People's United Financial, Inc. (PBCT) Q4 2017 Earnings Conference Call Transcript

People's United Financial, Inc. (NASDAQ: PBCT)Q4 2017 Earnings Conference CallJan. 18, 2018, 5:00 p.m. ET

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the People's United Financial, Inc. Fourth Quarter and Full Year 2017 Earnings Conference Call. My name is Sandra, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. Following the prepared remarks, there will be a question-and-answer session. If you would like to participate in this portion of the call, please press * followed by 1 at any time during the conference. If assistance is needed any time during the call, please press * followed by 0 and a coordinator will be happy to assist you. As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to Mr. Andrew Hersom, Senior Vice President of Investor Relations for People's United Financial, Inc. Please proceed, sir.

Andrew Hersom -- Senior Vice President, Investor Relations

Thank you. Good afternoon and thank you for joining us today. Here with me to review our fourth quarter and full-year 2017 results are: Jack Barnes, President and Chief Executive Officer; David Rosato, Chief Financial Officer; Kirk Walters, Corporate Development and Strategic Planning; Jeff Tangle, Commercial Banking; and Jeff Hoyt, Chief Accounting Officer. 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 -- President and Chief Executive Officer

Thank you, Andrew. Good afternoon. We appreciate everyone joining us today. Let's begin by turning to the full-year overview on Slide 2. 2017 was a noteworthy year for the company. We reported operating earnings of $346 million, or $1.04 per common share, the highest in the year's 175-year history. In April, we successfully closed and integrated the acquisition of Suffolk Bancorp, which further strengthened our presence in the New York Metro area. In August, we also successfully closed and integrated the acquisition of LEAF Cap Commercial Capital, which diversified our national equipment-enhanced portfolio into the small-ticket leasing segment. We celebrated our franchise's 175th anniversary with a variety of volunteer and charitable activities, highlighted by a $175,000.00 donation to Junior Achievement, our community foundation's single largest one-time grant ever. And we were once again recognized for our exceptional service by Greenwich Associates, who honored People's United with eight awards, including a national "Best Brand Award in Middle-Market Banking for Ease of Doing Business."

We were very pleased with our strong financial performance for the year. Results benefited from a $138 million increase in revenues versus the prior year to $1.5 billion, driven both by recent acquisitions and organic growth. This increase was due to improvements in both net interest income and non-interest income. In addition, results were highlighted by an 18-basis point improvement in net interest margin to 2.98%, the strongest level in three years and the first year-over-year increase since 2011.

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During the year, we continued to make revenue-producing investments across our franchise. Such investments include further building out commercial lending capability in the healthcare vertical and SGA lending as well as strengthening fee income-generating infrastructure by improving our loan syndications capabilities and international services. We also implemented a leading-edge customer relationship management system, which has begun to enhance the company's sales processes and increase referral and prospecting activity.

We also continued to thoughtfully manage expenses. From an operating perspective, the expenses of $930 million were up $66 million from a year ago and were at the low end of our mid-year guidance. We are please with these results, given the inclusion of Suffolk and LEAF into the franchise during the year and having Gerstein Fisher on the books for a full 12 months.

Loans ended the year at $32.6 billion, up $2.8 billion or 10% from 2016, marking the eighth consecutive year of growth. This increase was driven both by recent acquisitions and organic growth. Excluding Suffolk and LEAF balances, loans grew 3% year-over-year, primarily driven by solid production in residential mortgages, equipment financing, as well as middle-market commercial and industrial lending, highlighting the importance and impact of our diversified business mix.

Commercial real estate balances were unfavorably impacted by slower market conditions, higher payoff activity, a competitive environment, and continued runoff of the transactional portion of our New York Health and Family portfolio. From our perspective, some of our privately held owner-operator clients have tended to be net sellers in this environment. Period-end deposits of $33.1 billion were up $3.2 billion or 11% from the prior year, driven by continued success gathering organic deposits as well as the addition of Suffolk's attractive deposit base. As a result, non-interest-bearing deposits now comprise 24% of total deposits, up from 22% a year ago.

Finally, wealth management, discretionary managements under management reached $9 billion after achieving 14% growth during the year, due primarily to new client inflows and strong market performance.

Moving to Slide 3, we have included a score card of our 2017 goals, which were updated mid-year to actual results. We were in-line with all of our goals, with the exception of loan and deposit growth. As we guided in our October call, attaining the full-year loan growth would be challenging in light of the market conditions I previously described within commercial real estate, our largest portfolio. These market conditions continued during the fourth quarter and unfavorably impacted growth.

Before discussing the year ahead, I want to take a moment to reflect on the progress that we have made improving operating leverage and enhancing profitability in recent years. Slide 4 through 6 illustrate this progress over the last five years, as evidenced by an improvement of 350 basis points in the efficiency ratio to 57.7%, 44% growth in earnings per common share to $1.04, and a 360-basis point increase in the return on average tangible common equity over this period.

As we continue to build earnings power of the company, we remain focused on further improving these metrics. Moving forward, we are excited by the opportunities in front of us to further strengthen and grow the company. In the year ahead, we will continue to enhance technology and marketing capabilities to better serve existing relationships and develop new ones. We will also provide new and refreshed products as well as aligned technology base offerings with our expert bankers to drive a unique client experience.

We are confident revenue-producing investments, along with synergies created by the recent acquisitions, will result in continued improvement in operating leverage and further create value for shareholders. In addition, we remain very hopeful that the industry regulatory reform will occur this year. Based on my involvement in the mid-sized bank coalitions and the meetings I have attended on the issue of the $50 billion SIFI designation, it is front and center with many legislators in Washington and there is a bipartisan effort to pass reform. We will continue to move toward our readiness to cross this threshold if legislation is not enacted and remain confident in our ongoing preparations.

With that background in mind, let me outline our goals for the full-year 2018 as listed on Slide 7. The first goal is to grow our loan portfolio in the range of 4% to 6% on both a period-end and average-bounds basis. Secondly, our continued focus on gathering deposits is expected to drive deposit growth in a 3% to 5% range on both a period-end and average-bounds basis. The next goal is for our net interest income to increase in the range of 10% to 12%.

Embedded in this goal is the expectation of net interest margin to be in the range of 3.05% to 3.15%. This net interest margin range in derived from many different factors, one of which is an assumption of two 25-basis point rate increases in fed funds during the year. In addition, the net interest margin range includes the unfavorable impact of tax reform on our municipal bond and IRRB portfolios of approximately 5 basis points.

We expect non-interest income on the operating basis to grow in the range of 3% to 5%. Operating non-interest expense for the year are anticipated to be in the range of $975 million to $995 million as compared to $930 million in 2017. This includes full-year impact of the two acquisitions completed in 2017. We expect to maintain excellent credit quality with a provision in the range of $35 million to $45 million. We anticipate our effective tax rate for the year to be in the range of 21% to 23%. Finally, we also plan to maintain strong capital levels with an expectation that, at year-end, holding company common equity Tier 1 capital ratio will be in the range of 9.5% to 10%.

With that, I will pass it to David to discuss the fourth quarter in more detail.

David Rosato -- Chief Financial Officer

Thank you, Jack. We closed out 2017 with another quarter of strong financial results. Record quarterly operating earnings, $104.5 million, increased 17% on a linked-quarter basis and generated an operating return on average tangible equity of 14.1%. On a common per share basis, operating earnings were $0.31, up $0.05 from the third quarter. These results benefited from further improvement in net interest margins, higher fee income, and well-controlled expenses. The quarter was also favorably impacted by a lower effective tax rate.

It is important to note the quarter included the following items, which were deemed non-operating operating, given their non-recurring nature: security losses of $10 million pre-tax or $7.2 million after tax, incurred as a tax planning strategy in response to recently enacted tax reform; a tax benefit of $6.5 million, resulting from a revaluation over our net deferred tax liabilities; and, finally, merge-related expenses of $1.6 million pre-tax or $1.1 million after tax.

Turning to Slide 9, net interest income of $292.3 million, increased 3% on a linked-quarter basis. The loan portfolio contributed $7.1 million the increase in net interest income due to higher yields on new business, reprising of floating-length loans, and higher average balances linked-quarter. Net interest income also benefited $4.3 million from higher yields and average balances in the securities portfolio. These increases were partially offset by higher deposit costs and volumes.

Results in the fourth quarter benefited from further improvement in net interest margins, which increased 3 basis points linked-quarter to 307. This expansion, as displayed on Slide 10, was driven by the loan portfolio, which favorably impacted the margin by 6 basis points, as new business yields remained higher than the total portfolio yield. A higher securities portfolio yield also increased the margin by 1 basis point, while higher deposit costs had an unfavorable impact of 4 basis points.

Length-quarter loan growth continued to highlight the impact and importance of our diversified business mix, as shown on Slide 11. Period-end loans increased 2% annualized, driven by strong results across each of our equipment-financing units and solid production in middle-market commercial and industrial lending. This growth was partially offset by lower commercial real estate balances due to the reasons Jack outlined earlier in his remarks.

Mortgage warehouse lending balances ended the quarter at $1.45 billion, a decrease of only $22 million from September 30th. However, average balances for this business were down $107 million in the quarter. As such, while the total loan portfolio increased 4% annualized on an average balance basis, growth excluding mortgage warehouse was 5% annualized.

Turning to Slide 12, period-end deposits of $33.1 billion were up $509 million or 6% annualized for the quarter. The largest driver of this increase was higher non-interest-bearing balances of $347 million, primarily driven by our retail and municipal businesses. Deposits also benefited from a $218 million increase in time balances, due in part to successful two-year 1.75% CD offering, celebrating the company's 175th anniversary. On an average balance basis, total deposits increased 10% annualized.

Fourth quarter non-interest income totaled $87.3 million. During the quarter, we sold approximately $290 million of four-year duration securities, yielding 1.28% to take advantage of 2017 higher marginal tax rates. $150 million of sales proceeds have been reinvested in two-year durations securities, yielding approximately $190 and, in the first quarter, we intend to further add securities to fully replace loss carry income. As I referenced earlier, the $10 million pre-tax or $7.2 million after tax loss as a result of these sales was deemed non-operating and was offset by a $6.5 million tax benefit associated with tax reform.

On an operating basis, as displayed on Slide 13, non-interest income of $97.3 million increased $8 million or 9% from the third quarter. Higher non-interest income was primarily driven by $3.3 million improvement in customer interest rate swap income as well as a $1.8 million increase in commercial banking lending fees, largely due to higher commercial real estate pre-payment income. Non-interest income also benefited from higher operating lease income and investment management fees. The largest offset to these improvements was a $2.8 million decline in insurance revenues, reflecting the seasonality of commercial insurance renewals, which are higher in the first and third quarters of the year.

On Slide 14, we display the components driving the increase in non-interest expenses on a linked-quarter basis. Included in this quarter's results were merger-related expenses of $1.6 million with $1 million in professional and outside services and $600,000.00 in compensation and benefits. As a reminder, third quarter merger-related expenses were $3 million, of which $2.7 million were included in professional and outside services and the remainder split between occupancy and equipment as well as other.

Excluding merger-related costs, non-interest expenses were $238.1 million, an increase of $4 million or 2% from the third quarter. The largest driver of this result was a $1.8 million increase in compensation and benefits, primarily reflecting higher incentives and healthcare costs. Expenses were also unfavorably impacted by a $1.6 million increase in regulatory assessment, resulting from higher average assets as well as a $1.2 million increase in professional and outside services.

As a reminder, payroll taxes, 401K matches, and winter-related operational costs are highest in the first quarter of the year. Accordingly, based on historical experience, these expenses are expected to be higher in the first quarter compared to the fourth quarter.

As Jack mentioned earlier, we continue to enhance our operating leverage, as evidenced by the ongoing improvement in the efficiency ratio. As displayed on Slide 15, the efficiency ratio fourth quarter was 56.1%, which marks an improvement of 120 basis points on a linked-quarter basis and 320 basis points from a year ago. Going forward, even with the significant progress we have made, we will continue to emphasize improving our operating leverage through revenue growth and effective expense management.

Our strong credit culture and conservative underwriting standards continue to drive exceptional asset quality as demonstrated on Slide 16. Originated non-performing assets as a percentage of originated loans and REO at 56 basis points is, once again, well below our peer group in the top 50 banks. Net charge off of 8 basis points remains at a very low level and continue to reflect the minimal loss content in our non-performing assets.

As displayed on Slide 17, return on average assets and return on average tangible common equity were 96 basis points and 13.8%, respectively. Both metrics increase for the second consecutive quarter and were significantly higher than a year ago. We are pleased with the progress we have made improving these metrics over recent periods and remain focused on executing our strategy to further enhance returns.

Continuing onto Slide 18, capital ratios of the holding company ended the year either improved or unchanged from September 30th. Capital levels remain strong, especially in light of our diversified business mix and long history of exceptional risk management.

The final slide on Page 19 displays our interest rate risk profile for both parallel rate changes and yield curve twists. We remain asset sensitive, but slightly less so than at September 30th. However, we remain well-positioned for further increases in interest rates as approximately 44% of our loan portfolio at quarter-end was either one-month live or prime-based, consistent with both the previous quarter and a year ago.

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

Questions and Answers:

Operator

Ladies and gentlemen, we are ready to open the lines up for your questions. If you wish to ask a question, please press * followed by 1 on your touchtone telephone. And, if your question has been answered or you wish to withdraw your question, press #. Again, press *1 to ask a question.

And our first call comes from the line of Ken Zerbe with Morgan Stanley. Your line is now open.

Ken Zerbe -- Morgan Stanley -- Equity Research Analyst

Great. Thank you. Good afternoon. I just want to figure out what is the right tax rate? I know this is a moot point, right, because we know what it is for 2018, but for this quarter alone, if I back out the tax adjustments you guys have on, looks like Page 18 of your press release, I still come up with a very unusually low tax rate this quarter. Is there something else in there -- something that we're not seeing? Thanks.

David Rosato -- Chief Financial Officer

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

Ken Zerbe -- Morgan Stanley -- Equity Research Analyst

Got it. Understood. Okay. So, that item, the true up, I guess, there should be no corresponding impact next year? You should just apply your new lower tax rate? Okay, I think I've got that. And then, just in terms of your guidance that you provided for next year, the base number that we're talking about -- the growth in fees and the growth in expenses -- is that off of reported? Because I'm thinking of that $10 million of securities loss this quarter -- is it based on reported numbers or is it based on operating items?

David Rosato -- Chief Financial Officer

It's operating for both fee income as well as expenses.

Ken Zerbe -- Morgan Stanley -- Equity Research Analyst

Operating? Okay. Alright. Thank you very much.

David Rosato -- Chief Financial Officer

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

Ken Zerbe -- Morgan Stanley -- Equity Research Analyst

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

David Rosato -- Chief Financial Officer

Yeah, no, from that piece, it will always be a positive.

Ken Zerbe -- Morgan Stanley -- Equity Research Analyst

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

David Rosato -- Chief Financial Officer

Yes. Our expectations, for the full year, are in the guidance year.

Ken Zerbe -- Morgan Stanley -- Equity Research Analyst

Got it. Okay. Great. Alright, helpful. Thank you.

David Rosato -- Chief Financial Officer

You're welcome.

Operator

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

Steven Alexopoulos -- JP Morgan -- Wall Street Analyst

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

David Rosato -- Chief Financial Officer

Steve, it's David. So, if you use the middle of the guidance, $55 million off of the $930 million base, you come up with 6% expense growth, but if you back out of the full-year impacts of both LEAF and Suffolk, that number is about 4% growth expense growth. That's consistent with expense growth in that we experienced this year.

Steven Alexopoulos -- JP Morgan -- Wall Street Analyst

Okay.

David Rosato -- Chief Financial Officer

So, in our comments, you saw very positive operating leverage this year and you should expect to see that going forward. We are continuing to make expense investments -- Jack references some of those, we've talked about them on past calls as well -- but you have seen the revenues coming off of those investments that we've made in further leading to the operating leverage we've experienced.

Jack Barnes -- President and Chief Executive Officer

Yeah, Steve -- Jack -- just remember, as well, not to annualize the fourth quarter because the first quarter is always higher. Right?

Steven Alexopoulos -- JP Morgan -- Wall Street Analyst

Right. Okay.

Jack Barnes -- President and Chief Executive Officer

With the comps impact, primarily.

Steven Alexopoulos -- JP Morgan -- Wall Street Analyst

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

Jack Barnes -- President and Chief Executive Officer

Sure. That portfolio, $1.4 billion at the end of the year and that portfolio will probably come off next year about $250 million to $300 million over the course of the year.

Steven Alexopoulos -- JP Morgan -- Wall Street Analyst

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

Jack Barnes -- President and Chief Executive Officer

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

David Rosato -- Chief Financial Officer

Yeah, but they always have a strong...

Jack Barnes -- President and Chief Executive Officer

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

Steven Alexopoulos -- JP Morgan -- Wall Street Analyst

Okay. It sounds like $200 million's maybe a bit optimistic in terms of a run-rate.

Jack Barnes -- President and Chief Executive Officer

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

Steven Alexopoulos -- JP Morgan -- Wall Street Analyst

Okay. Okay. Perfect. That helps. Thanks for taking my questions.

Operator

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

Casey Haire -- Jefferies & Company -- Vice President U.S. Banks Equity Research

Yeah. Hey, thanks, good afternoon, guys. First off, just want to follow-up on the operating fees -- just the guidance. So, I have, as a starting point in 2017 about $362.2 million. Is that the correct base?

David Rosato -- Chief Financial Officer

Yeah.

Casey Haire -- Jefferies & Company -- Vice President U.S. Banks Equity Research

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

David Rosato -- Chief Financial Officer

I'm sorry -- can you repeat the question, Casey?

Casey Haire -- Jefferies & Company -- Vice President U.S. Banks Equity Research

So, the other income line within fees was very strong -- was up $6 million or so --

David Rosato -- Chief Financial Officer

Right.

Casey Haire -- Jefferies & Company -- Vice President U.S. Banks Equity Research

So, what was the driver there and what's a good run-rate going forward? I'm assuming it comes back down.

David Rosato -- Chief Financial Officer

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

Casey Haire -- Jefferies & Company -- Vice President U.S. Banks Equity Research

Okay. Great. And then just switching to loans, obviously, CRE has got some headwind still, so what's going to pick up that slack to get you to that loan growth guidance? Resi Mortgage has been a good story for you. Is that going to continue for you or what's sort of the drivers to pick up the slack on the CRE side?

Jack Barnes -- President and Chief Executive Officer

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

David Rosato -- Chief Financial Officer

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

Casey Haire -- Jefferies & Company -- Vice President U.S. Banks Equity Research

Okay. Great. Thank you.

Operator

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

Jared Shaw -- Wells Fargo Securities -- Managing Director

Hey, guys. Good evening. Yeah, could you talk a little bit about what you think you could do with this tax dividend with the new tax law change? I look at your capital level -- you're already outside the range on the common equity Tier 1. Should we expect to see maybe a higher cash dividend or 5X? Or, I guess, how are you thinking about deploying the extra earnings coming from the tax benefit?

Jack Barnes -- President and Chief Executive Officer

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

Jared Shaw -- Wells Fargo Securities -- Managing Director

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

Jack Barnes -- President and Chief Executive Officer

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

David Rosato -- Chief Financial Officer

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

Jared Shaw -- Wells Fargo Securities -- Managing Director

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

Jack Barnes -- President and Chief Executive Officer

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

Jared Shaw -- Wells Fargo Securities -- Managing Director

Okay. Thank you.

Operator

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

Dave Rochester -- Deutsche Bank -- Wall Street Analyst

Hey, good evening, guys. Back on the expense guide, just to clarify, it sounds like you're saying that lifting of the SIFI threshold shouldn't impact your expectation on expense growth this year -- is that fair?

Jack Barnes -- President and Chief Executive Officer

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

Dave Rochester -- Deutsche Bank -- Wall Street Analyst

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

Jack Barnes -- President and Chief Executive Officer

Well, as we said, we have two built in. Right now, we're working under the assumption that they're June and November -- that's underlying the guidance. We're also slightly flatter yield curve over the course of the year. I'll answer it slightly differently: from a quarter-to-quarter perspective as next year unfolds, we'd expect flat fourth quarter to first quarter, just because of day count. We've also allude in our guidance about the impact of tax reform on the NIM. But, beyond that, I would expect a 3 to 5-basis point, basically, linear increase as 2018 unfolds.

Dave Rochester -- Deutsche Bank -- Wall Street Analyst

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

Jack Barnes -- President and Chief Executive Officer

Yes.

Dave Rochester -- Deutsche Bank -- Wall Street Analyst

Okay.

Jack Barnes -- President and Chief Executive Officer

That's what we're assuming. So, obviously, if that comes forward, then we would benefit from that.

Dave Rochester -- Deutsche Bank -- Wall Street Analyst

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

David Rosato -- Chief Financial Officer

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

Dave Rochester -- Deutsche Bank -- Wall Street Analyst

Great. Alright. Thanks, guys. Appreciate it.

Operator

Thank you. And our next question comes from the line of Matthew Breese with Piper Jaffrey Your line is now open.

Matthew Breese -- Piper Jaffray -- Senior Research Analyst

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

Jack Barnes -- President and Chief Executive Officer

I'm going to give you a little bit of... There isn't a lot more color than what we gave you in the guidance in terms of what's going on in the market, Matt. As we said, I think there's, especially with the privately held owner/operator, people are being cautious and feeling like properties are fully valued and so they are net sellers right now. That's where some of the payoff that we mentioned comes where the slowness in the market is -- there aren't as many buyers when things are fully valued. That's our perspective on it.

The New York Multi-family is a separate issue. Right? Many years ago, we decided that the spreads were getting too tight. My understanding is they're still very tight -- or tighter -- and so we decided that there just wasn't enough spread in the business for us to keep producing and stay in the game and so we pulled back. And we've been there a couple years now, anyway, and so we, basically, service those loans, naturally, and we respond to people as they have any questions or issues, but, primarily, we don't have an origination unit that is out there competing for that business. So, that's where we are on that and we think very modest growth in the portfolio next year, but not declining.

David Rosato -- Chief Financial Officer

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

Matthew Breese -- Piper Jaffray -- Senior Research Analyst

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

Jack Barnes -- President and Chief Executive Officer

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

Matthew Breese -- Piper Jaffray -- Senior Research Analyst

Got it. Okay. My last question, could you just talk about the healthcare portfolio -- how big it is and the area's you're focused on?

Jack Barnes -- President and Chief Executive Officer

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

Matthew Breese -- Piper Jaffray -- Senior Research Analyst

Interesting. Okay. That's all I had. Thank you very much.

Operator

Thank you. And our next question comes from the line of Collyn Gilbert with KBW. Your line is now open.

Collyn Gilbert -- KBW -- Managing Director

Thank you. Good evening, guys. Two quick housekeeping items. First is just a question on the fees. When Casey, I think, reference a fee income number of, I think he said, $362 million or something that we should use as a baseline to then assume your targets of 3% to 5% and you guys said, yeah, that was right. But I'm just trying to reconcile that with, if we look at just if you had approximately $353 million of fee income for the full 2017 add back the $25 million of security losses, it's closer to $377 million number so I didn't know what also is missing to drop it to that $362?

Jack Barnes -- President and Chief Executive Officer

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

Collyn Gilbert -- KBW -- Managing Director

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

Jack Barnes -- President and Chief Executive Officer

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

Collyn Gilbert -- KBW -- Managing Director

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

Jack Barnes -- President and Chief Executive Officer

Yeah, so things are going very well on New York and Long Island. I think, if you look to the details in the back where we've started to break out our loans and deposits by state so that people get a little bit more visibility about that, you'll see a growing portfolio on the loan side in Long Island and in New York. It really is coming from a variety of places. So, our original group, if you will -- what is now the combined middle-market group -- is making good steady progress, not at a strong, strong rate, but good steady progress. Suffolk and their relationship managers really strengthened in a very meaningful way our business banking and efforts so we more than doubled the number of relationships and feet on the group and everybody's been doing a good job. It's actually providing the company our biggest pipeline in that market segment so we're really pleased with that.

We've mentioned in the past our New York commercial real estate unit, which covers all of Manhattan and Long Island, is growing nicely. We've had a lot of really nice activity. Some of it doesn't show yet because it's construction-related so they're not drawn down yet, but it's a group of really talented people that are making great progress so we're pleased, overall, with all of the business units in that New York market.

Collyn Gilbert -- KBW -- Managing Director

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

Jack Barnes -- President and Chief Executive Officer

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

Collyn Gilbert -- KBW -- Managing Director

Okay. Okay. Okay. Alright, that's helpful. I'll leave it there. Thank you.

Operator

Thank you. And our final question comes from the line of Erik Zwick with Stephens, Inc. Your line is now open.

Erik Zwick -- Stephens, Inc. -- Senior Research Analyst

Good evening, guys. Your loan to deposit ratio ended 2017 at 98.5% --

Jack Barnes -- President and Chief Executive Officer

Hey, Erik, could you speak a little closer to the phone or wherever you...? Can't hear you.

Erik Zwick -- Stephens, Inc. -- Senior Research Analyst

Yes, is this better?

Jack Barnes -- President and Chief Executive Officer

Much better, thank you.

Erik Zwick -- Stephens, Inc. -- Senior Research Analyst

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

Jack Barnes -- President and Chief Executive Officer

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

Erik Zwick -- Stephens, Inc. -- Senior Research Analyst

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

David Rosato -- Chief Financial Officer

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

Erik Zwick -- Stephens, Inc. -- Senior Research Analyst

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

Jack Barnes -- President and Chief Executive Officer

Yeah -- this is Jack -- so we've been talking about that, like a lot of people, I guess, and I would start by saying that, in that higher price type of property, we do expect that there would be at least some additional softness now as a result of the tax reform. Really hard to gauge what kind of an impact that is.

You've got someone that's in a home like that -- has capacity -- and how that will change -- how their view about the desirability of an attractive property -- is hard to gauge right now. I would just go to, when we talk about it in terms of what we're expecting in our portfolio and we think about that potential weakness, we've been originating loans with very conservative loaned values and very strong credit scores for a long, long time -- the portfolios are very seasoned -- so we don't have concerns about any impact, broadly, for sure. If there was something, it would be very, very much on the margins, so to speak. So, have the same concern, not sure...

I'd say the same on home equity volumes. The beauty of a home equity product is its flexibility. Right? You want to go buy a car, you want to pay a tuition bill, you write a check -- you don't have to go apply for the next loan -- so the structure of home equity to the consumer, I think, is going to remain very attractive and I would be very surprised if that changes. Again, does the lack of deductibility of the interest change the flow or growth of the portfolio? We're looking to see how that's all going to play out.

Erik Zwick -- Stephens, Inc. -- Senior Research Analyst

Great. Thank you for taking my questions.

Operator

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

Jack Barnes -- President and Chief Executive Officer

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

Operator

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

Duration: 63 minutes

Call participants:

Andrew Hersom -- Senior Vice President, Investor Relations

Jack Barnes -- President and Chief Executive Officer

David Rosato -- Chief Financial Officer

Ken Zerbe -- Morgan Stanley -- Equity Research Analyst

Steven Alexopoulos -- JP Morgan -- Wall Street Analyst

Casey Haire -- Jefferies & Company -- Vice President U.S. Banks Equity Research

Jared Shaw -- Wells Fargo Securities -- Managing Director

Dave Rochester -- Deutsche Bank -- Director

Matthew Breese -- Piper Jaffray -- Senior Research Analyst

Collyn Gilbert -- KBW -- Managing Director

Erik Zwick -- Stephens, Inc. -- Senior Research Analyst

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