People's United Financial, Inc.
Q4 2007 Earnings Call Transcript

Published: 18 Jan 2008

[Operator:]

Good morning ladies and gentlemen and welcome to the People’s United Financial Inc. fourth quarter 2007 earnings conference call. (Operator Instructions) I would now like to turn the call over the Mr. Philip Sherringham, the acting President and CEO and Chief Financial Officer, please proceed sir.

[Philip Sherringham:]

Thank you, good morning everyone and welcome to People's United Financial’s fourth quarter conference call. I am Philip Sherringham, Acting President and Chief Executive Officer and the company’s Chief Financial Officer. I am pleased to be here to discuss our fourth quarter results. Before I begin I’d ask you to please be sure to read the important disclosure statement at your convenience since we’re going to make forward-looking statements as you all know very well by now. Please refer to slides two and three for specifics on our disclosures. Now before we move to slide four I’d like to start by briefly reviewing some of the more significant events that took place during the past year. We successfully completed our second step conversion in April and in the process raised $3.44 billion in gross proceeds. We rebranded the bank in late spring and in June announced our agreement to acquire the Chittenden Corporation. As you know, this transaction was completed on January 1st. With the addition of the six former Chittenden Banks, we now have more than 300 branches over 400 ATNs and seven banks across six states. I think we’d all agree that 2007 was a transformational year. We are now the premier New England based regional banking company. As most of you also know I have assembled a management team to support this new regional banking company that is comprised of the best talent with the management teams of the former Chittenden Corporation and Peoples United Bank. Let me reiterate your new management team’s priorities. They are

[Operator:]

Your first question comes from Mark Fitzgibbon - Sandler O'Neill

[Mark Fitzgibbon:]

Good morning and thank you for taking my question Philip, my first question was about credit at Chittenden but I just got the slide presentation, I guess you have some details so I’ll skip that. Philip one of our competitors has been out in the marketplace telling investors that the OTS has put a moratorium on buy back waivers prior to one year conversion anniversaries, which doesn’t make a lot of sense to us, but I’m wondering are you aware of any such rule?

[Philip Sherringham:]

No this is a rumor as far as I’m concerned.

[Mark Fitzgibbon:]

Okay great. Secondly I wondered if you could maybe with us some of the things that, I know you’re not going to go out and leverage off the balance sheet with wholesale…

[Philip Sherringham:]

No I’m not.

[Mark Fitzgibbon:]

…but could you talk about other things that you might be able to do to mitigate some of the pressure from the FED rate cuts if they do occur?

[Philip Sherringham:]

Well as I did point out, I think the FED rate cuts depending on how extensive they are, will have an impact. I think what we’re going to do is as I suggested is focus on expense control and fee revenue growth to the extent we can. As we’ve pointed out earlier there’s some fee revenues income stream that Chittenden has that we don’t have and we hope to roll those out to our customers in Connecticut.

[Mark Fitzgibbon:]

Okay and then the last question, Philip at what point do you feel like People’s would be in a position to be able to do another acquisition, is that once the Chittenden deal is integrated in ’09 or is it sooner or what are your thoughts on that?

[Philip Sherringham:]

Well obviously as we said many times, our focus right now is not on other acquisitions but it’s on integrating Chittenden successfully. At the same time, I think we all know that given the environment today, attractive opportunity may in fact present themselves sooner than we thought and when it comes to this, we have to be somewhat opportunistic. However, our immediate focus is clearly on integrating Chittenden successfully.

[Mark Fitzgibbon:]

Thank you.

[Operator:]

Your next question comes from Jared Shaw - Keefe, Bruyette & Woods

[Jared Shaw:]

Good morning, just a couple of questions for you. The first is as you look out over the next few years and unwind that shared national credit portfolio, where do you plan on putting the proceeds from that and sort of relates to my second question is with PCLC. Do you have a target on how big that will get?

[Philip Sherringham:]

When it comes to unwinding the shared national credit portfolio as I think I suggested in my comments, this is not a prior sale by any means. The unwinding will be progressive, it will be orderly, it will slow. To give you a feeling, in 2008 I’d be surprised if the portfolio declines by much more than say $200 million. So in terms of any potential revenue hit, our plan is to make it up in-franchise loans. We have the privilege of working with extremely qualified loan personnel in this area and we intend to really employ them in our C&I and commercial real estate departments if you will and they’ll basically continue to originate new loans while monitoring and managing us out of this particular portfolio. So I think it will be progressive and I fully expect we will be able to make up the shortfall through in-franchise originated loans.

[Jared Shaw:]

Okay great and then in terms of PCLC, is there a target for that?

[Philip Sherringham:]

The PCLC no, there’s not a clear limit as to how large that could get. That company just crossed the billion dollar mark in outstandings at the end of the year. You know, it’s very much a function of course of the economy. Again our underwriting remains conservative so we’ll see. It may well slow down somewhat in 2008.

[Jared Shaw:]

And then on the BOLI income, quarter over quarter has increased pretty significantly on a percentage basis, was that as a result of increased purchases there or is that just poor performance?

[Philip Sherringham:]

Well that’s increased yields on the one hand but also unfortunately we had a death of one of the participants.

[Jared Shaw:]

Okay, and then finally on the expense side, can you give a little update on the technology initiative and what portion I guess what you’re expecting on the expenses in 2008 or if not an actual dollar amount, maybe trends or duration?

[Philip Sherringham:]

I think, no I won’t comment on dollars, the technology initiative is going to be part of the overall review of our operations were conducting right now so I won’t comment any further on that either. I think though the point I’m making here is that clearly expense is going to be a big issue for us 2008 and we plan to aggressively look at every area of the company and come up with a plan to address each issue.

[Jared Shaw:]

Great thanks and nice quarter.

[Operator:]

Your next question comes from James Abbott - Friedman, Billings, Ramsey

[James Abbott:]

Good morning Philip, it’s nice to see a very good asset quality number early in earning season but I’m not expecting to see any more companies in that camp at this point so, won and done. One of the questions that I had was on the syndicated credit or shared credit portfolio run off and you addressed it by saying about $200 million, did you mention whether there would be any, whether you anticipated any sales of those or is it just natural run off that you anticipate?

[Philip Sherringham:]

No, I mean this portfolio had two components essentially. One component is a construction loan component, a commercial real estate primarily construction loans and you know; as the units are sold they’ll pay off naturally. The other one is basically C&I credits and that will vary, it will depend. Occasionally we could be taken out by the agent, they want to increase the commitment and we don’t participate. There’s a natural process to this.

[James Abbott:]

It’s more natural run off then it is a sale of these.

[Philip Sherringham:]

No I mean clearly if we had the opportunity to make some sales at attractive prices we would but I don’t anticipate that.

[James Abbott:]

Okay and have you disclosed or could you give us a sense if you haven’t disclosed what the commercial construction is and geographically where that is?

[Philip Sherringham:]

You mean in the shared national credit?

[James Abbott:]

Yes, I assume it’s nationally but are there any concentrations in…

[Philip Sherringham:]

Yes, the largest concentration is Florida and as of the end of the year it was around $90 million. Keep in mind of course that you know historically we’ve had this 15% limit to the shared national credit portfolio as a percentage of our commercial banking totals. Of course now, including Chittenden we’ve got a much larger commercial portfolio so the percentage drops automatically a lot lower.

[James Abbott:]

Right, can you..let’s see if I can drill down a little bit more here, are the losses shared losses or are they tranched in some sort of fashion where you’re second or third tier in the loss?

[Philip Sherringham:]

I think you’re in a bit too deep here. Most of the time, if there were any losses, and the point I made I’ll make it again. This portfolio has performed superbly and continues to perform superbly. It has not experienced a single delinquency much less a charge-off or loss in its entire history. That’s remarkable.

[James Abbott:]

No and I understand that, but I guess just to play devil’s advocate, I heard that from several other banks that are now running at 5% non-performing asset levels. I’m just trying to get a sense as to, if it’s a shared loss position in some of these things or if it’s a…

[Philip Sherringham:]

I can’t really comment on that because it varies depending on the credits.

[James Abbott:]

Okay. And then regarding the buy back, assuming you get an early approval here, as we think about conceptually with the company’s outlook here, would it be an aggressive program? Would you buy back 30% of the stock in a given year, or would you be inclined to go a little bit slower and more measured?

[Philip Sherringham:]

Well as I stated in my comments and I want to stick to that at this point, our aggressiveness in pursuing a buy back is a functional market conditions, and other alternatives. Other alternatives look rather good to me right now. They may prove more compelling than a buy back. We’ll see, but again, that would be a function of what we can do at the time. I’ll remind you also that basically we’re mid-January and in fact later than that, and past April 16th, we don’t have any constraints on us anymore anyway. If we get an okay from the OTS it’s a very small window there.

[James Abbott:]

Understood. I do have other questions but I’ll drop out for now and let others ask. Thank you Philip.

[Operator:]

Your next question comes from Richard Weiss - Janney Montgomery Scott

[Richard Weiss:]

Hey Philip good morning. I wonder if you could talk a little bit about the deposit competition up in your market area, is it easing at all or do you expect it to ease going forward or will the cost of funds be coming down in your opinion?

[Philip Sherringham:]

Well I think the cost of funds is likely to come down some in 2008 as rates come down in general. I think the [bank] industry is trying to aggressively lower rates which is understandable given of course the compression of yields on the asset side. So you can sort of expect that a little bit. Look, I mean competition remains where it’s always been, tough, aggressive. Having said this, I mean we’ve, I think we’ve done remarkably well there. We’re hanging on to our market share. Should we at some point have a need for deposit growth I think we’ll be in a position to do that? At this point, we frankly don’t. We focused on managing our cost of funds and you can see the results.

[Richard Weiss:]

Okay and I was wondering too if you could give us your pro forma tangible book value including Chittenden.

[Philip Sherringham:]

Yes, I can do that. I’ll give you two numbers actually and I’ll point out those numbers are preliminary at this point. We haven’t completed all of the accounting entries yet obviously, since the purchase accounting I mean, so at this point an indication for all of you, our book value is going to be $15.69 a share and our tangible book value is going to be $10.57 a share.

[Richard Weiss:]

Okay, thank you very much.

[Operator:]

Your next question comes from Matthew Kelley - Sterne Agee

[Matthew Kelley:]

Just to clarify the margin guidance and net interest income guidance that you provided earlier, that was if rates were down 100 basis points from where we stand today? With the 10-year at 3 6, two-year at 2 3?

[Philip Sherringham:]

Yes we’re focusing our [FED] funds on where they are today, that’s right.

[Matthew Kelley:]

Any ability to provide a number on the static type of environment if rates don’t change much from today with the margin or net interest income sensitivity would look like relative to that 6%?

[Philip Sherringham:]

I don’t want to go too deep into this because I’m not quite ready for it but again we indicated a pro forma number of $785 million if rates don’t move. That’s a combined number for the two companies.

[Matthew Kelley:]

And that’s from today?

[Philip Sherringham:]

That’s from today.

[Matthew Kelley:]

Okay. And then on the share national credit portfolio what is the yield on that in terms of figuring out the income that is going away with that as that winds down versus the reinvestment yields in new opportunities and securities?

[Philip Sherringham:]

I don’t think I have this number handy. The yields are pretty close to our commercial banking portfolio average actually, it’s not that far.

[Matthew Kelley:]

Okay. And then could you just give some commentary on the appropriate numbers to be using on ESOP, stock awards options now that everything is granted, full quarters here starting to be expensed just to make sure we’re all on the same page.

[Philip Sherringham:]

I think if you go back to my comments I’ve indicated that the expense for the ESOP in the fourth quarter was $2 million and for the other incentive plans about $2.6 million. So some of this is affected by sub-price levels so you could say somewhere between $4 million and $5 million of extra expense a quarter.

[Matthew Kelley:]

Okay, that’s all for now, thank you.

[Operator:]

Your next question comes from Collyn Gilbert - Stifel Nicolaus

[Collyn Gilbert:]

Thanks, good morning Philip. Just a follow-up to some of the things you had said, you had said other alternatives in terms of capital deployment are looking more compelling right now? What would be some examples of those other alternatives?

[Philip Sherringham:]

Well the only choices, we’ve got three choices to deploy capital, organic growth, acquisitions or buy backs right? And all I was trying to say was that given what’s happened to bank stock prices I think at this point acquisitions don’t look unattractive to us necessarily. They look more attractive than they did six months ago that’s for sure.

[Collyn Gilbert:]

Okay and then also too you had indicated earlier in the call talking about with Chittenden and that the expenses were going to be a focus in right-sizing, and you had said efficiency expectations which you had laid out previously, could you just remind us what those are again?

[Philip Sherringham:]

Right, if you recall in June when we announced the transaction, we said things that we’d be targeting $38 million cut in Chittenden’s expenses on a fully phased in basis. That’s their GAAP expenses as reported. So we’re going to try to do better than that obviously.

[Collyn Gilbert:]

And then just finally on the credit front, when you said you’re not seeing any disturbing trends right now, is that also as you comb through Chittenden’s portfolio?

[Philip Sherringham:]

Well we’re combing as we speak here Collyn.

[Collyn Gilbert:]

Comb faster Philip.

[Philip Sherringham:]

It’s got to be done right though. The answer at this point is that we haven’t found anything that’s disturbing but we’re combing. I’ve got to put a caveat in there. However, look at the numbers, look at the historical numbers, look at the numbers that I put on the slides for you for 2007. They’re pretty impressive. That nature of the portfolio is a bit different, it’s more commercial real estate, so we’ll see how that goes.

[Collyn Gilbert:]

Right, okay that was it. Thank you.

[Operator:]

Your next question comes from James Abbott - Friedman, Billings, Ramsey

[James Abbott:]

Just a follow-up question on the home equity portfolio, we [inaudible] its mostly in Connecticut and correct me if I’m wrong on that, but assuming that’s the case, could you give us a little bit more detail on that on combined loan to value, stratification, do you have anything that…

[Philip Sherringham:]

Let me comment on that a little bit, I’m happy to. First of all, yes, the portfolio is 99% in Connecticut so there’s nothing in Nevada here. Second in terms of the combined loan to value issue on the average portfolio at origination, it stands at 59%. That’s combined including the first and the home equity loan or line. Now also in our case the portfolio is 90% lines of credit. The combined loan to value ratio reflects the line being fully drawn down. That’s never the case. On average those lines are 50% give or take 5% drawn down and also the portfolio is probably about three years old on average. So I really think taking all of this into account we’re extremely comfortable with our position in this portfolio. And also we basically never did anything with and LTV greater than 80%. I don’t have a total stratification for you but average combined LTV 59% at originatation probably much lower now, and we didn’t go above 80% in any case in general.

[James Abbott:]

Okay super, wow that alleviates any concern that I had on that. Thank you very much.

[Operator:]

At this time that concludes our question and answer session, I would now like to turn the call back over to the acting President and CEO and Chief Financial Officer, Mr. Philip Sherringham. Please proceed sir.

[Philip Sherringham:]

Well thank you all very much. This promises to be a challenging and exciting year for us and the rest of the industry and we look forward to it. We’ll see you again in April. Thank you much. Bye for now.