People's United Financial, Inc.
Q4 2014 Earnings Call Transcript

Published: 16 Jan 2015

[Operator:]

Good day, ladies and gentlemen, and welcome to the People's United Financial Inc.’s full year and fourth quarter 2014 earnings conference call. [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. Good afternoon and thank you for joining us today. Jack Barnes, David Rosato, Kirk Walters, and Jeff Hoyt are here with me to review the fourth quarter and full year 2014 results. 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.

[Jack Barnes:]

Thank you, Andrew. Good afternoon. We appreciate everyone joining us today. Let me start by noting that we have completed the transition of our chief financial officer position, effective January 1, 2015. As announced last April, Kirk Walters has transitioned out of the role for family reasons, and he has been succeeded by David Rosato. I appreciate how effectively Kirk and David have worked together to complete the transition seamlessly. Kirk remains an executive officer heading up corporate development and strategic planning and continues to be a member of the management committee. He also remains as a member of the board of directors of the company and the bank. I would like to take this opportunity to thank Kirk for all of his outstanding contributions in his previous role and look forward to continuing to leverage his broad industry experience and deep operational expertise in his new role. Thank you, Kirk. As has been our custom, in addition to reviewing the fourth quarter and full year results, I will outline our goals for 2015. Our performance for 2014 once again demonstrated the benefits of our deep customer relationships, product breadth, and ongoing strategic initiatives. We continue to build the business for the long term and made significant investments in talent, products, and services. This included adding a veteran wealth management team based in Hartford, Connecticut and a considerable number of experienced commercial bankers in Massachusetts. We also continued to evaluate the best ways to serve our customers and grow our businesses, as evidenced by the announcement of the Merchant Services joint venture in July. Slide two provides an overview of our 2014 results. We are pleased to report full year operating earnings of $245 million, a 2% increase from 2013. On a per share basis, operating earnings were $0.82, a 6% increase from the prior year and marks the fifth consecutive year of growth in operating earnings per share. We are building on the momentum generated in recent years through our focus on growing loans and deposits, which in turn creates new opportunities and deepens existing relationships. Compared to 2013, loans and deposits increased 9% and 16% respectively. Organic deposits had very solid growth of $1.1 billion, or 5%. As we further strengthen relationships in the New York and Massachusetts markets, our deposit base will continue to see growth. Net interest income increased 3% from the prior year, despite the net interest margin declining 22 basis points. This decline was primarily due to the impact of strong loan originations at rates lower than our existing portfolio. Noninterest income, excluding the $20.6 million gain on the Merchant Services joint venture in the second quarter of this year, declined $12 million or 3% due to lower gains on residential mortgage sales. We were especially pleased that expense levels remained flat compared to the prior year, considering the continued impact of strategic investments and increasing regulatory compliance costs. This focus on effective expense management improved our operating leverage during the year, as evidenced by an improvement in the efficiency ratio to 62.1% from 62.3%. Asset quality continued to be exceptional. Net chargeoffs in 2014 of only 12 basis points is the lowest level in over five years. This is a reflection of dedication to strong underwriting standards, the economic strength of the region we operate in, and the long term relationships we have with our customers. On slide three, we have provided a snapshot of last year’s goals compared to actual results. In general, we were in line with most of our expectations. Net interest income was below goal, primarily as a result of loan growth and the net interest margin coming in near the lower end of the targeted range. Noninterest income, excluding the $20.6 million gain on the Merchant Services joint venture, was also below the targeted range, primarily attributable to lower gains on residential mortgage sales and insurance revenues. On slide four, we provide more detail behind the increase in net interest income from 2013. Strong originated loan growth drove net interest income higher by $65 million. This increase were partially offset by the runoff in the acquired loan portfolio, resulting in declines in accretion of $46 million. As we have mentioned before, growth in net interest income from the originated portfolio outpacing lost accretion on the acquired portfolio is a positive sign looking ahead. The acquired loan portfolio ended the year at $1.1 billion, down nearly $500 million from 2013 and represents less than 5% of the total loan portfolio. On slide five, you can see our annual net interest margin results, which declined 22 basis points to 3.09%. The margin was impacted by declining benchmark interest rates and tightening credit spreads over the course of the year. New loan volume and mix negatively impacted the margin by 21 basis points as new business yields remained lower than the total loan portfolio yield. On slide six, we provide additional detail behind the change in noninterest income from 2013. As I mentioned before, excluding the 2014 gain on the Merchant Services joint venture, noninterest income declined 3% from the prior period. The decline was driven by lower gains on the sales of residential mortgage loans and acquired loans. Partially offsetting these declines were an increase in operating leases as well as strong results by our wealth management business, driven by a 12% increase in investment management revenues. On slide seven, we provide additional color around expenses. As I mentioned earlier, we were especially pleased the results were flat compared to the prior year. Moving on to slide eight, our primary goals are listed for 2015. As I referenced earlier, we remain committed to investing strategically in the franchise. The breadth of products and services we provide, and the exceptional talent we have attracted, will enable us to build new customer relationships and deepen existing ones. These ongoing investments, in combination with our large and attractive markets, as well as an unwavering commitment to relationship based banking, have driven, and will continue to drive, growth. With that background in mind, let me outline our goals. First is to grow loans at a high single to low double digit rate. Second is to grow deposits in the mid to high single digits. Next is to grow net interest income in the low to mid-single digits. Embedded in this goal is an expectation for net interest margin in the range of 2.85% to 2.95%. Another goal is to grow noninterest income in the low single digits, after adjusting for the 2014 gain on the Merchant Services joint venture. We will continue to tightly control costs by keeping our operating expenses essentially flat within a range of $835 million to $845 million. The final goal is to maintain excellent credit quality and strong capital levels. These goals reflect an assumption that interest rates remain at or near current levels. We look forward to executing on the opportunities that we have created to achieve these goals. With that, I will pass it to David to discuss the quarter in more detail.

[David Rosato:]

Thank you, Jack. With respect to our fourth quarter performance, please turn to slide nine for an overview. Operating earnings were $65.1 million or $0.22 per share, compared to $63 million or $0.21 per share in the third quarter. I will discuss the other results shown on this overview in greater detail on subsequent slides. Moving to slide 10, we provide detail behind the linked quarter change in net interest income. The overall results between the two quarters were generally consistent. Strong originated loan growth resulted in a $2.2 million increase in net interest income from the third quarter, while a decline in accretion from runoff in the acquired portfolio as well as increased deposit volume lowered net interest income by $1.9 million and $1.5 million respectively. As Jack mentioned earlier, growth in net interest income from the originated portfolio outpacing lost accretion on the acquired portfolio is a positive sign looking to the quarters ahead. On slide 11, you can see a breakdown of the elements contributing to our quarterly net interest margin results, which declined 5 basis points to 3%. The primary driver of this decline was new loan volume, which negatively impacted the margin by 5 basis points, as new business yields remained lower than the total loan portfolio yield. Slide 12 provides a breakdown of the increase in loans. The loan portfolio grew $638 million, or 10% annualized. This marks our seventeenth consecutive quarter of loan growth and is a testament to our relationship managers and customers. These results were achieved through leveraging our expanded footprint as well as progress in our heritage markets. Originated loan growth for the quarter totaled $767 million. As in prior quarters, growth was well balanced from a product and geographic perspective. Commercial real estate contributed $174 million of the total originated loan growth while C&I contributed $380 million. Within C&I, we saw particular strength in our asset based lending and equipment finance businesses. The commercial portfolio remains broadly diversified with respect to loan type, geography, and industry. Residential mortgages in the consumer portfolio contributed $203 million and $10 million of originated loan growth respectively. The growth in residential mortgages were driven in part by strong originations and lower prepayments. We experienced acquired loan runoff of $129 million this quarter, compared to $98 million in the third quarter and $137 million in the fourth quarter of 2013. The increase in runoff from the third quarter was primarily driven by the payoffs of two large loans. Slide 13 shows a breakdown of the elements contributing to the increase in deposits from the third quarter. Organic deposits increased $472 million or 8% on an annualized basis as retail and commercial deposits grew $304 million and $168 million respectively. Total deposits increased $877 million, supported by broker deposit growth of $405 million. As we have discussed previously, we are underweight commercial deposits and continue to make changes to further emphasize deposit gathering. We firmly believe that deposits are an important part of customer relationships and our ongoing focus remains on growing organic deposits. On slide 14, we take a closer look at noninterest income. Noninterest income grew 3% in the third quarter, driven by net security gains of $2.5 million, of which $2.3 million was from the call of a single acquired security as well as increased customer interest rate swap income of $1.4 million. Partially offsetting these increases was $2.2 million in lower insurance revenues from a seasonally strong third quarter. On slide 15, we illustrate the key components of changes of noninterest expense during the quarter. Similar to the full year results discussed earlier, expenses remained flat. As we have mentioned before, we continue to tightly control expenses while investing in revenue producing initiatives and covering the higher cost of regulatory compliance. As a reminder, payroll taxes, 401k matches, and winter related operational expenses are highest in the first quarter of the year. Accordingly, based on historical experience, expenses are expected to be approximately $5 million higher next quarter. The next slide details our efficiency ratio over the last five quarters. The efficiency ratio improved for the third consecutive quarter as we remained very focused on improving operating leverage. Slide 17 and 18 are a reminder of our excellent credit quality. Once again, we did see an improvement in nonperforming assets this quarter. Originated nonperforming assets as a percentage of originated loans and REO at 88 basis points remains well below our peer group and top 50 banks and is down from 108 basis points in the fourth quarter of 2013. Looking at slide 18, net chargeoffs remained low at 13 basis points, consistent with last quarter, and improved from 18 basis points one year ago. These levels reflect the minimal loss content in our nonperforming assets. Slide 19 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 credit quality. Over the past year, loans per share and deposits per share have grown at compound annual rates of 10% and 17% respectively. As shown on slide 20, operating return on average assets increased for the third consecutive quarter to 75 basis points. Our return on average assets continues to be impacted by the ultra-low interest rate environment and some initiatives which are still ramping up to more normal levels of productivity. Progress will be driven by continued loan and deposit growth, fee income growth, and an ongoing disciplined approach to expenses. Slide 21 illustrates the continued improvement in our return on average tangible equity over recent quarters. We expect to see continued progress over time on this metric as we improve profitability. On slide 22, capital levels at the holding company and the bank remain strong, especially in light of our low risk business model, with the tangible common equity ratio at 7.5%, tier one common at 9.8%, and total risk-based capital at 12.2%. Slide 23 illustrates our interest rate risk profile for both parallel rate changes and yield curve twists. As you can see, we remain asset sensitive, though slightly less so than last quarter. Year over year, we are slightly more asset sensitive. We remain well-positioned for an eventual rise in short term rates. Now, I’ll pass it back to Jack to wrap up.

[Jack Barnes:]

Thank you, David. As we move into 2015, we are fortunate to have significant opportunities before us, which can and should provide earnings growth for the years to come. We look to sustain momentum through continued investments in talent, products, and services while remaining vigilant on expense management. We are committed to successfully building this organization for the long term and delivering value to both customers and shareholders. This concludes our presentation. Now, we’ll be happy to answer any questions that you may have. Operator, we’re ready for questions.

[Operator:]

[Operator instructions.] Please stand by for your first question, and it’s from the line of John Pancari with Evercore ISI.

[John Pancari:]

I wanted to see if you can talk a little bit about deposit growth trends, specifically broker deposits are still a significant portion of your deposit growth. It looks like about half the deposit growth this quarter was brokered. So wanted to get your updated thoughts on your plans to continue to drive growth with the brokered product and then your overall expectation for how much you can still see growth there. And then separately, what cost at which you’re putting the broker deposits on the balance sheet at?

[David Rosato:]

So, in 2014, we had just around $2.5 billion of brokered deposit growth. And we really positioned that as a transition year for us as we continue to build out our commercial deposit gathering capabilities. Our expectation for 2015, you would see a significant reduction in the reliance on brokered deposits. In the last half of 2014, we continued to see incremental improvements in commercial deposit gathering and we would expect that to continue. From a cost basis, the costs are very similar to what we discussed last quarter. Most of those deposits are in the form of money market deposits, with an average cost of around 17 basis points. And we also have a laddered CD portfolio of brokered deposits, which has an average cost of about 65 basis points at the end of the year.

[John Pancari:]

And then how does that play into your expectation for overall deposit cost in coming quarters?

[David Rosato:]

The brokered deposits are actually lowering our overall cost of deposits because the largest component of that is coming in at 17 basis points. Our fourth quarter deposit costs were 34 basis points. In total, that was up 1 basis point quarter over quarter. There is a positive impact from the brokered deposit activity that we did in 2014, not a negative impact.

[John Pancari:]

And then lastly, in terms of loan yields, just want to get a little bit of detail on what yields you’re putting on new loan production by portfolio.

[Jack Barnes:]

As you know, we’ve got many portfolios. And I think first, as we always address this issue, we talk mainly about spreads. And we’ve been monitoring spreads forever, but certainly through 2014 and into 2015. And we have noticed that spreads have come in in the second half of 2014, generally, and while not in every portfolio, there is some modest, 25 basis point pressure in most of the portfolio. So running from the commercial real estate through middle market C&I. And there are some places like ABL and Mortgage Warehouse, where spreads are holding or actually improving slightly. Business banking holding. But on the larger portfolios of commercial real estate and C&I, they continue to show pressure.

[Operator:]

And your next question comes from the line of Dave Rochester from Deutsche Bank.

[Dave Rochester:]

Quick one on your margin guidance. It looks like in order to hit the middle of that range, the 290, you’re expecting maybe about 4 basis points of pressure per quarter through the year. Are you expecting the loan yields coming down are going to drive the bulk of that pressure, in addition to maybe some of the runoff of the lower-cost broker deposits you were talking about? Is there any accretion rolloff baked into that, or debt issuance in that at all?

[Jack Barnes:]

The primary driver around the margin guidance is the driver in 2014, and it’s just the new business loan growth going on at rates lower than the total portfolio yield. So there’s not an expectation that our funding costs will have any material change at all. It’s an asset issue, and on the asset side, it’s primarily almost exclusively on the loan side, rather than the investment portfolio side.

[Dave Rochester:]

And switching to capital, with the growth that you’re talking about, the high single digit, low double digit loan growth you’re expecting, would you expect capital ratios could continue to decline through 2014, just given the trend that we’ve seen recently? And if so, is there any thought to supplementing tier one with preferred, since you definitely have the capacity to do that?

[Jack Barnes:]

You did see TCE come down about 40 basis points over the course of 2014. We would expect TCE to again come down incrementally as 2015 unfolds. We do have the capacity to do tier one preferred stock. We don’t currently have plans to do that, but depending on the growth of the balance sheet, it could make sense as we have none in our capital structure today.

[Dave Rochester:]

Could you talk about maybe some of the targets on the capital ratios over the next couple of years? So TCE, maybe tier one capital, anything that you guys have to share there?

[David Rosato:]

From a TCE perspective, which is where we’re most normally asked questions, we could see TCE fall from the 7.5% at year-end down towards around 7% over the course of the year. That would imply growth of around $2.5 billion or so in risk-weighted assets, maybe just slightly above that. And our leverage ratio runs about 40 basis points higher than TCE, and you would see a consistent change there as well. From an operating target perspective, we have the ability to bring our capital ratios down within about a 50 basis point range. So our ratios at year-end are in the neighborhood of about 50 basis points higher than our long term operating targets.

[Dave Rochester:]

And so if we’re thinking about the tier one capital ratio of somewhere in the high nines here, we should expect maybe 50 basis points to come off of that? And so that could be in the low nines by the end of this year? And so that goes to your point, if you have any more growth than what you’re talking about, or if you end up at the higher end of your range, maybe it makes sense to issue some preferred to move that tier one capital ratio up?

[David Rosato:]

It could.

[Dave Rochester:]

And then just one last one. Sorry if I missed this, but what was the big driver for the growth in that other income line this quarter? It looked like it jumped up a few million there quarter over quarter.

[David Rosato:]

The other noninterest income, in the other line on that, which was up 2.8, we were the beneficiaries of some cash distributions on some legacy and acquired partnership investments.

[Dave Rochester:]

And did that make up pretty much the substantial growth in that?

[David Rosato:]

Yeah, that was almost all of it.

[Dave Rochester:]

And sorry, just one last one real quick. Just given your loan and deposit growth goals you gave, it looks like you’re expecting the loan to deposit ratio to increase over time. So just wondering what your tolerance for that is, and maybe what you’re thinking about in terms of the upper bound for that ratio over the next couple of years.

[David Rosato:]

Well, we ended the year at 102. If I recall, the high in the year was probably about 105 or so, maybe at the end of the first quarter. And we talked about bringing it down incrementally over the year. That’s about where our tolerance level is. The message that I think is most important is we’re really working the levers that we can to bring our loan to deposit ratio down to 100 or even better below. It takes time to do that. So, depending how the year unfolds, loan growth relative to deposit growth, we could see that metric deteriorate a little bit over the course of the year, but our expectation would be to do everything we can to bring it back down as close to 100 as possible.

[Jack Barnes:]

I think the other part of that is, I think you did the math right, and we’re not certainly uncomfortable getting up in that 105% range where we’ve been. And I would think of it as a range, but as David just said, we certainly have a focus on growing the deposits across the different business lines and the different markets. We’ve talked many times before about the opportunities in New York and Massachusetts, just growing both retail and commercial deposits. And we’re doing so very nicely. So like everything, it’s something that we watch and manage, but we have initiatives and things in motion to keep that in the right place.

[Operator:]

And your next question is from the line of Steven Alexopoulos from JPMorgan.

[Steven Alexopoulos:]

I wanted to start and follow up on John’s question on the use of brokered deposits in 2015, because unless you hit the low end of the loan growth guidance, and the high end of the deposit guidance, you’re going to need some form of wholesale funding to plug the hole. And if it’s not brokered deposits, what do you plan to use to support intended loan growth if it outstrips deposit growth?

[David Rosato:]

We would increase advances from the home loan bank. We had, at year-end, about just a little over $2 billion of advances there. We have the capacity to do substantially more.

[Steven Alexopoulos:]

And David, what are those costs approximately?

[David Rosato:]

Well, it depends on what terms you’re funding. So you have the ability to do very short funding as well as any point on the curve. You should think of it, in this type of environment, that we would be on the short end of that curve.

[Steven Alexopoulos:]

On the expense side, the 2015 guidance calls for a fairly modest increase in expenses and relative to the revenue guidance, implies a better efficiency ratio in 2015, but still quite a bit of room to improve. My question here is for you, David. As the recently appointed CFO, what’s your assessment of the expense base of the company [and is there an] ability to reduce the overall level of expense and make a more meaningful drive on the efficiency ratio lower?

[David Rosato:]

My overall assessment of the company’s expense base is not necessarily informed because of the position I’m now in. I’ve worked here for seven and a half years, and I’ve seen some significant changes in the way we think about expenses. And I’ve seen significant expenses come out of our cost structure. My mind goes back to what we call the [EMOC] process that we’ve talked about before, our expense management oversight committee, which has been in place since the end of 2011. That committee is the control on expenses and has been very successful over the last couple of years. That’s what I attribute our success on maintaining the expense base to date. I think we have the ability, as a company, to continue to hold expenses flat, and my expectation would be that we will. But I think if it, because there’s been so much done to date, as continued incremental improvement in the way we think and act around expenses, not that I walk in the door in this new position and think that there’s large things that were missed that we could take out of the expense base.

[Steven Alexopoulos:]

So maybe what I’m hearing is you think much of the heavy lifting has been done, and there’s not much room or fat to trim, per se.

[David Rosato:]

I would say that’s a fair assessment.

[Jack Barnes:]

I’ve got to respond to that, Steve. I mean, we’ve done a lot of heavy lifting. We’ve closed a lot of branches. We’ve trimmed a lot of areas. We’ve worked a lot of contracts hard. We’ve consolidated a lot of real estate occupancy levels. And because we did all that lifting, we were able to take on teams to drive revenues and grow in markets and able to deal with the increased regulatory burden around the BSA and compliance, etc., and stress testing. So when you look at our flat earnings, when we look at it, we feel very, very good about having achieved that given all of the pressure to invest in those two areas. And when we think about our EMOC process and think about how we’re moving forward, and the way we’ve worked this year’s budget, there’s plenty of heavy lifting going forward to do exactly the same type of things. You know, we still have plans to reduce and close some branches. We’re still consolidating some real estate where we can. We’re still working contracts very hard. So I think as David said, this is something that’s in motion, it’s been in motion, and it’s going to stay in motion as long as we’re all here. But you know, maybe to the other side of your question, I think we all feel very good about the growth and the way we are building the company for the long term, as we say. And to do some draconian things, we absolutely think that we would be damaging the prospects for achieving the goals we have on the other side. We want to do things very thoughtfully and stay disciplined.

[Steven Alexopoulos:]

On the loan growth, where you delivered 9% in 2014, and as we look to the 2015 guidance, what gives you more confidence that you’ll grow at the same or even better level in 2015? And maybe talk about some of the businesses that you’re looking to drive the loan growth this year.

[Jack Barnes:]

I’d just go to that general confidence. I start with if you look at 2014, and you look across the different business lines, we really had some really nice growth across geographies in the portfolios and across specialty businesses. So we’ve brought and built talent, we have had some talent for a long time, and all of these teams in the markets are executing. So if we look at 2012, 2013, and 2014, you’ve seen the growth that we’ve achieved in the portfolios, and it really is in a very diversified kind of manner. So as we went into our planning cycle this year, and we worked with Jeff Tengel and the managers in the commercial banking area, we went segment by segment and we looked at our pipelines and we looked at where the teams are in terms of momentum and built our plans around that. So it was very detailed, as you can imagine. It was very specific to the different geographies. The one big challenge that strikes me that I would mention is commercial real estate. We’re seeing growth next year, but that’s been a big struggle this year, and except for New York, where we’ve continued to make very nice progress, that’s been a tough one. We are expecting to make progress in other parts of our franchise next year, particularly Boston. So it really is diversified. It’s across the board, and hopefully, you can hear where the confidence comes from.

[Operator:]

And your next question comes from Ken Zerbe from Morgan Stanley.

[Ken Zerbe:]

I have a question for Jack on the in-store branches. One of your peers, BOK Financial, exited their in-store branches, basically saying that it was not a great place to build relationships with clients. Can you just address how you guys view in-store branches as being a better use of your locations?

[Jack Barnes:]

Obviously, I don’t know the company or the example that you’re giving, so I’ll just talk about us. We are very happy with the continued development of our in-store branches, and I’ll go to kind of the question around relationship building. So there’s a lot there. If you look at our results over time, in Connecticut, we have the largest average deposit per in store branch in the nation in Connecticut. What we acquired in New York continues to come along nicely. And so our comfort with our in-store results, and our comfort in thinking about moving forward, comes a lot from our experience and our success to date. In building relationships, first thing that comes to my mind is we look at the activity of our customers that use the in-stores and how they interact with the company on all fronts. And they are identified as in-store because that’s where they primarily do their business with us, but they often transact with us at other branches as well, including traditional. In addition to that, we originate off of the in-store platforms a lot of residential and home equity loans. This year, 2014 particularly, home equity loans. So we set up the in-store branches with two private offices so that customers, if they do engage with us and are interested in that type of transaction, we can bring them back, get them in, close the door, give them privacy, and pursue that. And we do a lot of training with our staff to be able to take that application and work with that customer. And that’s what builds the relationship, right? So we sell our full product set through our in-store branches. I think that differentiates us from many that play in that area. We service small business loans and small business customers in the branches. Many of our customers we find like the weekend hours. We just had our head of retail banking, Sara Longobardi, today told a story about a very happy customer who was someone else’s customer, was in our store and heard our folks promoting home equity over the loudspeaker and actually came in and did a loan with us on a Saturday. And incrementally, that’s the kind of thing that is going to help us move someone else’s customer into our shop. So we’re very pleased with our in-store results and prospects for the future. We just opened up several new ones in New York under our contract with Stop and Shop in Brooklyn, and we’re looking forward to that coming online.

[Ken Zerbe:]

And can you just remind us what your deposits per in-store branch is and how that might compare to the national average?

[Jack Barnes:]

The Connecticut in-store branches on average, by traffic, are just over $40 million, and I am not sure what the national average is. I know the second highest, I want to say, is somewhere in the high 20s. So we’d have to get back with you to go to the last data points that are out there to give you more specifics on that.

[Operator:]

And your next question comes from the line of David Hochstim of Buckingham Research.

[David Hochstim:]

Maybe I missed it, but did you talk about new branch openings that you plan for 2015?

[David Rosato:]

I think we have 10 closures scheduled for the year, and we have six that will open, and I believe all six of those are actually Stop and Shop locations.

[David Hochstim:]

And what about geographic expansion? So I guess beyond that? None in 2015? You opened the big branch in New York City. That seems to be successful. I guess I’m wondering if there are other places in the Northeast where you might open standalone branches like that in New York and Boston in addition to those markets.

[David Rosato:]

I would say the answer there is we are constantly looking at all our markets, and many of our market leaders periodically suggest or see opportunities that we evaluate. Generally, in our existing legacy footprints, we’re well represented and not emphasizing taking on new opportunities. But sometimes, in some markets, there are better locations and maybe cheaper locations that do become available. So we don’t close our mind to any of that. Most of our activity the last few years, and I think will go forward, you could expect New York and Boston would be the larger markets where we’re underrepresented in terms of market share, we’re growing our share, and we’re growing our brand. And we’ll look for opportunities there.

[David Hochstim:]

And the closures? Those are standalone branches, not in-store branches?

[David Rosato:]

That’s correct. We have had, just for clarity, sometimes Stop and Shop will close a store and we’ll close a branch with them. I think we had one of those in 2014 or late 2013. So that’s not an absolute.

[David Hochstim:]

And just on the merchant acquiring joint venture, do you get revenues from that going forward?

[David Rosato:]

Yes, we do, and we’re actually very pleased with how the joint venture is developing in these first six months, I guess roughly, since we closed. What we had hoped for was that the strength in the [unintelligible] product set was going to be more attractive to our customers than our prior offering, and particularly, as you get into larger enterprises that need stronger technology, stronger product set there. And we have had very nice success over the last six months in moving some business into the joint venture and we’re all happy with that. We’ve got approximately $500,000 in the fourth quarter in revenue from the joint venture.

[David Hochstim:]

And that should increase as you get better about selling it, shouldn’t it?

[David Rosato:]

I agree.

[David Hochstim:]

And then finally, have you seen much of a change in residential mortgage demand over the last few weeks, with lower rates?

[David Rosato:]

Yes, we have. I think it was the Mortgage Bank Association that said applications were up 49% or something. We did check on that, and we’re basically in the same ballpark.

[Operator:]

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

[Bob Ramsey:]

Just wanted to clarify, the NIM guidance that you’ve given, you said that that’s based on rates staying around current levels, rather than using any sort of forward curve or looking for something higher in the back half of the year? Is that correct?

[David Rosato:]

Yes, that’s correct.

[Bob Ramsey:]

And then I think we talked earlier about how it probably assumes about 5 basis points a quarter of compression if it were to be level through the year. Is it your expectation that it is sort of a constant drip, and it is level through the year? Or do you think it’s more front-end loaded and it sort of stabilizes?

[David Rosato:]

It’s a little more front-end loaded. The first quarter, we usually lose about 5 basis points, just the [day count], and then you would see that normalize. The way I would characterize 2015 would be a much steadier margin, though still margin pressure, but the rate of decline on a quarterly basis through the year should moderate.

[Bob Ramsey:]

And then I guess one other question around rates. I know you all talked about how the rate sensitivity had dropped quarter over quarter but wasn’t really far off from where it was a year ago. I’m curious how you sort of expect the rate sensitivity to transition through the year, given your loan and deposit growth outlook.

[David Rosato:]

I think you will see our rate sensitivity stay where we ended the year, or incrementally increase and kind of go back to where we were at midyear or at the end of the third quarter, which was the low 40s. Again, one of the big issues will be what’s happened in rates just the last couple of weeks, whether that is here to stay for all of 2015, or rates back up a little bit. What I would add is in the fourth quarter of every year, we go through and look at all of our model assumptions, and we tuned our model a little more conservatively around some of our deposit assumptions. And that was a driver as well, with the roughly $10 million decrease in [unintelligible] sensitivity. So some of that was not balance sheet driven. It was model driven.

[Bob Ramsey:]

I guess as you think about it sort of improving maybe modestly through the year, what are the balance sheet driven pieces that are going to take you guys a little bit higher?

[David Rosato:]

I think it will be probably a continuation of some of the stuff that happened last year, which is on the margin, the mix between the amount of C&I business done relative to fixed rate commercial real estate business. We saw that in the latter half of last year, and on the margin, I think that will tend to continue.

[Bob Ramsey:]

Any update on the charter conversion plans?

[Jack Barnes:]

Well, I assume you saw the press release from the Fed in the fourth quarter. So the Federal Reserve has approved our conversion of the holding company subject to the approval of the bank charter by the OCC. We continue to work with the OCC through the process, and we will keep moving ourselves through there and I’m confident we’ll get there in a reasonable period of time.

[Operator:]

And your next question is from the line of Sameer Gokhale from Janney Capital.

[Sameer Gokhale:]

I just had a question about credit quality. Clearly, your credit losses are very low and have been over quite a period of time, but in terms of your goals, you talked about maintaining excellent credit quality. So I was curious how one should think about the seasoning of your loan portfolio. Generally, that seems to be a term associated with largely consumer loans, but to the extent you’ve grown more quickly than the market has, and those loans mature, would you expect there to be upward pressure on your loss provisions? Or do you expect those loss provisions to be in a relatively tight band? How do you think about that and chargeoff rates as well?

[David Rosato:]

Basically, I would say we feel, if you look back and you look at the tight range of our net chargeoff ratios over the last few years, we would expect it to look in a similar range as we go forward. So when we make the statement we expect to continue strong credit quality, that’s kind of the context. We have a long heritage of being very disciplined underwriters. The people that are involved with our underwriting as we move through this growth period are the same folks that have been involved for many years. We’ve got very seasoned teams that work very closely together and everybody takes a lot of pride in being very, very thoughtful about what we do. So we do expect to continue that with good results. We are not concerned about the growth that has occurred and whether our fundamentals have changed at all. We’re very comfortable with what we’ve been putting on the books.

[Sameer Gokhale:]

So we shouldn’t expect any sort of front loaded bubble, if you will, in chargeoffs, again on a relatively low base, but some sort of front loaded bubble?

[David Rosato:]

No, not at all. I think again, the way I think about it is 12 basis points was a low, if I remember right, over the last number of years. We’ve had a few quarters where we might have a credit that is trouble, and it creates a lumpiness - my term - in the results. But again, if you look back over quarter by quarter our net chargeoff ratio, within that range, that’s where we would expect it to be.

[Sameer Gokhale:]

And then on a different note, I think you had talked about your relationship managers and incentives you had put into place in order to maybe elicit additional deposits, using them as a channel. And I was wondering if you have any sort of update on that, and if you look at their compensation structure going into 2015, if you have a greater percentage of their incentive comp tied to maybe raising these deposits or selling other commercial services. So just curious if there’s any update along those lines.

[Jack Barnes:]

We had very strong growth in commercial deposits this year, which is probably the clearest way to give you an indication that we are being successful in the programs that we’re doing. So we’ve mentioned incentives. We are not planning any dramatic shift there. We have increased focus and incentives on deposit gathering in the past, and we’ll keep that consistent moving forward. And then we talked about the fact that every opportunity we get to look at a credit event or other event with our relationships, we’re closely monitoring return on equity and profitability levels and that’s a strong tool for us to be working with the relationship managers to be cross-selling generally, including gathering deposits. So you know, above 10% commercial deposit growth, I think in the mid-teens this year, and we’re certainly looking for that to continue.

[Sameer Gokhale:]

And then just my last question was tied to the security gains, and you gave some color on that, $2.3 million. Can you just talk about that? Was that some sort of time based gain that you realized? Or give some context around that? That would be helpful.

[David Rosato:]

Just to put it in context, you really never see security gains come out of our company. That’s not something you see in the quarter results. This was one security that came from an acquired institution. It was a security that isn’t of the nature that we would normally hold, and the acquisition was a time where there was not much demand for this type of security in the market. So we decided to hold it rather than fire sale at time of acquisition. It had a low cost basis on it, from purchase accounting. And the security was called last quarter and paid off at [unintelligible] and that’s what generated what we would call a one-time gain. We have no other securities of this nature on the balance sheet.

[Operator:]

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

[Collyn Gilbert:]

First, just want to confirm, the jump in securities that you guys saw at period end, was that just part of that you need to sort of satisfy for the QTL test?

[David Rosato:]

There was a little bit of that, Collyn. I think we were up period end just a little over $300 million. We also did grow our municipal securities a bit in the fourth quarter.

[Collyn Gilbert:]

So is there any reason to see reversal of that growth in the first quarter?

[David Rosato:]

No, I think if anything, there might be small incremental additional growth.

[Collyn Gilbert:]

And then when you guys talk about the loan growth that you’re expecting for 2015, how are you seeing the mix of that shake out?

[David Rosato:]

Very consistent with the trends that you saw this year. When we think about the products, and we think about the geography, I wouldn’t expect any significant changes other than probably our Mortgage Warehouse business. That grew more than expectations. In the fourth quarter, it was up about $81 million, if I recall, and it ran higher in the fourth quarter than we were expecting. So away from Mortgage Warehouse coming off, I think you will see consistent growth in 2015 relative to 2014.

[Collyn Gilbert:]

So that means the assumption, then, that the resi mortgage growth, because I think it was 12%, I think in 2014, you expect it to sort of to run at that continued rate?

[David Rosato:]

I think it will abate a little bit. I would think more in the neighborhood of around 10% go or so for resi mortgages. If those rates hold, we’re going to go through another refi period. So more production, and then you have the question of what we lose to refis.

[Collyn Gilbert:]

And then just kind of a bigger picture, I guess, is there a point where it makes more sense to perhaps pursue acquisitive assets than organic assets? I’m just thinking about funding, capital, just overall risk-adjusted returns. And you’re sitting with a nice multiple. Have your views changed on acquisitions, or is there a point or a trigger that you’re looking for where you maybe would get more aggressive on acquisitions?

[David Rosato:]

I would say that our point of view hasn’t changed. We’ve been looking to be opportunistic. If the right partner comes along and it’s a good, solid opportunity, and it offers some of the benefits that you’re suggesting that we would be thinking about, which we do, we absolutely would be interested. So we contemplate and think about things like attractive deposit franchises, strong commercial track records, good fit culturally, all those things, and the geographic mix as well. So I would say we have not changed our view or the level of our interest. We are interested in M&A that makes sense.

[Collyn Gilbert:]

And I presume you don’t see that yet in the market, M&A that makes sense?

[David Rosato:]

Well, we work at seeing if we can then find another party that might think that we both think something makes sense. [laughs]

[Collyn Gilbert:]

That’s helpful, but is there an asset threshold that you wouldn’t go lower than in terms of a target? I mean, you guys now are getting pretty big.

[David Rosato:]

Oh, not a hard and fast level. Certainly the smaller you get, just from an execution and effort, naturally that comes into consideration. But we don’t have a hard and fast rule, for sure.

[Operator:]

Ladies and gentlemen, this will conclude the time we have for questions. I’d 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 have any additional questions, please feel free to contact me at 203-338-4581. Have a great night.