People's United Financial, Inc.
Q3 2015 Earnings Call Transcript

Published: 16 Oct 2015

[Operator:]

Good day, ladies and gentlemen, and welcome to the People's United Financial Inc. third quarter 2015 earnings conference call. My name is Amanda, and I will be your coordinator for today. [Operator instructions] 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, Amanda. Good afternoon and thank you for joining us today. Here with me to review our third quarter of 2015 results are Jack Barnes, President and Chief Executive Officer; David Rosato, Chief Financial Officer; Kirk Walters, Senior Executive Vice President; and Jeff Hoyt, our Controller. Please remember to refer to our forward-looking statements on Slide 1 of this presentation, which is posted on our website, peoples.com, under Investor Relations. With that, I'll turn the call over to Jack.

[John Barnes:]

Thank you, Andrew. Good afternoon. We appreciate everyone joining us today. Results for this quarter reflect our unwavering commitment to further improve profitability, which remains our most important objective. While we are proud of our accomplishments over recent years, particularly given the persistently low interest rate environment, we must continue to drive forward to further execute on the significant opportunities that exist across our large and attractive markets. Given the breadth of our products and services we provide, the exceptional talent we continue to attract and our strong focus on relationship banking, we are confident in our ability to deliver consistent quality earnings growth for our shareholders. Now, turning to the overview of the third quarter on Slide 2. Operating earnings of $68.4 million or $0.23 per share represent a 9% increase from the prior-year quarter or a 10% increase on a per share basis. Revenues increased 3% on both a linked quarter and a year-over-year basis, driven by higher net interest income and higher fee revenues. It is important to note, the pace of net interest margin decline continued to moderate in the third quarter. Net interest margin was 2.87%, a decrease of only 1 basis point from the second quarter. Expenses were up modestly on both a linked quarter and a year-over-year basis, primarily reflecting higher compensations and benefits costs. However, we remain confident in our ability to control cost, despite the ongoing impact of strategic investments and higher regulatory compliance cost. Loans grew for the 20th consecutive quarter, although the 2% annualized growth rate is a slower pace than recent quarters. The portfolio was primarily impacted by lower line utilizations and volumes within our mortgage warehouse lending business. Loan outstandings within this business tend to be more volatile than our other businesses. Excluding mortgage warehouse lending, loans grew over 6% on an annualized basis, driven by strong residential mortgage and commercial real estate results, highlighting the importance of our diversified business mix. Our progress gathering deposits continued during the quarter, as evidenced by annualized growth of 12% from the end of the second quarter. As we maintain emphasis on franchise-wide cross-sell and deposit gathering efforts, the deposit base will continue to see growth. Recently released FDIC data show we either increased or maintained our deposit market share rank in each state we operate in. And we are particularly pleased with our continued number one market share position within the Fairfield County, Connecticut and the State of Vermont. With that, I'll pass it to David to discuss the quarter in more detail.

[David Rosato:]

Thank you, Jack. On Slide 3, we provide detail behind the linked quarter increase in net interest income from the second quarter. Our ongoing loan growth as well as higher average balances and yields in the securities portfolio, each increased net interest income by $2.2 million. Net interest income also increased $1.7 million from an additional calendar day in the third quarter. The largest offset to these improvements was a $1 million reduction in net interest income, due to a decline in accretion from run-off in the acquired loan portfolio. On Slide 4, net interest margin of 2.87% was lower by only 1 basis point compared to the second quarter, as the pace of decline continued to moderate. As such, this result is the smallest linked quarter decline in over three years. New loan volume negatively impacted the margin by 2 basis points, as new business yields remained lower than the total loan portfolio yield. In addition, the margin decreased 1 basis point from higher deposit volumes and costs, which primarily resulted from the successful CD campaigns discussed last quarter. These declines were largely offset by a 2 basis point increase from an additional calendar day in the third quarter. Through nine months, the net interest margin is 2.89%. Given these results, we expect the full year margin will be within the range of 2.85% to 2.95% we outlined in January. Turning to Slide 5. The loan portfolio grew $110 million or 2% annualized from the second quarter. Originated loan growth for the quarter totaled $169 million. Retail contributed $208 million of originated loan growth, which was almost entirely driven my strong residential mortgage growth of $201 million. As is our practice, most of the newly originated residential mortgages retained in our portfolio were hybrid ARMs. Originated loans in the commercial portfolio were down $39 million from the second quarter due to a $248 million reduction in C&I. As Jack discussed earlier, this result was entirely driven by lower volumes and utilization rates in our mortgage warehouse lending business. The period-end balance for this business was $839 million, down $312 million from June 30. However, the quarterly average balance decline for mortgage warehouse lending was only $45 million. Commercial real estate contributed solid originated growth of $209 million, marking the second consecutive quarter, the pace of originated commercial real estate growth has increased. We experienced acquired loan run-off of $59 million this quarter compared to $58 million in the second quarter. The remaining balance of the acquired portfolio at quarter-end was $841 million. The fourth quarter historically has been our strongest quarter in terms of loan originations, and our current view is for this trend to continue this year. However, with annualized loan growth of 5% through nine months, achieving the lower end of the range we outlined in January will be challenging. Slide 6 shows the change in deposits by segment from the second quarter. Total deposits increased $845 million or 12% on an annualized basis, primarily due to continued progress gathering commercial deposits. Commercial grew $883 million in the quarter compared to a $39 million reduction in retail. The seasonality of our municipal business had a favorable $486 million impact on commercial deposits. While the third quarter represents a seasonal low point for retail deposits with growth expected in the fourth quarter. Broker deposits ended the quarter at $2.7 billion, an increase of $60 million. This small increase does not change our expectations that broker deposits will represent a decreasing percentage of our deposit base, as we continue to grow organically. It is also worth noting that our loan-to-deposit ratio was 98% at the end of the quarter. Overall, we are very pleased with our progress gathering deposits and firmly believe that deposits are an integral part of customer relationships. On Slide 7, we take a closer look at the 3% increase in non-interest income from the second quarter. The seasonal nature of insurance renewals increased non-interest income by $2.6 million, while the continued success of our customer interest rate swap business contributed an additional $1.2 million compared to the second quarter. In addition, bank service charges improved $1 million, primarily as a result of one more business day in the third quarter and higher cost management fees, which have benefited from efforts to grow commercial deposits. On Slide 8, we illustrate the key components of changes in non-interest expenses on a linked quarter basis. Non-operating expenses decreased $2.9 million, primarily resulting from no branch closures in the third quarter. As you will recall, we closed 10 branches in the second quarter. From an operating perspective, expenses were up $5.3 million from the second quarter, due in large part to a $4.3 million increase in compensation and benefits, primarily reflecting an additional workday and higher medical-related cost in the third quarter. While operating expenses were modestly higher than recent quarters. We remain confident our proactive approach to expense management will continue to control cost. The next slide details our efficiency ratio over the last five quarters. While the ratio ticked up slightly in the third quarter, the results were still generally consistent with recent quarters. As we have mentioned before, continuing to improve operating leverage through revenue growth and effective expense management remains a highly important commitment of the company. Slides 10 and 11 are a reminder of our excellent credit quality. Originated non-performing assets as a percentage of originated loans and REO at 78 basis points remains below our peer group and top-50 banks, and has improved from 92 basis points in the third quarter of 2014. Looking at Slide 11, net charge-offs for the quarter remained at a very low level. These levels reflect the minimal loss content in our non-performing assets as well as our conservative and well-defined underwriting philosophy that has served us so well for many years. As shown on Slide 12, operating return on average assets increased 3 basis points from the second quarter. Notwithstanding this improvement, our return on average assets continues to be impacted by the persistently low interest rate environment. Further progress will be achieved by balance sheet growth, fee income growth and an ongoing disciplined approach to expenses. Looking at Slide 13, our return on average tangible equity was 10.5% for the third quarter, an improvement of 70 basis points on a linked quarter basis. As we continue to focus on our most important objective, improving profitability, we expect to see further progress in this metric overtime. Turning to Slide 14, we remain comfortable with our capital structure and balance sheet strength. Capital levels at the holding company and the bank continue to be strong, especially in light of our diversified business mix and history of exceptional credit risk management. Slide 15 displays our interest risk profile for both parallel rate changes and yield curve twist. As you can see we remain asset sensitive though slightly less so than last quarter. However, we remain well-positioned for an eventual rise in interest rates. Now, I'd like to pass it back to Jack to wrap up.

[John Barnes:]

Thank you, David. As we have mentioned many times before, we remain committed to investing strategically and building the business for the long term. As such, we are pleased to announce today the acquisition of Kesten-Brown, a Bridgeport, Connecticut based insurance brokerage firm focused on commercial lines and employee benefits. This acquisition will further diversify revenues through additional non-interest income as well as bolster our insurance business, which already placed People's United as the 12th largest bank in terms of insurance brokerage fee income for a recent industry report. This concludes our presentation. Now, we'll be happy to answer any questions that you have. Operator, we are ready for questions.

[Operator:]

[Operator Instructions] Our first question comes from David Hochstim of Buckingham Research.

[David Hochstim:]

Can you give us an update on opening new branches? I think Stop & Shop bought some A&P branches. Will you be expanding into those?

[John Barnes:]

We are engaged with Stop & Shop to talk about that, and don't have an answer there at this time. And I don't know that they've fully developed their plans as well as they move through that transaction. We do under our existing contracts expect during the next fiscal year '16 that we may have some activity in Connecticut and New York.

[David Hochstim:]

And about other non-supermarket branches, any new plans?

[John Barnes:]

Nothing new. We do look and certainly get approached, but we have no new plans at this time.

[David Hochstim:]

And could you talk a bit more about pricing? What you're seeing in commercial loans? Multifamily indicated that it was getting better, but -- ?

[John Barnes:]

Well, basically, I would say stable in the multifamily arena, and really the spreads run differently based on the lines of business. We've kind of seen actually a little slight improvement in our larger portfolios, but many of our specialty businesses we're seeing continued pressure. So a bit of a mix bag across the portfolios.

[David Hochstim:]

How about competition on the deposit side, rates there worst from --

[David Rosato:]

The deposit environment hasn't really changed from our perspective in the last quarter and actually probably last two quarters. There are still some banks who are paying to attract money in money markets and you see occasional CD specials. We talked about this in the second quarter some small CD specials we ran. But the competitive environment is essentially unchanged.

[David Hochstim:]

And then could you just say a little bit more about your net interest margin guidance for the year, it's still pretty wide range, we only have one quarter left?

[David Rosato:]

Well, we're at 2.89% through the first three months. And as is our practice, we give annual guidance in January. So rather than just provide fourth quarter guidance at this point, we will stick with our 2.85% to 2.95% for the year.

[David Hochstim:]

But I guess, are you signaling something dramatic that could happen in the fourth quarter or you're just not changing the guidance?

[David Rosato:]

We are not signaling anything dramatic in the fourth quarter.

[Operator:]

Our next question comes from Casey Haire of Jefferies.

[Casey Haire:]

Dave, wanted to follow-up on the expense outlook. By my math to hit the high-end of that guide of $845 million, we're looking at some about $4 million of leverage in the fourth quarter. Does that make sense? And if so, what are the drivers?

[David Rosato:]

What I would say is we had a couple of one-timers in the third quarter. We called out the day count on comp and also the healthcare expenses. So at this point, we are still comfortable with comp. We still have comfort that we will hit our operating expense range that we set out at the beginning of the year of $835 million to $845 million.

[Casey Haire:]

And then on the mortgage warehouse, obviously, that can be volatile and clearly went against you this quarter. It sounds like on an average basis, there is still some attrition on the come. I was just wondering from that $839 million level, do you expect it to settle from here on a period-end basis? And then what are the yields on mortgage warehouse?

[John Barnes:]

Well, a couple of things. I think the very positive news for mortgage warehouse, if you look back over the last three or four years is the level of commitments that they have had outstanding has steadily increased. They've continued to build the business. And so the peak that we had in line utilization in the second quarter has proved to be right at the end of the period, proved to be more than we expected. And in hindsight now it kind of feels like a lot of the discussion about the change in the regulatory disclosure was pushing volume, kind of pulling it through ahead of that transition and certainly our customer base kind of displayed that. If you look where the third quarter is and then go back to the first and the fourth quarter, those line utilizations has kind of come back to the range where it's been. So very much in line with those other quarters. So kind of forecasting forward into the fourth quarter is difficult. There is certainly some discussion out there that mortgage bankers and Fannie and Freddie people expect things to slow. And we're evaluating that, especially as we think about the fourth quarter, but also the plan for next year. I would say, our folks on the ground are cautiously expecting some continued reduction. But I don't see it as being dramatic right now. It's just like interest rates, how do you predict it.

[David Rosato:]

So I was just going to say, the spreads are holding up nicely in that business. They run 2.5 to 2.75.

[Casey Haire:]

And just last one for me. On the insurance field Kesten-Brown, just curious what's the revenue impact and capital impact? And when do you expect that deal to close?

[David Rosato:]

Well, the deal is close. The revenue impact is they have our annual run rate in the neighborhood of $2.5 million to $3 million. It's not material from a capital impact for us.

[John Barnes:]

It's just under 10% growth in the business, which is very attractive for us, the business lines and the customer base. There was actually a customer that we competed for. So it's nice to have the principals join the company and the entire team, they both kind of move forward with us. They have created a very successful business and we're looking forward to them, helping us continue to build our business here in Connecticut, which has a plenty of opportunity.

[Operator:]

Our next question comes from Bob Ramsey of FBR.

[Bob Ramsey:]

I was wondering, if you could talk a little bit more about expenses. I know you all indicated you still feel good with the full year guidance. And I was wondering if you could talk about the sort of unusual items this quarter. How much of it was the healthcare piece? And is that really non-recurring or is there somewhere where you expect to offset it in the fourth quarter?

[David Rosato:]

The healthcare expenses were up $1.7 million in the quarter. We can clearly identify $700,000 that is non-reoccurring. Also if you look at healthcare cost year-over-year by quarter, you normally see an uptick in healthcare costs in the third or the fourth quarter, as employee start to meet their deductibles and there is a higher percentage share on the company. But we would expect in the fourth quarter our healthcare cost probably to recede a little bit from what we saw in the third quarter.

[Bob Ramsey:]

So that's there. There's $700,000 that's non-recurring and maybe you recede a little bit on the rest. I guess I'm looking at total expenses to hit the full year guidance, seem to come down by about $5 million. So it's a piece of it. The day count won't really change. Where else are you all hoping to trim a little bit?

[David Rosato:]

I think our comp line will come down a little bit in the fourth quarter. Also in this quarter the divisional incentives were up in some of our lines of business. And that will probably normalize as well in the fourth quarter.

[Bob Ramsey:]

I'll just ask one other question and I'll hop out. But credit quality obviously is very strong for you guys, it always has been. How should we think about the provision cost and sort of certainly given your loan growth outlook and sort of the updated guidance there, how should we think about provisioning?

[John Barnes:]

Well, I think, as we have laid out in the past, the way we think about provisioning is twofold. First is covering net charge-offs during a period, and then looking at growth in the portfolios and building the allowance accordingly based on loan type and our analysis about the provisioning that would be required for that. So its net charge-offs and then loan growth in the period.

[David Rosato:]

If you look at allowance to loans and allowance to NPLs, you saw modest improvements in the third quarter relative to the second.

[Bob Ramsey:]

And so maybe it's fair to the extent fourth quarter is seasonally strong for loan growth that the piece of the provision that's associated with growth would be slightly larger and that net charge-offs will sort of dictate the other piece of it, however that shakes out?

[John Barnes:]

Yes. That's fair.

[Operator:]

Our next question comes from Mark Fitzgibbon of Sandler O'Neill & Partners.

[Mark Fitzgibbon:]

First question I had, Jack, maybe you or David could share your thoughts on your current capital position and how you're thinking about that in relation to your projected growth?

[David Rosato:]

As you saw, we had a very modest change in capital ratios, either did not -- regulatory ratios for the most part did not change. Tier 1 leverage was only down 10 basis points. So we are very comfortable based on the risk in our balance sheet with our capital position. We have discussed in the past from questions we've received our thoughts around future capital actions. And on the call last quarter we talked about the possibility of a midyear preferred transaction in midyear 2016 really based on two factors. One was going to be loan growth this year as well as our sense around loan growth next year. So as we sit here today, we wouldn't change that assessment that we gave three months ago.

[Mark Fitzgibbon:]

And then secondly on the acquisition front, I wonder if you feel like the company is operating at a level where you could do some larger bank acquisitions. Do you feel like you have capacity in the system to do something like that today?

[John Barnes:]

Yes, absolutely we do, on kind of multiple levels and that we've built the company with a very strong foundation in terms of a scalable platform, if you will, strong risk management and governance structure. And if you look across our markets, there remains considerable opportunity for us to continue to augment our presence in the markets. And well we are and we'll continue to look for those opportunities, but we definitely feel prepared to do so.

[Operator:]

Our next question comes from Steven Alexopoulos with JPMorgan.

[Steven Alexopoulos:]

I don't want to beat a dead horse on the expenses, but just to take a minute to make sure we're on the same page. Do you guys consider your operating expense year-to-date of the $634.5 million, which is in the release, is that what you're considering when you're looking at your original full year guidance or you're making any adjustments to that number?

[David Rosato:]

No, we're looking at the $634 million.

[Steven Alexopoulos:]

So fourth quarter expenses you're saying will come down to $211 million, something like that, to get into the range.

[David Rosato:]

That's our sense.

[Steven Alexopoulos:]

I want to follow-up on Jack's comments about the most important objective being to improve profitability. I know in past calls you guys have indicated that without the help of rates, it's going to be tough to make dramatic steps forward in the efficiency ratio in terms of improvements. But given maybe some uncertainty on the rate front, is there a plan B to move the efficiency ratio down or does it just sit at 62%, so long as the fed is zero?

[John Barnes:]

Well, I think granted it will be slow progress, depending on the rate of growth in the loan portfolio. But moving the businesses forward through the initiatives that we've undertaken to grow the various business lines and take on talent to do that, we would expect to move our revenue front forward without the benefit of a rate rise by growing our businesses both in the interest income categories and the fee businesses. And we are steadily doing that and we would continue to do that. And we think managing expense levels, despite those investments in a pretty darn tight range. So we don't have a plan B that calls for dramatically changing the expense structure. We manage it very tightly. We find opportunities to reduce expenses. We've referenced in the past our ability to find and close branches effectively in the past. We mentioned our EMOC process. So we've built pretty considerable risk management compliant structure and hired a lot of people in Boston and New York, and in ABL business, and the mortgage warehouse business and the wealth business, and we've maintained expense levels, while we've done that. So I would call that plan A. And I think we're working very hard at improving the efficiency ratio that way.

[Steven Alexopoulos:]

Maybe if I could ask just one final on the tax rate, it looks like the lower tax rate data maybe a penny to the quarter. Were there any one-timers in there or for some reason should we be thinking about the lower tax rate going forward?

[John Barnes:]

No. There were no one-timer, Steve. We were a little over accrued, when we did a midyear true-up.

[Steven Alexopoulos:]

So not a run rate, then?

[John Barnes:]

Correct.

[Operator:]

Our next question comes from Ken Zerbe of Morgan Stanley.

[Ken Zerbe:]

I guess first question, someone asked about the revenues of Kesten-Brown, I think you said it was $2.5 million to $3 million. Is that net revenues or is there any expenses that are associated with that?

[David Rosato:]

There are expenses associated with that revenue. So that's gross total.

[Ken Zerbe:]

That's gross revenue?

[David Rosato:]

Correct.

[Ken Zerbe:]

And so the net income benefit from that is -- what should we assume sort of a --

[David Rosato:]

It's not something we are prepared to disclose.

[Ken Zerbe:]

But it reasonably will be something less than the $3 million annual benefit. And then just in terms of loan growth, you made a comment that you're not going to hit your target this year. It's going to be tough challenging to hit your target for loan growth. Where have you been the most surprised? Like if you look back to beginning of year what headwind is now present that you were not expecting when you originally provided your guidance?

[David Rosato:]

So the biggest headwind that we've had and actually we've had in prior periods has been commercial real estate portfolio, with our largest portfolio. And really over the last several years, maybe three or four now, it feels like it's become very, very competitive. There are more players that have come back into the business, and it's very difficult competitively really in every market in every type of lending that we do. So we are pleased with the progress that we had in that area this quarter and prior. But overall, when we think about our guidance and our plan for this year, commercial real estate was the largest portion that has disappointed us. We also have seen a slowdown in our PCLC equipment finance area, which really is more dynamic about some prior relationships that we had that fundamentally changed. We shared exposure with a couple of other parties and those relationships changed, because their circumstances where changing. So we're originating actively and we're focused on getting that back on a better growth trajectory. In the meantime that has not grown at the same rate that it did in the prior really three years and probably beyond that.

[Ken Zerbe:]

And then just last question, on the provision expense, I think in the past you said that it shouldn't meaningfully change more. It has been running in the past, I'm going to ballpark, and say, roughly $10 million, but it is come down over the last few quarters, and it's still in very, very good credit. But going forward from here, are we at a better run rate at $6 billion or is that more likely to trend closer to $10 billion, given what you're seeing?

[John Barnes:]

Well, I think if you look at our net charge-offs, say, over the last eight quarters, it operates in a range that is very low. And for one quarter or another we may have a credit that we need to take a charge on, but thing have progressed really well. I think if you look at that range over those eight quarters, we don't expect that to change as far as we can see at this time going forward.

[David Rosato:]

Just to put some numbers around that. It's probably, I think of it is kind of an $8 million to $10 million provision number. It had some recoveries that have taken the number down a little bit as well as the acquired loan portfolios winding down, and we were able to release some reserves from that as well.

[Operator:]

Our next question comes from David Darst of Guggenheim Securities.

[David Darst:]

So David, maybe, would you drill into your technology budget for a minute, and then maybe talk about what maybe the top one and two things are that your incremental spending is going into right now and what your budgets are?

[David Rosato:]

There is a couple of things. I mean in terms of kind of the overall budget, we obviously have very large core processing contract with FIS. That is the most significant commitment we have on the technology side. It's a pretty deep relationship, meaning, we use a lot of their products and services, applications that we run. And I would say, maybe a way to think about overall our spend rather than kind of go into specific projects, I mean we could talk about that, and I'll give you a little color on that. I would say, as we look back on our capital spending over the last four or five years, we generally are continuing to invest in our products and try to improve our offerings, strengthen our offerings through technology. And that's been a fairly steady commitment and we don't see that changing in the near future. We have an IT project staff that we run pretty hard, and you can only load so much on the process. So we kind of managed to a level of work and activity annually based on our priorities. So we are investing now in project, we have projects that will run to strengthen our commercial product set in cash management international services, in particular. And we're also enhancing our loan system environment to help us improve our servicing capabilities in our large corporate area. And so we have those types of projects active and on the board. And of course, we invest in compliance and other types of activity that keep us in the right spot on the regulatory front.

[David Darst:]

And based on kind of what you have and what you're investing in today, do you think there will be a material change in the budget for next year?

[David Rosato:]

No.

[David Darst:]

And then just maybe on deposits. You alluded to your broker deposits being declining as a percentage of mix going forward. Is something kind of changing with your ability to generate retail deposits or commercial deposits, kind of excluding municipals?

[David Rosato:]

No. The only reason we mention the broker deposits was that they ticked up $60 million in the quarter, and it's just the timing issue. So that was the only reason it was worth mentioning. I mean the good news is we're continuing to have really nice momentum in commercial and retail deposit gathering as a company. And where we really have been moving the needle is on the commercial side. And that as this audience on the call knows is something that we've been talking about for a couple of years now and having really nice success.

[Operator:]

Our next question comes from Collyn Gilbert of KBW.

[Collyn Gilbert:]

If I could just go back to your comments about loan growth, so obviously it's going to come in a little bit lower in the fourth quarter in that 8%. I think you guys had guided 8% to 12% at the beginning of the year, so below that. But just trying to reconcile that with your comments David about still thinking there would be a need for a midyear preferred issue. As you guys kind of look at your landscape and you're talking to your customers and you go into the budgeting process in the fall, and everything that's happened globally, is your expectation that loan growth could rebound in '16? I mean how are you just thinking about it kind of in a broader sense?

[David Rosato:]

Sure. Just broader, just talk about the preferred for a minute. So if you want to get really minute on it, we had slower growth in the third quarter than we though we would have, right. So you could take that preferred deal and push it out, let's say, three months. And that conceivably could happen. But today as we sit here, there's an expectation that we'll have reasonable loan growth in the fourth quarter. And as we start working through the budget process, there is no reason to think that the momentum and the people that we have in the field and the customer relationships, there is a fundamental change in our ability to grow loan. So with all that said at a high-level, I can see a need for capital some time in the back half of 2016, whether it's midyear or whether it's some time in the third quarter or the beginning the fourth quarter, it's an open question at this point.

[John Barnes:]

We certainly have a lot of confidence in the various business lines and the people that are running and active in those businesses and building customer relationships that that will continue. And I think that's at the heart on the loan growth side of that on the balance sheet side of it. We've got a very good track record, if you look back over the last three years. We've got an average, probably 9%, 10% growth. And we continue to build those businesses and expect to make progress. I agree 2% GDP economic growth environment is not 4% straightly, but we continue to build relationships.

[Collyn Gilbert:]

And then just quickly, David, back to the preferred, and if you guys have said this, I apologize. But what's kind of your capital targets, your tier 1 targets or whatever that's? Just to think about the whole that you'd be looking to sell?

[David Rosato:]

Sure. So what we said on the call last time was that people backed into an issuance size of somewhere between $150 million to $250 million issuance. And that would not address obviously PCE, but it would address all of our regulatory ratios. We've also said that today as we sit here, our capital ratios are above our targets, our internal targets. But as you project growth, obviously those ratios will come down and you need to be fortified at some point.

[Collyn Gilbert:]

And then just a final question. Jack, just coming back to your comments on M&A and indicating that you guys could be in a position to really be ready to do large M&A. Can you just sort of frame that for us in terms of what your interest or appetite could be on larger M&A?

[John Barnes:]

Well, what do you mean by larger?

[Collyn Gilbert:]

I don't know. That's what I think the question was. I have definitely written in all caps in my notes. So it sounded like it was [multiple speakers].

[John Barnes:]

There are a lot of potential partners for us that across our Northeast corridor that some that are very attractive at $2 billion and some at $10 billion. And so we have a very good track record in terms of acquisitions and moving through integrations and conversions. We have a great playbook that we have used in the past that we continue to update and be prepared when the right opportunity comes. We're also very disciplined and thoughtful about what we do. And we'll continue on that track. So my reference to being prepared is just that that we look at our history. And moving through whether for this organization it was Chittenden acquisition at the time, which was a significant undertaking, and what we've done since, we've executed very well.

[Operator:]

Our next question comes from Matthew Breese of Piper Jaffray.

[Matthew Breese:]

Just curious, one more on the Kesten-Brown acquisition. Can you provide us with the dollar amount projected for intangibles or goodwill created?

[John Barnes:]

No. Not at this point.

[Matthew Breese:]

And then, going back to your asset sensitivity and some of the changes there, given the lack of a fed funds hike and some uncertainty around how and if the fed will move interest rates this year, was that intentional? Was this tied to the mortgage, the decline in mortgage warehouse balances? Can you just give us some color around why the shift?

[David Rosato:]

First of all, I would say, it was a very modest decrease in asset sensitivity, really driven. If you'll notice the securities portfolio grew in the quarter and so that was the number one driver of the decrease in asset sensitivity. And then I would also just say that, if you pick the five year point on the swaps curve, quarter-over-quarter five year swaps were down about 40 basis points. So you're starting from a lower interest rate level, when you run your models and that also had a modest impact.

[Matthew Breese:]

And then just touching on the potential preferred equity raise, can you walk us through the thought process of going down that avenue versus taking potentially some other capital strategies such as sub-debt or maybe potentially changing the payout ratio, which is a lot higher than a lot of your peers?

[David Rosato:]

Well, I would start with our job is to manage capital ratios, both at the bank and at the holding company level. And I'd remind you that we did do a $400 million bank sub-debt issuance towards the end of the second quarter of 2014. As you can see some of the residual effects of that, where at the bank we have higher total risk-based capital currently, and you can see the changes overtime. So we go back to -- there has been a long evolution of capital management at this company going back to being grossly over capitalized coming out of the Tier 2 second step conversions. And there has been a series of acquisitions, we bought back 25% of the stock that was issued in that transaction through a bunch of buybacks, and we've also had a nice and strong dividend payout to shareholders. So the capital rules under Basel III are pretty clear about what an efficient capital structure is, and those efficient capitals structure does include preferred. And our job is to create that efficient capital structure, the most efficient capital structure we can for shareholders. And that's the simple logic behind the need to add preferred at some point and into the capital structure. And if you look at our peer group, you'll see many of them, not all of them, but many of them who have preferred in their capital structure.

[Operator:]

Our next question comes from Dave Rochester of Deutsche Bank.

[Dave Rochester:]

Just quickly on the tax rate, were you guys saying that we should expect that to rebound back to that 34% level next quarter as the true-ups roll-off?

[David Rosato:]

No. It will rebound, if you will, to about 33.5%.

[Dave Rochester:]

And then just back on capital quickly. As you guys try to formulate how much capital you need, but what do you see is limiting regulatory capital ratio that you're watching more closely? And then, just second part to that, if you were to see the TCE ratio decline to a 6% handle next year, is that an issue at all with the regulators, given you're still growing or is it not something to worry about?

[David Rosato:]

Well, two questions there. The first is what is the most limiting capital ratio for us. I would say it's total risk-based capital. We're a commercial bank, we generate a large amount of 100% risk-weighted assets overtime. That was the reason that we had the bank level sub-debt issuance last year. I mean you threw out a hypothetical 6% TCE ratio --

[Dave Rochester:]

Or just a 6% handle.

[David Rosato:]

A 6% handle, and then couch that with issues with regulators. What we have talked about is TCE will probably end up the year at about a 720 or so rate, dependent on growth. We've said last quarter that that's about where our long-term preference is. In the short-term in this interest rate environment, we would have a tolerance to let it slip below that for a short period of time. But we also believe that there will be some rate relief at some points that will help us create more cap, internal capital generation, even with our dividend payout ratio. So it's an internal comfort level, much more than a discussion with our regulators.

[Dave Rochester:]

And just lastly, this is a long-term question here. But since you guys are still below $40 billion, you don't need to worry about this, this year, probably even next year, but I do have you crossing through $40 billion in assets at some point over the next couple years. Just wondering, at what point you actually have to start that glide path to crossing the $50 billion threshold and discussing that with your regulators and getting your systems ready. At what point you start having to do that?

[John Barnes:]

Well, actually we've been talking about that for a couple of years and we've actually continued to work at it and on kind of the multiple fronts and trying to understand what it would mean and try to -- our view is that we should gradually to be ready. And that's the longer-term view that we've been taking. So there is a lot of different angles on kind of the management of data being prepared to deal with big data being understanding what a CCAR filing is in detail, and then examining your data for that type of thing and examining other components of it. So on multiple fronts we spend time and we give folks assignments and we also work with others in the industry to try to understand from their experiences what that means. And then we make preparation, as we don't want to get there eventually and start when it's too late.

[Dave Rochester:]

Do any of those expenses -- sorry, go ahead.

[David Rosato:]

Dave, the only thing I was going to add to that is we're a good DFAST bank, and we got there in the same approach that Jack is talking about. We got ahead of it early. We've build out a team overtime and improved our capabilities, and it was all just built into the run rate.

[Dave Rochester:]

So I guess, as you're kind of in the process of thinking through this. Do you think that it might be not until maybe 2017 that you start seeing some accelerated expands in this area in terms of building out for this or would you expect that to be pushed even more into the future?

[John Barnes:]

At this point, we're not expecting any accelerated expenses to hit us, but we don't have all the answers either. So we are making the incremental investments, as David, DFAST point is a real good one. We've built that staff over the last number of years and it came into our run rate. And those are the kinds of things that we are doing incrementally to be compliant with DFAST and the requirements and successfully meet that requirement. So when we talk about expenses and say that we're managing expenses at a level, while we are also meeting increased regulatory compliance demands and making the investments in the businesses, those were the references we're talking about.

[Operator:]

Our next question comes from Steven Alexopoulos with JPMorgan

[Steven Alexopoulos:]

Just one follow-up on all this commentary around the larger M&A and CCAR. Jack you threw out two asset sizes that would each keep you below the CCAR line, much of that was intentional or not, but do you have an appetite to do a deal large enough that it would make you a CCAR bank sooner than later?

[John Barnes:]

I would say it would depend on kind of the answer I just gave about preparedness and the time it takes. I don't think that we are clear yet about that and we continue to work at it. So I guess the right kind of response would be, we don't know enough yet to know exactly what those requirements are. So we would not prepare to undertake that without that understanding.

[Steven Alexopoulos:]

I'll also add, just given that you have a dividend payout ratio that's significantly higher than the other CCAR banks, which I would guess would also be a consideration for you.

[John Barnes:]

Correct. End of Q&A

[Operator:]

Thank you. Ladies and gentlemen, this will conclude the time we have for questions. I would now like to turn the call over to Mr. Hersom for closing remarks.

[Andrew Hersom:]

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 203-338-4581. Have a great night.

[Operator:]

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