People's United Financial, Inc.
Q1 2008 Earnings Call Transcript

Published: 18 Apr 2008

[Operator:]

Good day ladies and gentlemen and welcome to the People’s United Financial First Quarter Earnings Call. My name is Michelle, and I will be your coordinator for today. (Operator Instructions). And I would now like to turn the presentation over to your host for today’s call Mr. Philip Sherringham, President and Chief Executive Officer and Chief Financial Officer, please proceed.

[Philip Sherringham:]

Thank you. Good afternoon everyone and welcome to People's United Financial’s first quarter 2008 earnings conference call. Again I am Philip Sherringham, President, CEO and hopefully for not too much longer Chief Financial Officer of the company. I am pleased to be here to discuss our first quarter results. Before I begin as usual I’ll ask you to please be sure to read the important disclosure statements on Slide 2 and 3 at your convenience, since we’re going to make some forward-looking statements as you all very well know by now. And with that said, let’s move on to Slide 4. Net income in the first quarter was $15.1 million or $0.05 a share. There were a number of one-time charges and a gain during the quarter, so adjusting for these, operating net income is $48.3 million or $0.15 a share. Operating return on tangible assets was 1% compared to 1.38% in the fourth quarter of 2007. Our net interest margin for the quarter was 3.68% compared to 4.01% for the fourth quarter of 2007. We had anticipated this margin compression due in large measure to the Federal Reserves' current posture and a 200 basis point drop in short-term rates during the quarter. I’ll provide more details on the margin a bit later. On the asset quality front, net loan charge-offs for the quarter was 8 basis points to average loans, indicating that asset quality remains excellent. At quarter end, we had a substantial excess capital position of more than $2.5 billion. Before we delve deeper in to the numbers, I’d like to take a moment to briefly discuss some important recent developments which appear on Slide 5. As we discussed in our January call, we completed our acquisition of the Chittenden Corporation on the 1st of the year. I would note that for comparison purposes, our 2007 results do not include the Chittenden Corporation. With the addition of the six former Chittenden Banks, we now have seven banks serving six states and we have the largest regional bank based in New England. Beyond maintaining our focus on financial performance, our priorities remain, continuing of the seamless integration of Chittenden and judiciously managing our significant excess capital position. Recently, we announced annualized expense reductions of $57 million, eliminating 420 positions including 20 branches throughout the company. As you’ll recall, at the time of the Chittenden acquisition announcement, we noted the expense savings as a result of the combination of both companies could be about $19 million in 2008 and $38 million on a fully phased-in basis in 2009. As we indicated at the time of the announcement, that estimate was conservative. Subsequently pursuant to a recently completed review of our combined operations, we found additional opportunities for expense savings. And it is important to note that this recent announcement does not reflect additional anticipated savings that will be realized upon the eventual consolidation of the back office operations of the company. Our Board, earlier today approved a 12.5% dividend increase from $0.53 to $0.60 on an annual basis. This is our 16th consecutive annual dividend increase. Our Board also authorized this morning, an initial 5% share repurchase plan. The company currently has 345 million shares outstanding, so we can buyback approximately 17.3 million shares on that basis. As we move forward with this repurchase plan, we will constantly assess the desirability of alternative uses for the company's capital, the market for the common stock, the cash flow and capital level of the company, as well general economic conditions. Slide 6, provides a reconciliation of our GAAP numbers and our operating income for the first quarter. As I noted earlier, we reported net income of $15.1 million or $0.05 a share. GAAP earnings were impacted by several one-time pre-tax items. Merger related cost totaled approximately $41 million, other one-time charges totaling $14.8 million and a $6.9 million gain from our participation in the Visa IPO. The after tax impact of these one-time events, totals $33.2 million or $0.10 a share. Adding that back to the company’s reported net income results in operating income of $48.3 million or $0.15 per share. As we all know, consensus estimates for us were $0.18 a share. It seems to me that some estimates may not have fully reflected the 200 basis point of Fed Funds reduction during the quarter. As you can see on Slide 7, total average earning assets this quarter were $18.2 billion, an increase of $5.7 billion over the fourth quarter 2007. The increase was due in large measure to Chittenden - People's United combination. The increase can be attributed to $6.8 billion of earning assets from Chittenden; that’s approximately $1 billion resulting from liquidation or short-term assets to complete the Chittenden transaction. There was an increase of $8.5 billion when compared with total average earning assets reported for the first quarter of 2007. Slide 8 illustrates changes in the mix of our average earning assets. Average securities and short-term investments increased to 20% of total earning assets, compared to 4% a year ago, as a result of the proceeds from the second step conversion. This also reflects, as I just mentioned, the liquidation of approximately $1 billion to purchase Chittenden. Commercial and home equity loans again in the first quarter represented approximately the same respective percentages of our earning asset mix from a year ago period due to the sharp increase in short-term investments. Slide 9 illustrates the company’s loan mix. As you can see, our commercial banking loans, as a portion of our total loans increased 12% due to the loan mix at Chittenden, while our residential loans, as a portion of our total loan decreased 12%. So in other words, our tilt and our shift towards the commercial bank mix is increasing. Slide 10 addresses our commercial loan portfolio. Our total commercial loan portfolio increased 98% as a result of the acquisition of $3.8 billion in Chittenden commercial loans. As you can see commercial real estate loans represent the largest increase followed by C&I loans. PCLC, our equipment finance subsidiary continues to grow up 12%, compared to the first quarter of last year. While our shared national credits portfolio increased 28% from last year, that number will decline in future quarters, reflecting our decision to unwind this portfolio over the next two to three years. It currently represents 10% of total commercial loans and only 5.6% of total loans. I want to reemphasize, as I did last quarter, that our shared national credits portfolio which was built up from a low base has performed and continues to perform exceptionally well. Now let's move to the liability side of the balance sheet on Slide 11. We acquired deposits of about $6.1 billion as a result of the Chittenden transaction. Once again our loans are fully funded by deposits and stockholders equity. Slide 12 shows a comparison of our average funding mix in the first quarter of 2008 and 2007. As you can see, our stockholders' equity nearly doubled from 13% to 25%, largely a reflection of the proceeds of our second step conversion. Slide 13, illustrates the components of the bank's deposits. The across-the-board increases also [effected] the acquisition of about $6.1 billion in Chittenden deposits. So Savings, NOW accounts and money market accounts which represent 42% of our deposit mix are up 92% compared to the first quarter 2007, which also included $84 million in escrow funds from the stock offering. Time deposits representing 37% of the mix are up 53%, and demand deposits representing 21% are up 48%. Our overall cost of funds for the quarter was 2.32%. However the real strength of our balance sheet can be seen in the equity and core deposits. The weighted average cost of which is only 68 basis points for the quarter. Looking at demand deposits more closely, consumer demand deposits were flat year-over-year, while commercial DDA increased about $1 billion or 107%. This reflects the deposit composition of the Chittenden Corporation, which was largely commercially focused as we know. Now let's take a look at the income statement on Slide 14. The first quarter 2008 operating net income was up 44% from first quarter 2007 levels. The company’s adjusted earnings per share for the first quarter 2008 increased 36%, compared to the same period last year. First quarter 2008 net interest income was negatively impacted to the tune of about $13 million or $0.03 a share to the previously mentioned Federal Reserve rate cuts. The provision for loan losses in the first quarter of 2008, reflects net loan charge-offs of 8 basis points for average loans, more evidence of the company’s excellent asset quality. And by the way the lower tax rate this quarter reflects [fully] debt benefits. First quarter 2008 non-interest expenses were relatively flat, when compared with fourth quarter 2007 pro forma results. The bar chart on Slide 15 shows the trend in our margin. The company’s margin reflects a negative impact of approximately 30 basis points compared to fourth quarter 2007, as a result of declining interest rates and our decision to stay liquid. An additional six basis points of negative impact is due to the amortization or fair value adjustments related to the Chittenden purchase. And as I said before, you should think of us an $18.5 billion asset bank with an additional $2.5 billion stash of extra capital. We look at Slide 16, obviously the liquid capital is extraordinarily asset sensitive and exacerbates the more modest asset sensitivity of the core bank. This slide brings out the impact of those two factors. Slide 17, addresses non-interest income. The trust area added $5.7 million in fees for the quarter, compared to the fourth quarter 2007 in large part and due to the Chittenden acquisition. Also as a result of the Chittenden acquisition fee-based revenues were up 54%. Net security gains include a one-time $6.9 million benefits related to the Visa IPO and a $1.5 million gain from the sale of the former Chittenden securities earlier in the year and their reinvestments at shorter durations. Adjusted non-interest income increased 72% from the first quarter 2007 to first quarter 2008. Slide 18, shows non-interest expense highlights. Operating non-interest expenses increased largely as a result of the Chittenden acquisition. As I noted earlier, first quarter 2008 non-interest expenses were relatively flat when compared with fourth quarter '07 pro forma results. While Slide 19 illustrates the trend in our efficiency ratio, the absolute levels are hugely impacted by the recent trends in interest rates. We, here at the bank, remain committed to continually [improvise] from the bank more efficiently and control the actual levels of expenses. And the results this quarter did not reflect any meaningful acquisition related to cost savings at this early stage of the integration. But as you all know, the efficiency ratio is also driven by revenues. Given our high levels of liquid investments, this has caused an increase in the efficiency ratio in the short-term. While our long-term goal remains an efficiency ratio in the mid 50% range, it will be dependent on the continued deployment of capital. We're very pleased to report their asset quality, as you see on Slide 20, it continues to be excellent. The former Chittenden banks accounted for $46.5 million or roughly 65% of non-performing assets in the first quarter of 2008. The provision for loan losses this quarter reflect a $4.5 million increase in the allowance for loan losses, resulting from aligning the former Chittenden reserving methodology with that of People's United Financial. And as I noted earlier; net charge-off are only 8 basis points to average loans which is quite remarkable in the current environment. Now I had the risk of sounding like a broken record, let me restate that we have no sub-prime, Alt-A or SIV exposure, and that at present we see no cracks in the foundation in terms of our asset quality across all of our loan portfolios. Slide 21 illustrates the differential impact; a great news on our excess capital position compared to the core bank. As you can see, if rates were to decline 100 basis points, the net interest margin on the excess of capital would drop by 40%, contrasted to only a 4% decline in the core bank's margin. If the fed funds remained flat at 225 basis points which would translate to 250 basis point on average for the year, the margin would be 345 for the year. If the fed funds rate dropped [250] basis points or 200 basis points on average for the year, the margin would decline by 13 basis points to 332 basis points. Now, I'd like to provide some insights into our outlook for the remainder of the year. From current operating levels this quarter, we expect that total average earning assets will increase by about 2% by year-end, as the decline in total average loans or roughly 2% should be offset by additional growth in liquid investments. While loans overall should decline as residential loans and national credits drop by almost 15%, this should be partially offset by continued growth in commercial lending of approximately 8%. And I know it says 6% on your slide, but that typo should be 8%. So please make that change. Thank you. We assume our deposits will increase 2% by year-end and our net interest margin will be 3.45% for the year even no change in account short term rates. Non-interest income expects to be stable, and we expect to realize non-interest expense savings of 8% to 10%, not to 8% to 12%, 8% to 10% based on the cost reduction efforts we discussed earlier in this presentation. Finally, we believe that our strong asset quality and significant capital position will continue to set us apart from our peers. In summary and as I stated at the beginning of this presentation, our areas of focus are very clear with successful integration of Chittenden, continued strong financial performance and effective management of capital. By maintaining our focus, we believe, we'll be well positioned to deliver the level of [shorter] returns that our franchisers performance warrants, regardless of the greater macro issues hurting so many of our peers. This concludes my review of this quarter's results, and now I’ll be happy to answer any questions you may have.

[Operator:]

(Operator Instruction). And your first question comes from the line of [Kane Jerbi] of Morgan Stanley. Please proceed.

[Kane Jerbi:]

Great, thanks. With $2.5 billion of excess capital that is clearly depressing your earnings, how long are you willing to hold that? Because I saw the 5% buyback that I guess in the grand scheme of things that really doesn’t move the dial too much?

[Philip Sherringham:]

Well, yeah, couple of things even I can't resolve. The 5% of that, as we mentioned in the press release and the initial purchase, depending on how we feel about the world we could obviously come back and increase it later. As to your question as to how long we are willing to hold that capital? If you go back to exactly a year ago, when we closed the deal on the road show then, people asked us how long it's going to take us to deploy the capital. And the answer was three to five years. So we are sticking with that. Obviously we didn’t waste time with Chittenden and you know, I think based on that you could say another two to four years, two to three years.

[Kane Jerbi:]

Okay. And then maybe switching gears a little bit. Could you just talk a little bit about acquisition opportunities right now? What are you seeing out there in the market; is it more attractive essentially than doing buybacks and what's your appetite for large versus smaller deals?

[Philip Sherringham:]

Well, maybe I’ll answer the last question first. Larger deals, smaller deals, that question comes up pretty often. Candidly all things being equal which currently they never are, larger deals are better, because they move the needle, they are simply more efficient in terms of our own resources here internally. Doesn’t mean we wouldn’t look at smaller deals. We are going to be very open-minded about this. So we could look at both. I still have a preference for larger deals to the extent they are available. Now, back to the first part of your question, are they available, what do we see, is it attractive? On paper, if we could do deals, at prices closer to what the market is today, for many of our potential targets it could be fairly attractive. We think it would be actually probably more attractive than buying our stock. Whether or not that’s actually possible, as you know that’s a one-on-one discussion with potential targets and it may or may not happen.

[Kane Jerbi:]

Okay, great. Thank you very much.

[Operator:]

And your next question comes from the line of James Abbott of FBR Capital. Please proceed. Mr. Abbott, your line is now open. James Abbott - FBR Capital Sorry, yes. Hi Phil, how are you?

[Philip Sherringham:]

Good, how are you? James Abbott - FBR Capital Good, thanks. Housekeeping question, on the BOLI line or the amount of the BOLI income for the quarter, that's unusual or non-recurring related to the debt. Can you give us that amount, I think it's in the other fee income line.

[Philip Sherringham:]

It's about $2.3 million. James Abbott - FBR Capital Okay.

[Philip Sherringham:]

I remember that’s not taxable. James Abbott - FBR Capital Right. Correct, okay. And would the tax rate return back to around 32%, 33%, level in the second quarter?

[Philip Sherringham:]

Yes, 34%. James Abbott - FBR Capital 34, okay. And then also on a little bit more subsequent question, how should we model or think about modeling in the cost savings. I think you mentioned at the beginning of that process in the third quarter as far as and so forth if I remember from the press release. And at what point will the 100% of that $57 million be fully factored in?

[Philip Sherringham:]

Well, the $57 million should start impacting the second quarter numbers actually. And that’s an annualized rate. So, I mean roughly totaled something like say $12 million to $14 million a quarter, starting in the second quarter of the year. Again, it depends, some of this maybe [covered] to some phase-in, but you should start seeing the impact in the second quarter. James Abbott - FBR Capital Okay. So, we can take the non-interest expense line item of the $219 million, and we need to track the merger expense?

[Philip Sherringham:]

No, its not, let me stop you, James. It's not the 219, it’s the 167 start with that, right. James Abbott - FBR Capital So, 167.

[Philip Sherringham:]

The 219 includes the non-recurring one-time numbers, expenses, I should say. So, go from 219 to 167, 167 again reflects essentially no synergies at all between the two companies. If you go back to the pro forma numbers which we had in fact disclosed earlier, you add our expenses in the fourth quarter which were a $100 million to the Chittenden Corporation expenses adjusting in a little bit, like $160 million. So the total level is about $160 million of fourth quarter pro forma. So what I am saying is, you are now looking at 167.9, so essentially flat, like that a little bit. 167.9. So, yeah. So that number, 167.9 should start to be reduced in the second quarter to the tune of anywhere from $10 million to $14 million a quarter over time. And those expenses saved of course are permanent in nature. James Abbott - FBR Capital Okay. Thank you. That’s helpful. So we should expect it in the second quarter completed.

[Philip Sherringham:]

Well, not maybe entirely completed, but you should see a big piece of it, yeah. James Abbott - FBR Capital The vast majority. Okay. And last question that I had anyway is on the amount of construction loans in the shared national credit portfolio. Do you have that handy with you? I know there are some construction loans in there, I just didn’t know if you could give us the dollar amount of the number and then also sort of the health of those construction loans?

[Philip Sherringham:]

Well, unfortunately I don’t have the exact number handy. So I'll call you back on that later. I will be happy to give it to you. But as far as half of the portfolio is concerned, so far it's going very well. I mean this is a portfolio, I know it sounds surprising to most of you but again they are [close] to be because the quality of our underwriting frankly, as well as our monitoring and management of the portfolio. I mean, so far this portfolio is performing just fine. James Abbott - FBR Capital Were you the lead bank on those constructions or are you just participants?

[Philip Sherringham:]

No. We are participants. James Abbott - FBR Capital Okay. Thanks very much.

[Philip Sherringham:]

Sure.

[Operator:]

Your next question comes from Rick Weiss of Janney. Please proceed.

[Rick Weiss:]

Hi guys.

[Philip Sherringham:]

Hi Rick.

[Rick Weiss:]

I was wondering if you could discuss the integration of Chittenden in some more detail, and whether you have received any surprises both positive and negative, and also what kind of deposit run off have you seen?

[Philip Sherringham:]

Yes first of all no surprises. Chittenden we thought was a good bank that’s why we bought it. It's been confirmed, Chittenden is a good bank. Again in terms of asset quality, their methodology for reserving and things like that was a little different from ours, we made the adjustments in this quarter. So we are now on the same plane if you will on that front. In terms of how the integration is going, it's going very well. Some aspects are going - are as fast as others as it was expected. The good news is really no surprises.

[Rick Weiss:]

Okay. And when you say the reserve methodology is a little different, does that mean that they tend to have a higher reserve levels and People's did?

[Philip Sherringham:]

Actually it's got the other way round. The way they looked at non-performing assets, and compared to the way we look at non-performing assets, the slight definitional differences which led us to increase the allowance of the $2 million to $4.5 million in the first quarter as we indicated.

[Rick Weiss:]

Okay. And I was wondering if for the one-time charges excluding the merger ones, kind of what were the main elements of that?

[Philip Sherringham:]

Well as we indicated there are some charges related to the passing of our former CEO Mr. John Klein and then there is some other collection of minor items, including our setup a reserve for potential legal exposure which is now fully covered, you know, stuff like that.

[Rick Weiss:]

Okay. That is all I have. Thank you.

[Operator:]

(Operator Instructions). And your next question comes from the line of Collyn Gilbert of Stifel Nicolaus. Please proceed.

[Collyn Gilbert:]

Thanks. Hey Philip, how are you?

[Philip Sherringham:]

Hey Collyn how are you?

[Collyn Gilbert:]

Good. Just a question on credit quality. You had said that Chittenden had $46.5 million of NPAs. But were they about, I guess I am showing somewhere that at the third quarter they were about $30 million of NPAs, so that…

[Philip Sherringham:]

Well at the end of the fourth quarter and that's the number we disclosed also, they are basically $36 million. Okay, so yeah if you look at our numbers and if you look at what their numbers were, the increase came almost entirely from the former Chittenden banks. In other words on a pro forma basis, NPAs were basically $62 million as of December 31st, now they are at 72 and that increase came almost entirely from the former Chittenden banks. And in fact to be more specific, most of that goes to the last bank that Chittenden acquired CBNT bank and Community Bank and Trust in Wolfeboro, New Hampshire.

[Collyn Gilbert:]

Yeah.

[Philip Sherringham:]

It's a very small bank actually. But that too has a [few asset] quality issues, so that is what I.

[Collyn Gilbert:]

Okay and you all along have been pretty clear on what the credit profile looks like for you guys, for people and you had said that you don't see any major issues for the combined organization. But do you anticipate reserve building at all here now with Chittenden on the books, just given the profile of those credits, given that they've done some acquisitions in the last few quarters, specifically the CBNT where credit may not be quite as strong.

[Philip Sherringham:]

As you know Collyn, as we’ve discussed many times in the past reserve building is not a discretionary proposition for us or for anybody else for that matter. It's a function of ultimately actually asset quality charge-off levels and so on. At this point frankly, no I think our ratio of allowance to total loan now stands at 105, which on a combined basis of course is higher than what we use to be standalone and we are very comfortable with that.

[Collyn Gilbert:]

Okay. And then just in terms of the CFO search, could you give us any color as to how that's going or potential timing on when you may announce the heir?

[Philip Sherringham:]

Well, again if you know of any good candidates let me know. You got my number, anybody out there please call me. We're actively looking, we have engaged [Spencer Stewart] to help us with that, and it's one of those things, it’s a very important position for us as you might imagine, and it's going to take the time it takes. So I am hoping frankly it can be concluded within the next couple of months but I can't promise anything.

[Collyn Gilbert:]

Okay. And then just finally on the share repurchase. I know you've indicated you are obviously going to be opportunistic and market conditions are going to affect that etcetera. Is there any guidance you can give on how we should really model that? I mean the fact you came out of the gate with only a 5% authorization is less than certainly what we've seen from your peers, but just any color on how we should be factoring that in?

[Philip Sherringham:]

I wish I could help you Collyn, but I am afraid I can't, because it's completely, it's really going to depend -- we will give the list of factors we're going to be considering; I think of course on basically a combination of alternatives we may have. The markets will stock itself and so on. So I cannot be more specific, I wish I could.

[Collyn Gilbert:]

Okay. And I keep saying final question but I am stealing one more.

[Philip Sherringham:]

That's alright. We can understand.

[Collyn Gilbert:]

Acquisition plans, you had commented on size. What about mix? I know in the past you've been pretty adamant about not diluting the balance sheet mix or sticking to more of a commercial orientation. Are you broadening your criteria at all, as it relates to opportunities?

[Philip Sherringham:]

Not really. I mean, again, initially the answer is no. I mean, if we are completely successful on that front, we may reconsider it, but at this point, we're not. We haven't given up at all. I think we're building a very nice balance sheet, a very nice commercial bank, and as you know, the reason we're doing this is because ultimately this is where the profitability is, you can't build a high performing bank on mortgage portfolio alone, doesn't happen.

[Collyn Gilbert:]

Okay, All right, that's all, thanks

[Operator:]

And your next question comes from the line of Philip Robert of Westwood.

[Philip Robert:]

Yeah, Philip, how are you?

[Philip Sherringham:]

Good, how're you?

[Philip Robert:]

Yeah good, thanks. Listen I was wondering if you could kind of lay out the parameters and criteria for your acquisition strategy. Obviously we saw coming out of 20, then you did the Chittenden deal, evidentially the market feels like you're prepared for Chittenden, whatever that may be. Given the relatively short track record, you guys have to do deals. Part of that thesis for having excess capital was to deploy that in an acquisition, so how can you assure us that essentially that won't be diluted again. If you can just walk through that strategy that would certainly help.

[Philip Sherringham:]

Well, first of all, I could take issue with some of your statements but I won't because we don't have our perspective on this and that's fine. At the end of the day we think that Chittenden was a great deal, we think that our stock was even [bad] with some, as all our financial institution stocks have done, are comparatively, frankly very well as you well know. I could list a number of companies that would be delighted to have our performance in terms of the stock price. Anyway, we thought it may, yeah, you are right when we raised the capital we were unambiguous, very clear I thought at that time about our desire to deploy it by acquisitions. We think that well-priced acquisitions are franchise accretive. We've got a very clear target profile, which again we restat. We are talking about commercial oriented franchises in our general designated market areas, the northeast and that goes from Maine to Washington DC at this point. We are looking for companies that are commercial and that have philosophies, credit culture somewhat similar to our [deposits], good deposit franchises that's what we are looking for.

[Philip Robert:]

Okay. And in terms of ROE kind of hurdle metrics of internal rate of return that you guys are going to deploy.

[Philip Sherringham:]

Right. As you know -- and thanks for bringing it up. Our most important metric that we paid most attention to is in fact the internal rate of return. And we stated initially that it ought to be the internal rate of return -- any acquisition ought to be higher than our cost of capital. That happened to be the case with Chittenden otherwise of course we have never done the deal. And we announced an [IRR] of 13.5 if you recall, cost of capital we feel is around 11, probably still around 11, doing 10 or 11. So that met the hurdle rate then. I think today it's different, and given the environment being considerably different the hurdle rates have just increased. My target is now at least 20%, so IRR should be at least 20% for us to do a deal.

[Philip Robert:]

Great. Thank you for sharing that Philip.

[Philip Sherringham:]

Sure.

[Operator:]

And your next question comes from the line of [Steve Shepherd of HGK Asset Management]. Please proceed.

[Steve Shepherd:]

Hi. I noticed, if I remember correctly a few months ago in the local paper there, where you were selling most of your buildings in Downtown Bridgeport. Is that still the case, that you are consolidating your operations there?

[Philip Sherringham:]

Well, first of all, let me clarify something. We have indeed put a bundle of properties in downtown Bridgeport on the market. Those are properties that we’ve owned in some cases for a very, very long time. And frankly none of them involved are operations. Those are properties that are currently used by a variety of commercial tenants. They are on the book for about $8 million, so it's not exactly an earth shacking transaction. Frankly our thinking is very straight forward. To the extent there is right now a start, a little bit of a beginning of a renaissance in Bridgeport, our thinking is that outside investors or potentially developers or others would be in a better position than we are to maximize the best use of those properties and that’s why we are doing it.

[Steve Shepherd:]

Okay. Lastly a question on the development in the area; are you one of the (inaudible) involved with the loans for the new train stations and things that are going on in Fairfield and in Bridgeport?

[Philip Sherringham:]

No, we’ve got nothing to do with that.

[Steve Shepherd:]

Okay. Okay, that’s a positive I think, all right.

[Philip Sherringham:]

All right, well thank you.

[Steve Shepherd:]

Thank you very much.

[Operator:]

(Operator Instructions) And your next question comes from the line of Matt Kelley of Sterne Agee. Please proceed.

[Matt Kelley:]

Yeah, hi guys.

[Philip Sherringham:]

Hi, Matt.

[Matt Kelley:]

Yeah, hi guys.

[Philip Sherringham:]

Yeah, hi Matt.

[Matt Kelley:]

Putting some of this guidance together and the margin guidance and I appreciate all the details you’ve provided, but you put it all together and it's difficult to see '08 coming in higher than last year. And so if you have flat earnings, I’m wondering if, you know the 20% IRR would coincide with another deal, that you would consider being 15% accretive to earnings and 26% dilutive to tangible book, I mean, has that changed at all?

[Philip Sherringham:]

You need to rephrase that, I am not quite sure I understand the…

[Matt Kelley:]

What I mean is that the Chittenden was originally, it was 15% accretive to earnings in the PowerPoint presentation when the deal was announced?

[Philip Sherringham:]

You mean that Chittenden deal.

[Matt Kelley:]

Right.

[Philip Sherringham:]

Yes.

[Matt Kelley:]

Right. And so, if we are looking at flat earnings now for '08, that’s just the way I am coming up with it right now. You'll be looking at $0.75 for next year, if you return out a similar type of transaction to Chittenden, and then Chittenden was 26% dilutive to your tangible book. And I am wondering if you would repeat that type of transaction or not?

[Philip Sherringham:]

Well, I think the math has probably changed some. Honestly, the premiums that we'll be paying will probably be lower, at least we'd hope. I can't really depend on those specific situations; I understand your logic. I think this year’s earnings again depending on what the Fed does, they are very strong on what the Fed does. If very stiff that's one thing, if they go down to some more or another, if they go up some, seem to much better. I want to emphasize by the way that we think it's really prudent for us at this point to stage forward in terms of our capital. We have all kinds of options, so we could go out and take more credit risk, [modulation] risk and camp with earnings that would be fairly significantly higher this year already, Matt. But as you know, cash can't be marked down unlike everything else and given the huge amount of uncertainty and volatility in the financial markets; I think that it's just - a better of valor at this point is to stay in cash. And so, we're being very vocal about this to you and anybody else who gets to us and listens. It's going to have impact, but you should understand it's a very temporary situation. In a way doesn’t really reflect in my mind at all on the earnings potential of the company. This is a temporary deployment of capital; it's in cash for now. We're looking for acquisition. Should we determine after a certain period of time which remains to be seen say a year, two years. Two years from now we can’t find anything that meets our criteria. We can always buy the stock back massively or there are all kinds of options.

[Matt Kelley:]

Okay. And can you just remind us again on just kind of the geographic regions that you would find appealing for acquisition strategies and maybe rank those a little bit in terms of markets you'd like to expand the franchise into more than others?

[Philip Sherringham:]

We are very open-minded there. I think there are excellent markets up and down the East Coast. The excellent markets are still in New England, they were not in. Boston's one of them, at that point of (inaudible), whereas in Rhode Island, as you’ve observed, I am sure. So that's [rugged] markets in New Jersey, rugged markets in Pennsylvania, and Delaware all the way down to DC. So it really will depend on who we can talk to, who will see the value of associating with us.

[Matt Kelley:]

Okay. Fair enough. Thank you.

[Operator:]

And that does conclude the question-and-answer session. I am now turning back to Mr. Sherringham for closing remarks.

[Philip Sherringham:]

Well very good. Thank you all for your questions and I look forward to our next call. Again, thank you very much for participating.

[Operator:]

Ladies and gentlemen, thank you for you participation in today’s conference. This concludes the presentation. You may now disconnect. Have a good day.