through the C&I line.

[Operator:]

Thank you. And our next question comes from the line of Jared Shaw with Wells Fargo.

[Jared Shaw:]

Can you talk a little bit about what you think you could do with this tax dividend, with the new tax law change? If I look at your capital levels, you’re already outside the range on common equity tier 1. Should we expect to see maybe a higher cash dividend or buybacks or I guess how are you thinking about deploying the extra earnings coming from the tax benefit?

[David Rosato:]

Yeah. Sorry, so, it was a little hard to hear you, Jared. So you’re expecting what we expect to do with the benefits of the tax reform?

[Jared Shaw:]

Right. Yeah. So, I mean, as your capital levels are already strong, should we expect to see a more robust capital management program or would you be looking to do more acquisitions or I guess where should we expect to see some of that benefit long term?

[David Rosato:]

Yeah. So, I would say, as we see the impact of the improvement in probability fall to the bottom line, we do expect to generate more capital and we’ll basically go through our capital management process. As you know, we already have a pretty healthy dividend payout now. So we're looking forward to that coming down and more in line with kind of our target there. And right now, that’s our perspective on it and we’ll look to kind of run into our existing capital management program as we move forward.

[Jack Barnes:]

Yeah. The only other color I would add to that Jared is, as you followed us for a long time, you know that we've been working down our dividend payout ratio and then on the regulatory front, you're starting to see cash dividends of the larger banks increase and we're expecting going forward, higher capital return from those banks. So as we think out beyond next year, but farther out, as other bank’s capital levels start to come down towards ours, we think we will have an opportunity on a longer term planning horizon to be able to start buying back stock at some point.

[Jared Shaw:]

And then on the expense side, so looking at the expenses in conjunction with the -- your commentary Jack around the SIFI threshold, does that expense guidance assume that SIFI – the SIFI threshold is raised and what is -- what about the timing of that in your mind? And if we don't see it happen at some point, when do you actually have to start maybe spending the money to implement the current SIFI threshold?

[Jack Barnes:]

So the guidance includes all of the efforts that we've been talking about in prior calls and meaning much of the impact in the run rate, being SIFI ready is already there. There's really nothing unusual in the guidance for next year as it relates to SIFI, because it isn't necessary. And, we're hopeful as I said in the comments that we can get something done here. I think the nature of the bill and the bipartisan support is obviously a huge change in how things have evolved in recent years. So I'm really hopeful about that. So that said, as I finish that comment, I’m really just trying to make sure everybody want to know that we understand that we need to manage through the various challenges, including SIFI preparation and we've been doing that and building out all of the areas around financial standards and data governance, et cetera and feel very good about where we are in terms of that preparedness.

[Operator:]

Thank you. And our next question comes from the line of Dave Rochester with Deutsche Bank.

[Dave Rochester:]

Back on the expense guide, just to clarify. It sounds like you're saying the lifting of the SIFI threshold shouldn't impact your expectations on expense growth this year. Is that fair?

[Jack Barnes:]

Yeah. It is. Much of that investment is in things that we have been doing through the B50B project, really for now, multiple years. So if it's strengthening data governance, if it’s strengthening our enterprise risk framework, the resources and the skillset and the strength of those programs is in place. And so, those expenses are part of our run rate now and there would be some unusual things that would come in gradually, but we're not expecting anything unusual when and if we get there.

[Dave Rochester:]

Okay. Great. And I appreciate the color. And on the NIM guide, what's the timing of the rate hikes that you're talking about and how much lift do you guys assume you get with each hike?

[David Rosato:]

Well, we have -- as we've said, we have two built in. Right now, we're working under the assumption that June and November, that's underlying the guidance. We're also slightly flatter yield curve over the course of the year. From a – I will answer it slightly differently. From a quarter to quarter perspective, as next year unfolds, we’d expect flat fourth quarter to first quarter just because of day count. We’ve also alluded in our guidance about the impact of tax reform on the NIM, but beyond that, I would expect a three to five basis point basically linear increase as the year -- as 2018 unfolds.

[Dave Rochester:]

And then you said, I'm sorry, the first rate hike is June hike. Is that right?

[David Rosato:]

Yeah. That's what we were assuming. So obviously as that comes forward, we would benefit from that.

[Dave Rochester:]

That makes sense. And then just on deposits, are you guys seeing any increase in pricing pressure at all post the hike or is it pretty much what you saw in the fourth quarter and then where are you seeing competitor rates at this point?

[David Rosato:]

I would say really nothing from the last hike, so nothing from the third quarter to the fourth quarter. As we've talked about, the pressure that we've experienced has been in our largest government banking clients and some of our very large commercial clients. But as you get into smaller commercial, smaller government entities and retail, we really haven't seen some things or across the board deposit pressures. So, deposits were up 4 basis points linked quarter to 47 basis points. From our perspective, our deposit costs have been very well controlled, so we had a beta, a deposit beta of 16% in Q4, but if you look over the tightening cycle today, we’re up 125 basis points in the Fed funds rate and we're up 14 basis points on deposit costs. So my calculator says that's 11% deposit beta, which we would -- we do believe as rates go higher and Fed tightening has become more sustained, the beta will increase, but to date, cycle to date, it's been very well contained.

[Operator:]

Thank you. And our next question comes from the line of Matthew Breese with Piper Jaffray.

[Matthew Breese:]

I was hoping for just a little bit more color on the underlying issues with of course real estate and then New York City multi-family portfolio and I know you noted competition, but maybe you could just give us an idea of the extent of that in terms of spread compression in new rates? And then as a follow up, is the runoff in that portfolio enough to keep the CRE portfolio flat to down in 2018. Is that the way we should be thinking about it?

[Jack Barnes:]

I am going to give you a little bit of -- there isn't a lot more color than what we've gave you in the guidance in terms of what's going on in the market. I mean, as we have said, we see -- I think there is -- especially with the privately held owner operator, people are being cautious and feeling like properties are fully valued and so they are net sellers right now. That’s where some of the payoffs that we mentioned comes with the slowness in the markets. There aren’t as many buyers when things are fully valued. That’s our perspective on. The New York multi-family is a separate issue, right. We now -- many years ago, we decided that the spreads were getting too tight. My understanding is they're still very tight, sorry, tighter. So we decided that there just wasn't enough spread in the business for us to keep producing and stay kind of in the game and so we pulled back and we’ve been there a couple of years anyway now and so we basically, we service those loans naturally and we respond to people as they have any questions or issues, but we are primarily -- we don't have an origination unit that is out there competing for that business. So that’s where we are on that and we think very modest growth in the portfolio next year, but not declining.

[David Rosato:]

Yeah. I would echo those comments, you will see growth in our commercial real estate portfolio, exclusive with multi-family of about 3%, but that will be mostly offset by the decline in the multi-family portfolio.

[Matthew Breese:]

And then one of the added benefits or we talked about added benefits from tax would be enhanced loan growth or potential for enhanced loan growth. Are you seeing any evidence for that? And if so, whereabouts.

[Jack Barnes:]

We are not seeing evidence of that yet. I would say that what the tax reform does is it bring clarity to the situation, right. Those that we’re waiting to see if they would make an investment with a different tax code structure are now on the other side of that. And, we do think it has very good potential to spur growth in the economy, spur further investment and equipment. And the thing that we're watching most closely is if the economy begins to improve, then the companies are going to start to increase sales and build inventories and our line utilization should move in an upward direction and it is not done yet to this point.

[Matthew Breese:]

My last question, could you talk about the healthcare portfolio, how big it is and the areas you're focused on.

[Jack Barnes:]

Yeah. Off the top of my head, I am going to tell you how big it is. We've had healthcare relationships over time, long time across our footprint. So, what we have done is strengthened our ability to grow that business by strengthening the skillsets and the resources that we're focusing on. And we are bringing that unit together to focus on it. So we brought in some folks and a leader who has years of focusing in that healthcare vertical and what we're going to do is leverage off of that to continue, particularly in our footprint, healthcare is a big part of our economies across the northeast and we want to do more in all of those areas, so not just hospitals, but long term care homes, facilities, and other types of healthcare activities that service off and around all the healthcare needs of people.

[Operator:]

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

[Collyn Gilbert:]

Two quick housekeeping items. First is just a question on the fees. When Casey, I think referenced a fee income number of, I think, you said like 362 or something that we should use as a baseline to then assume your targets of 3% to 5% and you guys said, yeah, that was right, but I'm just trying to reconcile that with -- if we looked at just in the press release, you had roughly 353 million of fee income for the full 2017, addback the 25 million of security losses, it's closer to 377 number. So I didn't know what else I was missing to drop it to that 362?

[David Rosato:]

Yeah. So, thanks for asking the question. So, we're working -- we're only adding 10 million back for the Q4 security losses. Yeah. The other security losses that we took earlier in the year, there were gains and losses on the same line item. So, the base is closer to 363.

[Collyn Gilbert:]

Got it. All right. Thank you for that. And then one other just quick question, the CD campaign that you guys are running in sort of celebration of your 175th year, is that campaign finished now or are you still running that into the beginning of this quarter?

[David Rosato:]

We're still running it now. We're talking about whether we should continue it discontinue it or adjust pricing.

[Collyn Gilbert:]

And then just, if you guys could just give us an update on how business has been out on Long Island. I know that the pipelines I think were pretty good with Suffolk in the third quarter. How you’re seeing the pipelines and then also if you're seeing any fallout or impact of the Astoria-Sterling merger having closed just this past quarter.

[Jack Barnes:]

Yeah. So, things are going very well on New York and Long Island. I think, if you look to the details in the back where we've started to break out our loans, deposits by state, so that people get a little bit more visibility about that, you will see a growing portfolio on the loan side with -- in Long Island and in New York. It really is coming from a variety of places, the -- so our original group if you will, what is now the combined middle market group is making good steady progress, not at a strong, strong rate, but good steady progress. Suffolk, and their relationship managers really strengthened in a very meaningful way our business banking efforts. So we’ve more than doubled the number of relationships with feet on the ground and everybody's been doing a good job. It’s actually providing the company our biggest pipeline in that market segment. So, we're really pleased with that. We've mentioned in the past, our New York commercial real estate unit, which covers all of Manhattan and Long island is growing nicely. We’ve had a lot of really nice activity. Some of it doesn't show yet, because it’s construction related. So it’s not drawn down yet. But it’s a group of really talented people that are making great progress. So we're pleased overall with all of the business units in that New York market.

[Collyn Gilbert:]

And then I guess finally, Jack, you had mentioned kind of in your opening remarks that you fully expect regulatory reform this year? How does that overlay into the likelihood that you all would be participating in some form of traditional M&A this year?

[Jack Barnes:]

I would say if the SIFI level is moved from 50 to 250 as is proposed, it does certainly make the path to activity easier. On the margin, as we've said, if it was the right deal, we would proceed anyway and we feel like those preparations have – would put us in that position. But that said, obviously, if that's not in the way, it makes it easier.

[Operator:]

And our final question comes from the line of Erik Zwick with Stephens Inc.

[Erik Zwick:]

Loan to deposit ratio ended 2017 at 98.5%.

[Andrew Hersom:]

Eric, could you speak a little closer to the phone or wherever. We can’t hear you.

[Erik Zwick:]

Your loan to deposit ratio ended 2017 at 98.5% and if I apply the midpoint of your loan and deposit growth goals for 2018, you would end 2018 just under 100%, maybe 99.5%. What is the high end of your comfort range for this ratio?

[David Rosato:]

I would start with what is our goal. Our goal is really to run just around 100 or lower loan to deposit ratio. If you go back in time three to four years ago, it crept up briefly to upto 105 to 106. We were uncomfortable there and started increasing our deposit gathering efforts. We wouldn't expect it to get back there, kind of what we would call in the new environment, because those ongoing deposit efforts have now become ingrained into the company. As you can see with the success we've had over the last couple of years growing commercial deposit base and growing our government banking business. So at 12/31/18, I wouldn't expect any major difference in our loan to deposit ratio from where it is today.

[Erik Zwick:]

Okay. And just kind of -- David given your commentary earlier that the deposit beta has been just 11 basis points this cycle and that you would expect it to increase maybe just gradually, but not a huge jump up. I was just kind of trying to understand maybe why you're targeting slightly slower deposit growth than loan growth in 2018 as opposed to trying to match it dollar for dollar at this point.

[David Rosato:]

Well, they're both ranges theoretically if we hit the high end of deposit and the low end of loans, right, we’re starting out with more deposits and loans, our loan to deposit ratio would fall. So, I would just say based on past experience, it is easier to grow the loan book and the deposit book. And hence the way the guidance would -- one of the reasons the way the guidance was presented, but what I would say is, there is a lot of deposit gathering power in our franchise, especially on the retail side, if and when we choose to blanket the market with advertisement and put an attractive rate out there. And that gives us confidence to know that we can bring in those deposits when we want to or when we need them.

[Erik Zwick:]

All right. And just one last question from me, do you think the tax reform will have a material impact on residential real estate values in some of your higher priced markets and what could that potentially mean for mortgage and home equity volumes going forward?

[Jack Barnes:]

So, this is Jack. So, we've been talking about that like a lot of people I guess. And I would start by saying that in that higher price type of property, we do expect that there would be at least some additional softness as a result of the tax reform, really hard to gauge what kind of an impact that is. You've got someone that’s in a home like that has capacity and how that'll change their view about the desirability of an attractive property is hard to gauge right now. I would just go to when we talk about it in terms of what we're expecting in our portfolio and we think about that potential weakness, we've been originating loans with a very conservative loan to values and very strong credit scores for a long, long time. The portfolios are very seasoned. So we don't have concerns about any impact broadly for sure. If there was something, it would be very, very much on the margin, so to speak. So, have the same concern, not sure, I would say the same on home equity volume. The beauty of the home equity product is its flexibility, right. You want to go buy a car, you want to pay a tuition bill, you write a check, you don't have to go apply for the next loan, so the structure of home equity to the consumer I think is going to remain very attractive. And I would be very surprised if that changes. Again, does the lack of the adaptability of the interest changed the flow or growth of the portfolio? We’re looking to see how that's all going to play out.

[Operator:]

Thank you. Ladies and gentlemen, since there are no further questions in the queue, I'd now like to turn the call over to Mr. Barnes for closing remarks.

[Jack Barnes:]

Thank you. In closing, record quarterly income for the fourth quarter provided a great finish to the strong 2017 for People’s United. We were pleased with our performance during the quarter, which was highlighted by continued progress, enhancing our profitability metrics, further expansion in net interest margin, ongoing improvement in operating leverage, the importance of our diversified business mix, strong deposit growth, particularly non-interest bearing deposits, exceptional asset quality. Looking ahead, we are well positioned to execute on the opportunities in front of us and are committed to provide superior service to clients and we remain confident in our ability to deliver value to shareholders. Thank you for your interest in People’s United. Have a good night.

[Operator:]

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day, everyone.