People's United Financial, Inc.
Q4 2012 Earnings Call Transcript

Published: 18 Jan 2013

[Operator:]

Good day, ladies and gentlemen, and welcome to the People's United Financial Incorporated Fourth Quarter Earnings Conference Call. My name is Patrick, and I will be your coordinator 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 afternoon, 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 fourth 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 afternoon, everyone. Appreciate you joining us today. As has become our custom, in addition to reviewing the fourth quarter results, I'd like to reflect on the past year, as well as our goals for 2013. You'll recall that since I took over as CEO in mid-2010, we have had 2 primary objectives, optimizing existing businesses and efficiently deploying capital. In 2012, we executed well against both of these goals. 2012 was a year in which we continued to take action to enhance growth opportunities by expanding existing business lines and deepening our market presence. Our people made this progress possible by building new relationships across our footprint. We are also in a fortunate position to have outstanding fundamentals which allows us to continue to attract and retain talent throughout our franchise. We experienced growth in essentially every loan product and every fee income business, and we were able to grow loans at faster than market rates by bolstering our capabilities and a few underrepresented asset classes, including asset-based lending, New York commercial real estate, mortgage warehouse lending, private banking and wealth management. In addition, we extended our presence in Metro New York through the acquisition of 57 branches in Southern New York and also opened a flagship branch in Midtown Manhattan. These branches represent a significant source of future low-cost funding, asset-generation and an important connection with the current and future customers. We are able to make progress while interest rates remain low, and in fact, fell 30% at the short end of the yield curve since the beginning of 2012. As a reminder, approximately 35% of our loan portfolio is comprised of floating rate loans tied to short rates. Our progress allowed us to grow loans per share by 12% and deposits per share by 9% in 2012. Operating earnings grew 10% year-over-year to $254 million and our operating earnings per share grew 14% to $0.75. Our operating return on average assets was 90 basis points, up 1 basis point over 2011. Operating return on average tangible equity improved 130 basis points as we increased earnings and returned capital via dividends and share repurchases. Our revenue growth and highly disciplined approach to expenses drove the efficiency ratio from 64% in 2011 to 62.4% in 2012. In addition, asset quality strengthened further from the existing industry-leading levels. On Slide 3, you can see our total loans and deposits grew 7% and 4%, respectively, which provides a good link to Slide 4. Slide 4 shows that our growth in loans and deposits was offset by lower interest rates which combined to produce relatively flat net interest income and revenue. Efficiency ratio improvements combined with our share repurchases serve to boost earnings per share by 14% year-over-year. As we mentioned at the start of the call, our rate environment will likely mask some of the benefits of the larger balance sheet at least as seen through the net interest income line. However, fee income growth, a disciplined approach to expenses and attractive -- excuse me, active capital management will continue to drive earnings per share progress. We have 6 goals for 2013

[Kirk W. Walters:]

Thank you, Jack. On Slide 6, we provide an overview of our fourth quarter results. For the quarter, operating earnings were $63.2 million or $0.19 per share with net income of $61.2 million or $0.18 per share. The operating net interest margin declined by 19 basis points to 3.63% compared to 3.82% in the third quarter. The decline is largely the result of lower loan yields driven by strong loan originations, lower accretion on acquired loans and a slightly larger securities portfolio. Loans grew at a 13.3% annualized rate in the fourth quarter driven by strong commercial loan growth. The efficiency ratio for the quarter rose to 63.1% from 61.4% in the third quarter primarily due to lower income from acquired loans. Net charge-offs remain low at 19 basis points compared to 18 basis points last quarter. During the quarter, we repurchased 4.7 million shares at a weighted average price of $11.95 or $56.3 million. We also announced a new share repurchase authorization for another 10% of our outstanding shares. This new share repurchase program will be financed with cash on hand, as well as the proceeds from our $500 million senior notes offering priced at 3.65% in December. Capital ratios remain strong, we continue to deploy capital through organic growth, dividends and share repurchases. The tangible equity ratio stands at 10.2% at the end of the fourth quarter of 2012. On Slide 7, you can see that our operating net interest margin declined steadily in 2012 as acquired loans ran off, longer term fixed-rate loans continued to reprice and our new loan originations grew at a faster rate in the latter half of the year. There is no difference between reported margin and operating margin this quarter as we did not experience any cost recovery income in the fourth quarter. On Slide 8, you can see a breakdown of elements contributing to our 3.63% margin results for the quarter. As you'll recall, third quarter operating net interest margin was 3.82%. The effects of lower yielding new loan volume and acquired loan accretion reduced the margin by 7 basis points and 5 basis points, respectively. We also lost 2 basis points related to loan repricing and amortization this quarter. The decision to run a slightly larger securities portfolio pressured our margin by 4 basis points. The securities portfolio represents 15% of total assets, which although up from the middle of last year, remains below our peer median. The previously discussed senior note offering and the expiration of fair value amortization adjustments associated with Danvers time deposits negatively impacted our margin by 2 basis points. These changes are partially offset by a 3 basis point improvement in deposit costs. Next quarter, we will have a full quarter of interest expense associated with our recently issued senior notes. In the quarters ahead, we will be working hard to increase the mix of DDAs to help offset some of the decline in loan yields. However, the primary determinant of the pace of the margin decline in the quarters ahead will be the pace of loan originations. Slide 9 links closely with our discussion of the net interest margin. For the quarter, interest accretion on acquired loans totaled approximately $42 million and the carrying amount of acquired loans to period end totaled $2.2 billion, down from $2.6 billion last quarter and $3.6 billion one year ago. All of these portfolios are seasoned at this point, and since we aggressively dealt with some of the more troubled loans first, we continue to believe that the acquisition date credit marks will, in the aggregate, prove to be sufficient. Slide 10 illustrates the amount of non-cash accretion running through our income statement. If you go to the top left, you will see that we booked total accretion of $42 million this quarter, which when you annualize and divide by the average balance to the acquired loan portfolio gives us an effective yield of 6.86%. The weighted average coupon in the acquired loan portfolio is 5.27%. This was the actual cash coming in from the acquired loans. The difference between the 6.86% effective yield and the weighted average coupon of 5.27% amounts to $9.7 million of additional interest income from the amortization of the original discount on the acquired loan portfolio. Annualized in this number and dividing it by the adjusted average earning assets in the fourth quarter shows that 15 basis points of our operating net interest margin during the quarter relates to noncash accretion. So if you wanted to think about our core underlying margin, excluding the noncash accretion, it would be our operating net interest margin at 3.63% less than 15 basis points or 3.48%. The noncash accretion was equivalent to $0.02 per share this quarter as shown on the right-hand side of the page, which is similar to prior quarters. Over time, as the acquired loans repay, mature or settled, the amortization of original discount will dissipate. At the same time, it is possible that we may also experience reclassifications from the non-accretable difference to accretable yield due to better-than-expected credit performance. Slide 11 provides a breakdown of the elements contributing to our net increase in loans. Our loan portfolio produced total growth of 13.3% quarter-over-quarter annualized. This is a testament to the number of loan initiatives we have focused on over the past year, as well as our deepening market presence. The growth is particularly notable considering the degree of acquired loan runoff, which we expect will slow in the quarters ahead due to a combination of or limited opportunity for problem asset resolutions. Significant progress has already been made on the problem assets as evidenced by the decline in the level of acquired non-performing loans. Further portfolio seasoning, which is expected to reduce the level of outflows given the fact that these acquisitions have all anniversaried at least 1 year, and the remaining portfolio composition, which reflects longer duration assets such as commercial real estate loans and residential mortgages. Originated loan growth for the quarter totaled $1.1 billion. As in prior quarters, growth came from a variety of products and geographic areas. Commercial real estate contributed 38% or $412 million, including $146 million from New York commercial real estate. The portfolio remains broadly diversified with most relationships well below $25 million. C&I contributed 44% or $477 million. Within C&I, we saw strength across all categories, but I would highlight 3 businesses

[John P. Barnes:]

Thank you, Kirk. Slide 20 highlights our ability to grow both sides of the balance sheet. We continue to make progress on loan and deposit growth on a per-share basis while maintaining excellent asset quality. We know that if we grow loans and deposits per share, increase fee income and continue to reduce costs, we will produce greater recurring earnings per share. Over the past 2 years, loans per share and deposits per share have grown at compound annual rates of 16% and 14%, respectively. On Slide 21, our operating return on average assets for the fourth quarter was 87 basis points. This decline relates to having a larger balance sheet and a lower net interest margin. Progress will be driven by loan growth, aided by slower acquired loan runoff, fee income growth and a disciplined approach to expenses. Further in the future, with our highly asset-sensitive balance sheet, we look forward to rates returning to more historically normal levels. Slide 22 illustrates the improvement in our return on average tangible equity from the low levels of 2010. We expect to see continued improvement on this metric as we improve profitability and thoughtfully deploy capital. Still, our significant capital levels remain approximately 230 basis points over peers on a tangible common equity to tangible asset basis. Normalizing our equity base to be consistent with our peers shows that the bank is performing well with the return on average tangible equity of 11.8%. Slide 23 demonstrates our substantial progress since 2010 on the dividend payout ratio. We expect progress to continue in the quarters ahead from improved profitability and continued share repurchase activity. We anticipate our recently announced share repurchase program will, depending on earnings, produce an improvement on a dividend payout ratio of 5% to 10%. Over time, we will expect our dividend payout ratio will trend still lower as we grow earnings and retire shares. On Slide 24, we see that capital levels of the holding company and the bank remain strong with our tangible common equity ratio at 10.2% and Tier 1 common at 12.7%, which compares well to our peers at 7.9% and 10.7% as of the third quarter, respectively. At this point, in a very long, low rate cycle, we are focused on taking actions to enhance growth opportunities which will allow us to hold net interest income steady while increasing fee income, reducing cost and returning capital to shareholders. Our robust pipelines and strong originated loan growth contribute to the continued momentum of our franchise. The strength of our platform continues to allow us to attract and retain exceptional talent and provides us sustainable competitive advantage. We will not take on unfamiliar credit risk or interest rate risk. When the rate environment does change, we will be well positioned. This concludes our presentation. Now we'll be happy to answer questions you may have. Operator, we are ready for questions.

[Operator:]

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

[Steven A. Alexopoulos:]

I wanted to start in terms of the loan growth guidance for 2013. Maybe first, how much of a headwind should we expect from the acquired loans? Is $800 million the reasonable rate which is annualized in 4Q?

[John P. Barnes:]

The -- in terms of the runoff of acquired loans, the -- I mean 4Q was $400 million itself. But we do expect that to slow down so by an appreciable amount, probably a range of around 40%, somewhere around there. So $200 million to $250 million, in that range on a quarterly basis annualizing would be some general guidance on that.

[Steven A. Alexopoulos:]

Okay. Kirk, looking at the required growth, you would need to drive total loans in the highest single digit to mid-teens. Can you help us think about the sources of that growth? And then what gives you comfort at this stage that, that will materialize at that level in the backdrop of pretty difficult environment still being painted by most of your peers?

[Kirk W. Walters:]

Let me take -- I'm going to take an initial crack and then have Jack add onto this. I mean, at the first part is that we do expect not only in the acquired loans, but in some of our other portfolios that the level of reductions that we've experienced will, in fact, slow a bit. And so that is embedded in there particularly on the acquired loans. And secondarily, I would say that one of the reasons that we are encouraged is that we continue to have good strong pipelines across all of our different portfolios going into the year in spite of a very strong fourth quarter. So with that, let me just turn it over to Jack and he could maybe talk a little more business-by-business.

[John P. Barnes:]

I think we have been talking through the year, Steve, about the very nice progress that we've made in businesses like ABL mortgage warehouse lending. And I've also -- I know I've mentioned before and we've certainly ended the year strong across pieces of our core geography, particularly Connecticut C&I, even had a very strong 15% growth in New Hampshire C&I, for instance. So our -- across our geographies, our core commercial businesses are doing very nicely. And we had an excellent performance in our equipment finance and the other businesses that I mentioned. So we're feeling just very good about all of our business lines and our presence in the relationship building in the core franchise. I know I mentioned during the year our work around building C&I in our Long Island market in New York. We had a 33% growth rate there this year. So when you start to kind of break it down by how we're doing in different business lines across the footprint, we're getting very, very good momentum and traction. We actually would have done much better this year if we didn't have the payoffs that we experienced that slowed the rate of growth. And we don't expect that pace to be the same this year.

[Steven A. Alexopoulos:]

Okay. Maybe just one final one on the expense guidance. I guess the run rate of operating expenses around $818 million, and you're guiding it to $815 to $825 million. Does this imply that the bulk of the cost-cutting initiatives are now behind you essentially?

[Kirk W. Walters:]

I think as far as what it implies is if we think about that number in the range that we've given, effectively that is assuming that we are taking out additional cost as we go forward into '13 because we would have had a full year of expenses on the branches that we acquired from Citizens, which, that with couple other things, would've added about $20 million on to our run rate, and in fact what we're implying is that we'd be holding the run rate constant. So there are continuing initiatives underway to, in this case, hold expenses at this level, and we will be -- continue to be very focused on the expense number and working of ways to bring the absolute level of expenses down.

[Operator:]

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

[Collyn Bement Gilbert:]

Just wanted to kind of ask sort of a big picture question. It seems as if I understand, the commentary obviously about the portfolios that the run-off is slowing and in the momentum that you've been carrying as the years gone on. But it still seems like there's been a bit of maybe a strategic change in how you're looking at the environment, I mean with kind of your guided growth rates to be twice the level of pretty much what we saw in 2012. Is that the case? I mean, do you see something here that's causing you to sort of accelerate your growth plans? And then also, two, just thinking about the funding of it? Because when you -- with the guidance terms you gave for 2013, it looks like you're going to utilize borrowings in a much better or a much more aggressive way. And then I guess part B of this question would be how does this sort of fit in with the share repurchase authorization of the 30 million shares? Again, at that point, it seems like you were -- maybe were going to pursue a more conservative growth path, utilizing the capital to buy back stock. So just -- sorry, it's a long wind, it's a little all over the place. But just trying to sort of reconcile the sort of the moving parts of this, what seems like a pretty aggressive growth plan for you all in coming forth?

[Kirk W. Walters:]

Let me -- Collyn, it's Kirk. Let me -- I'll take the first crack at it, and then Jack will chime in. In terms of sort of the 3 embedded questions you had there. As far as loan growth, I think part of our encouragement and a little more bullishness really is from what occurred in the third and fourth quarter. In the third quarter, toward the end of the third quarter, we did have good solid loan growth that continued into the fourth quarter in terms of seeing loan growth across all of our portfolios and continued progress. I think we also are seeing the results of all the additional people we've hired, new bigger markets we're operating in, the different branches and such that we've either de novo-ed or acquired, getting up and operating in a larger presence in those. So I think it's a variety of factors that we're feeling more confidence in our ability to really grow and realize on those, including the various initiatives we've taken. The fact that now on all those initiatives, people are there clearly up and operating, by year end, pretty well at full speed. In terms of funding, the -- certainly this could require some more wholesale funding. As you know, we have very little wholesale funding on our books that actually comes on in a rate lower than where our deposits are. And assuming the high end of the loan growth, you would have some modest additional borrowings that we would put on. As far as repurchasing shares, we don't believe the guidance here changes the game plan there. We raised the $500 million to use at the holding company as liquidity. To fund the repurchase, we have historically performed on our repurchases in terms of buying the shares and pretty well ratably over the year. And obviously, from a pure economic standpoint, the debt we issued was 10-year debt, which on an after-tax basis was around 2.2%, 2.3% and we'd be retiring shares or paying dividends on, that has a yield of over 5%. And we still, even with this buyback, continue to have strong capital ratios. With that, let me turn it to Jack for a minute.

[John P. Barnes:]

Just to circle on the beginning of it, Collyn. Regarding strategy, if you really step back and you think about the acquisitions we made that included getting ourselves into larger markets in New York and Boston, and we've hired a lot of talent there to help us. And now that momentum is paying off. We also -- we announced things like the commercial real estate initiative and a number of other initiatives through the period all tied to that strategy of allowing the company to grow at a faster rate than the industry, if you will, averages and putting ourselves in a position to take advantage of our -- the way we operate and the opportunity we have in the Northeast corridor. So it very much ties to the strategy.

[Operator:]

The next question comes from the line of Damon DelMonte with KBW.

[Damon Paul DelMonte:]

Quick question for you on credit trends. The numbers that were reported were favorable quarter-over-quarter for sure. Looks like there's a little bit of movement within the resi and the home equity portfolio. Was that due to the new Chapter 7 OCC regulation?

[Kirk W. Walters:]

The answer is yes. There were a couple other legs to that. We really had no P&L impact and such around that. But in terms of the increased NPLs and such, that is in relation to the new OCC guidance.

[Damon Paul DelMonte:]

Okay. Have all of the appraisals been completed on the portfolio?

[Kirk W. Walters:]

Yes.

[John P. Barnes:]

Yes. We were doing that before. We were there already on that one, Damon.

[Damon Paul DelMonte:]

Okay, great. And then kind of in step with credit here on the provision expense. As you continue to see the strong loan growth, should we expect to see a bit of an uptick in the provision level versus like what we saw this quarter?

[Kirk W. Walters:]

Well, I think if you look at this quarter, out of the $12 million provision, $7.2 million related to growth in the loan portfolio. So we have a very good, detailed allowance process where each new loan is coming on. We're putting something away for rainy days. So certainly, if loan growth accelerates from the level that we have in the fourth quarter, you would see a little bigger provision. If it slowed down, it could be a little smaller. But like I say, about $7 million to $12 million was related to loan growth for this quarter.

[Damon Paul DelMonte:]

Okay, great. And then I guess, just my last question. It looks like the growth in securities and the FHLB advances came towards the end of the quarter. Could you just talk a little bit about what you're buying on the securities side and what the funding looked look like on the advances?

[Kirk W. Walters:]

Sure. The -- in terms of the securities side, we continue to buy really relatively short CMOs, same structure that we have been buying. And we've been adding a little bit as we've been going to our municipal portfolio. Duration in the portfolio is just a couple of ticks over 3 years, and we've been trying to pretty well keep it right around that 3-year benchmark. And it's also set up in a way that we do have fairly significant cash flow on a monthly basis coming off of it that we would expect to reinvest in '13 but would also be available to us if we wanted the liquidity.

[Damon Paul DelMonte:]

Okay. And then the -- of the advances, did they just -- what's the duration on those?

[Kirk W. Walters:]

The advances that we have out there are relatively short, 1 year to 2-year type advances.

[Operator:]

Your next question comes from the line of Bob Ramsey with FBR.

[Bob Ramsey:]

Just sort of following Damon's question about the securities book. I know you all said that securities are a bigger piece of assets but still small relative to the peer group. Is 15% a level that you want to keep it at? Will you continue to grow the securities portfolio faster than you have in the past or maybe in line with the loan book? Or how are you thinking about the prospects for continued securities portfolio growth over 2013?

[Kirk W. Walters:]

We would expect, when you look at the level of the investment portfolio right now, that, that to remain fairly constant throughout '13 and keeping it probably at 15% of assets or lower.

[Bob Ramsey:]

Okay. And then since it looks like the securities sort of came on late in the quarter, would that suggest that the margin compression that you all expect in 2013 will be certainly, to some extent, front-end loaded and you'll see a lot of that pressure on the first quarter of 2013 and less as you work through the year?

[Kirk W. Walters:]

Yes. As we go into -- it's an excellent question. As we go into the first quarter next year, I mean there's a couple of factors that definitely will put a little pressure on the margin. One is the investments, as you know there, that will have a full quarter of the impact of the investments on the margin. Also the senior notes obviously came on in the middle of the quarter and accordingly would be on for the full quarter. So both of those will have a full quarter's impact in first quarter and then will flatten out as we go into the balance of the year.

[Bob Ramsey:]

Okay. And then last question. The deposit fees this quarter looked a little light to me, and I wasn't sure if there was anything that might have affected that or any thoughts there?

[Kirk W. Walters:]

You're right. They are a little light this quarter. And the -- one, just from a general concept, fourth quarter tends to be our lighter quarter in terms of, on a seasonal basis, deposit fees. It tends to be a quarter that has a very good deposit growth, and we see less of DCs. But we did have the impact of super storm Sandy, get all my Ss out here, in that number that impacted it as well.

[Bob Ramsey:]

Okay. And I would assume that fee waivers from Sandy are now behind us, and so you would expect that line item to be up in the first quarter?

[Kirk W. Walters:]

That's correct.

[Operator:]

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

[Matthew Brandon Kelley:]

Just wondering how big is the mortgage warehouse now in terms of the total balance, and what are you getting for a rate on that?

[Kirk W. Walters:]

The -- in terms of the overall rate on the mortgage warehouse, as you know, we really tend to discuss spreads. We tend to think very much as a commercial bank in terms of overall spreads on mortgage warehouse. And the spreads have been very consistent over the year in terms of that business, ranging probably between 3.45 to 3.75. In terms of outstandings on that, the balance is a little over $700 million.

[Matthew Brandon Kelley:]

Okay got you. And then you'd mentioned that of the roughly $300 million in commercial real estate growth, I think there's $146 million that came from the Metro New York region. Is that mostly multi-family, and what were those yields in terms of originations during the quarter?

[Kirk W. Walters:]

The -- what came out of the New York CRE group was largely multi-family. And I can say once again, we really tend to think about this in spreads. And so the spreads are running around 2.25 to 2.75 depending on the credits -- spreads, yes.

[Matthew Brandon Kelley:]

Okay. And how much products were you doing kind of -- how much went beyond 5 years, the traditional 5-year fixed? Anything longer than that? Or what was the breakdown in average maturity?

[Kirk W. Walters:]

Yes. We haven't necessarily put that out there. But just in terms of thinking about it from a memory standpoint, there were some over 5 years. But I would say it probably wasn't a lot of that number.

[Matthew Brandon Kelley:]

Okay, all right. And then just going back to the warehouse, I know that you had acquired a team to kind of build out that line of business. Have they essentially transitioned most of their portfolio now at $700 million or do you expect that to become a larger balance as well in the year ahead?

[John P. Barnes:]

Well, there's 2 things going on there. We do expect that they'll continue to build relationships, and they've done -- they've made a lot of progress but we feel like there's more to go. On the other hand, as the refinancing begins to slow, the line utilization will start to back off from the high levels that we've hit here in the last few quarters. So there'll be a dynamic going on there this year that we'll be expecting to make progress, but it won't be at the pace that -- certainly that we had this year.

[Matthew Brandon Kelley:]

Okay. And then on the securities that you purchase, what was the actual yield that you generated on the new securities in the quarter with all that liquidity that you put to work?

[Kirk W. Walters:]

The yield on the CMOs that we're buying is around 1.25%.

[Matthew Brandon Kelley:]

Okay. And the munis in the low 2s, mid-2s or...

[Kirk W. Walters:]

More toward the mid-2s.

[Operator:]

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

[Casey Haire:]

Just a quick question on the margin outlook. I understand the guide for this year, it looks like 3.30%, 3.40%. That implies a pretty rapid pace of compression per quarter. I know it's very early for '14, but I was just wondering what's your best guess in terms of how that -- does that stabilize in '14? Or do you see that continuing?

[Kirk W. Walters:]

Well, I think the primary driver that the decline in the margin will be loan originations. So as you see our success at continuing to grow loans and new volume coming on, that's a primary factor that is driving that margin down over the year.

[Casey Haire:]

Okay. I mean both -- so assuming loan growth continues in '14, do we get some -- a slower rate of change on the compression side as we reach stability?

[Kirk W. Walters:]

I mean, I think if we look where spreads are today and saying rates are relatively consistent with where they are today, we would expect certainly stabilization in the margin in '14 and maybe even later in '13.

[Casey Haire:]

Okay. And then just a couple of questions on capital. First, just to clarify. So the -- using the buyback to improve the dividend payout ratio, is it correct to assume that will continue at $5 million of shares per quarter? Or are you looking to utilize that 10% all in 2013?

[Kirk W. Walters:]

Yes, I think as we commented earlier, we would expect to complete the share repurchase program in the year of 2013 ratably over the year.

[Casey Haire:]

Okay, I got you. And then just lastly, any updated thoughts on the M&A environment? Do you feel like it's loosening up in your footprint, and what's your appetite there?

[John P. Barnes:]

Well, I'd say it's -- we're very much kind of where we have been. We continue to actively build relationships, and we certainly have an obligation and we do look at the marketplace. But I don't sense any big change, and I think it's a fairly difficult environment.

[Operator:]

Your next question comes from the line of Ann Warner -- I apologize. Your next question comes from the line of John Pancari with Evercore Partners.

[John G. Pancari:]

Kirk, can you talk a little bit more about how the margin is coming in versus your expectations? I know you mentioned that loan growth is a contributing factor to the downside moving the margin and also your compression expectations going into '13. Outside of the loan growth, though, can you talk about other factors that are impacting your margin expectation here and how that might be different than what you initially expected.

[Kirk W. Walters:]

Well, if we refer back to Slide 8 that we, I think, gave a pretty good waterfall of what was driving the margin compression. I think what you see is really our ability to adjust deposit cost, the mix there largely offset the repricing amortization that occurred in the portfolios. So similar to answers to some of their earlier questions, we did increase investment portfolio. Part of that is reflected in this quarter. Next quarter will have a full impact of that. We did issue the senior notes this quarter. Part of it is in the quarter, but as we go to next year, we'll see a full year impact of that. And as far as acquired loan accretion, those loans continue to pay down and accordingly that there will be some impact from that. But probably, the biggest fundamental driver as we go into next year will be the new loan volume coming on at rates lower than where the portfolio is currently at today.

[John G. Pancari:]

Okay, all right. And then in terms of the securities investments, how much of that incremental additions to the securities book do you -- would expect here would be, I guess, delivered investments funded by borrowings in FHLB advances? I'm just trying to gauge how much more leveraging of the balance sheet you're going to do here as you build up the securities book versus just funding it with the excess deposits.

[Kirk W. Walters:]

I mean as I mentioned earlier with some questions around this, we don't expect this balance to increase from where we're at, if you're looking at ending balances. We do expect to hold the balance throughout the year so we will be reinvesting the cash flows that comes off. And obviously, some of it was funded through borrowings but we do expect to continue to have good solid deposit growth, which would go into next year, which will be the primary funding vehicle. And then it'll be just a question of how strong the loan growth is.

[John G. Pancari:]

Okay, all right. Then lastly, your comp expense, it came down nicely in the quarter. And -- however, your other -- all other expenses were a little bit higher than what I'd initially expected. So could you just give a little bit of color around what you're seeing in terms of your cost reduction efforts?

[Kirk W. Walters:]

Yes, I think we have a little bit of sort of mix and match in there. I mentioned earlier that the grants, the stock grants were -- that were done in 2007 when the company did the second step, finished their vesting in the fourth quarter. Grants that were to employees or officers go through comp expense. Grants that were to board members go through other expense. And as we finish the vesting and all the related true-ups to that, that was the primary contributor to the decrease in comp expenses for the quarter and was also the primary contributor to the increase in other expenses on the other side because the way the calculations worked, one was a positive, one was a negative. The other thing is when you look at this quarter, we had a couple less workdays in there that impacted our comp expense as well. So as we get into next year, first quarter as usual, we tend to see comp expense go up with all the taxes and everything that was paid in the first quarter and then settle down from the seasonality effects of this.

[Operator:]

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

[Matthew J. Keating:]

You mentioned the strong deposit growth you're experiencing in the acquired southern New York branches. Can you just talk to whether or not that might accelerate plans for those branches to breakeven by 2014 at this point?

[John P. Barnes:]

Well, I -- this is Jack, I'll take that. I would go 2 places. First, we accelerated the level of training and the pace of training that we asked those folks to take on in the transition more so than we had in previous integrations. They did very, very well. And with the -- our approach to customer experience and the training that we've done, we feel really good about how they have -- how they progress. We expect that, that pace of improvement and moving along the spectrum will continue. And we're really optimistic about how we got a great team there. I think that whether or not we're -- and it's too early, I think, to adjust the original timeline until we get further down the line, we're 6 months into it, if you will. But we appreciate the question. We'll...

[Matthew J. Keating:]

Understood, yes. I guess just speaking on that branch strategy, could you also -- I know it's very early on the flagship branch in Manhattan. But maybe just talk in broader terms about your Manhattan strategy, any early read on how the new branch is fitting with your strategy there?

[John P. Barnes:]

Well, we really are focused primarily in Manhattan with working on the commuting lines that -- in the centers where our customers from Fairfield County and Long Island and Westchester County commute into the city, be convenient for them, be relevant. We -- and the flagship branch park is a great start. We've hired a great team there that were very experienced in the market. I'd say, again, it's been 1 month but the initial reaction has been great. We've -- we're raising deposits, which is great. And we're also getting visits to the branch from customers saying it's great to see my bank here. So we're -- the initial reaction is we're very excited about it. I think it's going to work out great.

[Kirk W. Walters:]

And I would just make a few other comments in relation to that. For many of those customers that are walking by in the past, we have historically waived fees because we didn't have ATMs and such in the city. And so now, for many of those customers, we don't need to do that because we obviously have the ATMs and facilities right there in the city. Secondarily, that branch is only about 1.5 blocks from where our commercial real estate as well as asset-based lending operation is in the city. So it also provides the means that -- for the customers of those business lines to bank out of as well. So that's another plus of that branch. One of the items we'd like to -- or I'd like to remind folks of is under our model, one of the real pluses of the in-store branch is the asset generation. And I think the early feedback and what we've seen in terms of the level of applications that come in from home equities and resis, business banking loans and such, has been very good and actually probably a little bit ahead of what our original expectations were. So to Jack's comments, probably a little too early to call the ball whether it could move up from '14. But it does feel like that we certainly had a good start, particularly in the fourth quarter.

[Operator:]

Ladies and gentlemen, this concludes the time we have for questions. I will now turn the call over to Mr. Peter Goulding for closing remarks.

[Peter Goulding:]

Thank you for joining us today. We appreciate your interest in People's United. If you still have any additional questions, please feel free to contact me at [phone].

[Operator:]

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.