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People’s United Financial, Inc. (NASDAQ:PBCT)

Q1 2009 Earnings Call

April 17, 2009 11:00 am ET

Executives

Philip Sherringham – President and Chief Executive Officer

Paul Burner – Chief Financial Officer

Brian Dreyer – Chief Commercial Lending Officer

Analysts

Ken Zerbe – Morgan Stanley

Mark Fitzgibbon – Sandler O’Neil

Damon Delmonte – KBW

Benjamin Andrew - William Blair & Co

Collyn Gilbert – Stifel Nicolaus

Steven Alexopoulos – JP Morgan

[Amana Larsen] – Raymond James

Matt Kelley – Sterne Agee

Steven Moss – Janney Montgomery Scott

James Abbot - FBR Capital Markets

Operator

Good day ladies and gentleman, and welcome People’s United Financial first quarter earnings conference call. (Operator Instructions). I would now like to turn the presentation over to your host for today’s call, Mr. Philip Sherringham, President and CEO. Please proceed.

Philip Sherringham

Good morning everyone and welcome again to the first quarter 2009 earnings conference call of People’s United Financial. I am Philip Sherringham, President, and CEO and with me today is Paul Burner, our Chief Financial Officer. Before we get to meat of the presentation, I would like to remind you all to please be sure to ready our forwarding statements on slide 2.

Now, I would like to start with a few comments about the macro environment prior to discussing the first quarter’s results. Clearly, the economy has continued to deteriorate over the last quarter. National unemployment increased to 8.5% in March from 7.2% at year end, and 10% is no longer widely viewed as a likely cap on that trend. Likewise, the prospects for GDP growth and housing prices remain negative. While the New England economy has held up better than the country as a whole, unemployment in the region increased to 7.6% in February from 6.4% at year end.

In the three months since our last call, we’ve seen sustained efforts on the part of the administration and the Federal Reserve to stabilize the national sector and overall economy. Nevertheless, the economic environment remains unsettled despite the government’s disbursement over $300 billion in TARP funds, its announcement of trillion dollar plus debt repurchases, and the unveiling of the public-private investment programs. I would note as you may already know that we have not taken any TARP funds and don’t anticipate taking any by the away.

While the equity markets have shown some signs of life in the past few weeks, we believe that it’s still too early to call a bottom on the economy. Despite the ongoing turmoil and with no recovery expected before the end of this year, we believe that People’s United remains a very attractive investment. The strength of our capital and liquidity, asset quality, and earnings as well as the fact that our balance sheet continues to funded almost entirely by deposits are hallmarks that set us apart from most in the industry. Our conservative underwriting standard coupled with strong monitoring, resolution, and loss control practices act as a backstop to our credit discipline.

Over the past two years, we elected not to sacrifice credit quality. As a result, we grew our balance sheet at a slower rate than our peers, but today continue to enjoy much lower net charge offs. In the current environment, decreased competition in the lending markets along with our substantial capital resources allow us to grow our commercial loan book with wider spreads, better guarantees, and other lower enhancements.

Our considerable excess capital is a unique strategic advantage. Additionally, given our asset sensitive position and the fact the fed cannot lower the fed funds rate any further, we are well positioned for future, as any increases in rates will have an immediate positive impact on our net interest margin. As a result and because we continue to be focused on increasing the shareholder value, we are pleased to announce our 17th consecutive dividend increase of $0.01 per share annually. As we said in the past, we remain convinced that the best use of our capital and that with the potential to most emphatically drive shareholder value is to have the patience to find and execute the right acquisitions.

Now, please turn to slide 3 for some highlights of the quarter. Net income in the first quarter was $26.7 million or $0.08 a share. I would like to remind you that we have resisted the temptation to extend our investments off the yield curve or to take on credit risk essentially giving up approximately $0.15 a year assuming a 3% spread on our $2.5 billion excess capital. Keep in mind, however, that while we have no present intent to do so, that is an option that we could exercise at any time. Now moving on, the margin in the first quarter was 325, down 30 basis points to 8.5% for the fourth quarter 2008. The margin still reflects our disciplined lending and deposit pricing which partially offset the continued decrease in interest rates.

Net loan charge offs for the quarter remained essentially unchanged at the low 18 basis points of average loans on an annualized basis compared to 16 basis points in the fourth quarter, and our NPS loans, REO, and repossessed assets were 97 basis points. While we saw some weakening of asset quality, we believe that it does not foreshadow a materially negative trend in charge offs. We did have one real estate-related Shared National Credit loan that moved to nonperforming status which we will discuss in greater detail later in the presentation. We continue to feel that we are in a very good position in terms of asset quality. Our industry leading tangible equity ratio remains strong at 19%, and with that, I’m pleased to hand it over to Paul Burner to provide you with details on the quarter.

Paul Burner

Thank you Philip, and good morning everyone. Slide four illustrates the continued growth in our strategic commercial banking and home equity loans which were up 11% annualized in the quarter. Our core commercial portfolio continues to focus on little market credits within our footprint. It’s a business line that does not support commoditization and allows us to compete very effectively against the largest national players throughout our franchise. As Philip alluded to earlier, $2.5 billion of our investment portion of our investment portfolio, that portion representing excess capital, was invested in short-term credit risk free investments. The other $600 million was invested in highly liquid credit risk free agency hybrid ARM securities.

As you can see on slide 5, we continue to be funded almost entirely by deposits and stockholders equity, and our deposits grew 2% in the first quarter.

Turning to the income statement on slide 6, you can see that our net interest income declined $10.5 million from the fourth quarter reflecting the impact of lower interest rates. We’ll talk further about our asset sensitivity and the net interest margin in a moment. Our provision for loan losses at $7.9 million was relatively flat. Non-interest income while appearing flat was a bit of a disappointment as we had some one-time security gains. Our expenses met our expectations for the quarter excluding the impact of one-time items.

Slide 7 shows that the principal driver behind the decline in net interest income is the margin. The red margin represents the core bank at the well-capitalized level, and the gray one represents the excess capital that we’re maintaining. In the first quarter, the core bank margin was 366—a decrease of 28 basis points from the fourth quarter. Disciplined pricing has enabled us to partially mitigate the impact of falling rates. As you can see, the yield on the completely asset-sensitive excess capital which declined to 78 basis points has a significant impact on the blended margin.

With regard to non-interest income, as you can see on slide 8, operating fee income was down $3 million from last quarter and $9 million from the first quarter of 2008. It was below our expectations, primarily due to two factors. First, deposit service charges which reflected a change in customer behavior to where lower spending that impacted both our interchange and ATM fees as well as customers better managing their personal finances that reduced overdraft fees, and then secondly the wealth management fees being adversely impacted by equity market conditions. We have excluded from non-interest income the $5.6 million of proceeds from the sale of Visa Class B shares.

As you can see on slide 9, operating non-interest expenses of $163.2 million excluded a $4.4 million of one-time charges. This $4.4 million was primarily incurred in conjunction with our previously announced $25 million cost cutting initiative which has been implemented. Our major focus now is on converting our core banking systems to Metavante. We signed a contract with Metavante in January and are working toward converting our Southern New England franchise in the first quarter of next year and Northern New England in the second quarter of next year. This will enable us to fully combine our back office and increase efficiency, thereby reducing expense. Given the announcement of Fidelity’s acquisition of Metavante last month, I should probably add that we do not see their combination slowing us down.

Our non-interest expense numbers are generally stabilized aside from any FDIC special assessments. Given macroeconomic trends and the growth in our non-performing assets, we wanted to enhance our discussion on asset quality. Even in the current environment, we are comfortable with our asset quality, as Philip stated earlier, because of the strength of our initial underwriting as well as our monitoring, resolution, and loss control processes.

As you can see on slide 10, our NPAs increased from 64 basis points in the fourth quarter to 97 basis this quarter. While this appears in isolation to be a significant increase, you can see that it compares very favorably to the top 50 banks at 269 basis points and our peer group at 243 basis points as of year end. In fact, our first quarter NPAs are roughly one third of those of the top 50 banks in the fourth quarter. We do not of course have the current quarter comparisons yet.

On the next slide, we break our NPAs down by major product lines. Our increases for the quarter came from primarily commercial real estate at $24 million and residential mortgages at $18.1 million. Therefore, we’ll describe those categories in some more detail.

Slide 12 digs deeper into our residential loan asset quality. As you can see on the left of the page, our NPAs of 77 basis points in Q4 contrasts with that of our peer group at 156 basis points and the top 50 banks at 224 basis points. The Q1 138 basis points for us also compares favorably to both year end as well as those who have reported their Q1 results so far. Our net charge-offs of 11 basis points and 7 basis points respectively are at about 10% the level of our peer group in the top 15. Generally, we had low average loan to value ratio at origination at 51%, and current FICA scores are at 729. These measures are significantly better than industry standards, and I’d remind you that we stopped portfolioing residential loans at the end of 2006.

Finally, of our $42.3 million of residential NPAs, approximately 75% have current loan to values of less than 90%, suggesting minimal loss content for the overall portfolio. Our practice is to obtain updated appraisals at 90 days past due. We have updated our exposure to customers employed at large financial sector companies for 1 to 4 family homes and have exposure of $189 million with only three delinquencies totaling $2 million. For home equity loans and credit, the exposure is $34 million, and there are no current delinquencies.

As you can see on the left on slide 13, in the first quarter, our NPAs as a percentage of loans for commercial real estate at 106 basis points compares favorably with our peer group at 202 basis points and the top 50 banks at 153 basis points. Our charge-offs have been consistently much lower proportionately. As you can see, we have underwritten our entire commercial real estate portfolio with a primary emphasis on cash flow as opposed to collateral. The portfolio is well diversified with limited exposure to construction which itself went down 6% during the quarter.

A single Shared National Credit became nonperforming during the quarter, accounting for two thirds of the entire growth in commercial real estate nonperforming as such. This $16 million loan is part of a $165 million total loan on a $250 million mix use development in the South consisting of office and retail space, apartments, and condos. We believe that the project which is 92% complete is economically viable. To date, 85% of the retail space and 76% of the office space has been leased. Additionally, of the apartments already completed, 70% are rented, and 60% of the condos are sold. Cost overruns have caused interest payments from the internal reserve fund to be suspended pending renegotiation of additional loan funding. This is the reason for sliding into the nonperforming status. A third party permanent financing commitment remains in place for $250 million until December 2010. As a result, we feel loss exposure is minimal. This is an example of our underwriting discipline. Lots of equity pre-sales and firm takeout financing, and why our NPAs do not turn to charge-offs at the rates of other financial institutions.

As we have said in the past, given the depth of economic weakness being experienced nationwide, we do not expect to remain insulated from credit losses or credit issues and losses. In fact, subsequent to quarter end, a second real estate related Shared National Credit in the amount of $16.9 million has migrated to nonperforming status. This is part of our remaining $36 million in exposure in Florida. The building is complete and partially occupied, but the majority of pre-sales with 20% downpayments have been either unable or unwilling to close. In fact, we have done a loan by loan analysis of the entire Shared National Credit portfolio and do not feel any undue concerns.

The next slide reflects our charge-off experience over the past couple of years as you can see. Our 18 basis points in the first quarter is less than 10% of both the top 50 banks and our peer group, and due to our strong underwriting, we do not expect significant increases in our loan loss levels. As you can see on slide 15, our reserves to NPLs at 126 basis points at quarter end are above those of our peer group at 97% and of the top 50 banks at 121% at year end. While this ratio is only slightly above our peers at year end, remember that our loss experience is only 10% of that of our peers.

On slide 16, we take a look at our Texas ratio, which as you all know is the ratio of NPAs to tangible equity plus loan loss reserves, and if you look at us relative to the industry, there is no comparison. Now, I’ll hand it back to Philip for closing comments.

Philip Sherringham

To conclude, I like to highlight our advantage position. We have a very strong balance sheet, with an enviable 19% tangible capital ratio and no wholesale borrowings. We have exceptional asset quality with a low level of nonperforming loans and very low loss content within the portfolio. We have a low-cost, stable deposit base. We have excellent opportunities ahead of us, both organically and through acquisitions. In addition, given our asset sensitivity, we’re poised to leverage earnings growth when the economy recovers and as interest rates begin to increase.

That concludes our presentation, and now we’d be happy to answer any question you may have.

Question and Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Ken Zerbe with Morgan Stanley.

Ken Zerbe – Morgan Stanley

On your NIM, I was hoping you could address the near-term outlook or your philosophy here. Obviously you have been shifting a little bit of the excess capital into the agency MBS. Is that something you’d want to do or would consider doing more of, and if you did, could you also pull that out in a timely manner if you found an acquisition, or does that preclude you?

Philip Sherringham

The answer is probably not. We’ve done a little bit of it, and we’re probably not willing at this point to do much more of it, for the reasons you outlined. We want to preserve flexibility, and also candidly given the rate environment, we don’t really think it’s very smart to load up on 4% or 3% longer term assets

Ken Zerbe – Morgan Stanley

Is there anything that would negatively impact your NIM going into the second quarter from here, on the security side or the excess capital side?

Philip Sherringham

Well, we think that the loan portfolio has taken most of the hit already, so candidly not a lot more.

Paul Burner

I’d say we are at or near bottom with regard to our NIM.

Ken Zerbe – Morgan Stanley

With the big rise in the resi mortgage NPLs in the quarter, was this an unusual item or is this something where it’s more ongoing? I live up in Connecticut. Housing values are falling, so we could see further and steady increase in NPLs and potentially credit losses in that portfolio.

Philip Sherringham

As we pointed out in our comments, I think the rise in NPLs is due to the unemployment situation basically. Housing values throughout our franchises have been reasonably stable particularly in the northern part of the franchise. Housing prices in Vermont, for instance, have been basically flat. You’re right of course in Connecticut particularly Fairfield County they have been declining, and you see is just the logical implication of the fact that we’re not on an island. That’s all I can. The reason we’re not uncomfortable with that at all as we pointed out is that of those $42 million of NPLs, 75-80% of them have current LTVs below 90%, so we’re not going to lose any money there, and on the other $10 million or so, take your pick. If we lost $3 million or so, I’d be surprised, so overall again, the loss content on that is minimal. Candidly until the economy recovers, I would expect NPLs as opposed to loss contents to keep increasing in that portfolio.

Ken Zerbe – Morgan Stanley

Did I hear you correctly that you said a second SNC loan went to NPL this quarter?

Phil Sherringham

Yes. This happened yesterday, so we’re disclosing on the count of being completely transparent.

Ken Zerbe – Morgan Stanley

What was the value for that?

Phil Sherringham

$16.9 million.

Operator

Your next question comes from the line of Mark Fizgibbon with Sandler O’Neil.

Mark Fitzgibbon – Sandler O’Neil

I know you gave some details about exposure you have to Wall Street folks, but can you share with us how much of the residential portfolio and the home equity portfolio are in Fairfield County?

Paul Burner

Approximately 62% of our residential portfolio is in Fairfield County, and interestingly, we looked at the delinquencies and nonperformings there, and Fairfield is actually a bit underweighted with the nonperformers at about 10% below that level.

Mark Fitzgibbon – Sandler O’Neil

On the home equity portfolio, is it similar you think, 60-65%?

Paul Burner

Yes.

Mark Fitzgibbon – Sandler O’Neil

I was wondering if you could perhaps share with us when do you test for goodwill impairment? I know you’re required to do it annually, and have you done that recently?

Phil Sherringham

The answer is yes of course. We’re required to do it annually. There’s absolutely no issue there at all.

Mark Fitzgibbon – Sandler O’Neil

Paul, I think you mentioned you thought that expenses had stabilized. Should we see some additional cost synergies from the Charter consolidation, or is that going to be offset by other things?

Paul Burner

As we announced last quarter, we were faced with about $29 million worth of expense headwinds this year, and so we identified $25 million of expense reductions to offset those, and the savings from the Charter consolidation is part of the $25 million. Our run rate is pretty stable at this stage. I will say we will have some one-time expenses associated with our back office and systems conversion. Of course, we will get additional savings there once we get converted in the first half, and they’ll start in the second half of next year.

Operator

Your next question comes from the line of Steven Alexopoulos with JP Morgan.

Steven Alexopoulos – JP Morgan

Looking at the Share National Credit that moved over, $16.9 yesterday, first what’s the total loan size of that one, and do you have a ballpark guess at this point in terms of what loss content it might look like?

Phil Sherringham

We’ll get back to you in a second on total loan size. What’s the next question there?

Steven Alexopoulos – JP Morgan

In terms of loss content, do you have a ballpark estimate?

Phil Sherringham

We really don’t because, again, it just happened yesterday, and we’ve been speculating it’s about $114 million.

Steven Alexopoulos – JP Morgan

Looking at the margin, I know you said you feel like you’re near a bottom, but if you look at the excess capital, shouldn’t that yield fall to about 25 basis points in the quarter, and secondly it looks like loan yields are coming down pretty sharply. Is that just a first quarter event? Why wouldn’t that continue into the second quarter?

Phil Sherringham

As you know, they’re tied to LIBOR, and LIBOR averaged 2.22, and that dropped to about 48 basis points in the first quarter, so you had a very sharp drop in LIBOR. In other spread between LIBOR and the fed funds rate was unusually high still in the fourth quarter of last year. We think we’re over that, which would explain the positive you see there. Then of course, we have the issue of the timing of the cuts in the fed funds rate and the related reclassifying of our portfolio. As you recall, the fed cut the rates in mid December, so we have those issues. Having said this, I think the yield on the excess capital itself will probably drop a little bit more.

Paul Burner

The increased pricing spreads that we’re getting on the new loan production as well as we’ve continued to drop deposit rates will kick in more in the second quarter to help offset the lower yield on the excess capital.

Steven Alexopoulos – JP Morgan

Regarding the Shared National Credit that moved in in the first quarter, how much control do you have if any on the workout process for that credit?

Phil Sherringham

We have some control. Obviously, there are active ongoing discussions, and we certainly have a meaningful input I would say.

Steven Alexopoulos – JP Morgan

Do you have any idea on the timing of that credit?

Phil Sherringham

Timing of what, you mean the final resolutions

Steven Alexopoulos – JP Morgan

Yes.

Phil Sherringham

Again, it’s a project that is 92% complete, so basically the bank group is going to fund the project to full completion, and as we pointed out, in this case, there is a $250 million third party takeoff financing that’s locked in until December 2010, so we’re very comfortable that the project will be completed before December 2010 and therefore we will be out of it with no loss at all actually.

Operator

Your next question comes from the line of James Abbot with FBR Capital Markets

James Abbot – FBR Capital Markets

One of my questions was on yield, and so that was just answered. A followup question that I have is on the reserves to loan ratio and how do you look at that as we move forward as we see increased…I believe the ratio that was presented in the PowerPoint presentation was the reserves to nonperforming assets or nonperforming loans. Do you look at it mostly on that basis?

Phil Sherringham

No. Actually, I’m glad you brought up the issue. The meaningful measures to us is the ratio of reserves to total loan portfolio, which went up a little bit to 109 because we boosted the reserves a little bit, as you know, and there I’d say that obviously we have a very robust methodology to determine loan adequacy. We keep fine tuning it to the current environment, but basically we’re extremely comfortable with our overall reserving position. The ratio that is in fact less meaningful is the ratio of reserves to nonperformers candidly especially in our case because the base is so low, so all it takes is one or two credits to either move up or down to be cured or to go bad, if you will, to move the ratio very meaningfully. That ratio to me for a bank of our size given our exposure is much less meaningful. It will swing.

James Abbot – FBR Capital Markets

Any update on the PCLC growth in the quarter and also the SNC balance? I don’t think I found either one of those in the press release.

Phil Sherringham

The SNC balance as of March 31, 2009, was $748 million rounding it up, and that’s a total of about 80 relationships.

James Abbot – FBR Capital Markets

And the PCLC?

Paul Burner

The Shared National Credit is $672.3. The PCLC is…this is a quarterly average. Let me get the period end.

James Abbot – FBR Capital Markets

While Paul is grabbing that number, your outlook for PCLC growth, tell us where you’re looking there?

Phil Sherringham

Well, PCLC growth, we had initially, fairly ambitious targets for the year, approaching 19-20%. Candidly given the environment, I think this is going to slow down some.

James Abbot – FBR Capital Markets

And how will you do that? Is it pricing that you’ll change?

Phil Sherringham

Yes. It is a combination of pricing and tightening the underwriting a little bit.

James Abbot – FBR Capital Markets

How so?

Phil Sherringham

The risk in this business for us is initially mostly in the first year. Because remember those are basically 100% loan to value-type financings, so we can request increased down payments and take other steps so that the collateral hold, if you will, initially is reduced, and that’s what we are doing.

James Abbot – FBR Capital Markets

I don’t know if Paul had the balance. I’m done with my questions.

Paul Burner

The balance at the end of March for PCLC is $1260 million.

Operator

Your next question comes from the line of Damon Delmonte with KBW.

Damon Delmonte – KBW

I just wondered if Paul can go back and repeat his comments about the remaining Florida construction exposure. I didn’t get what he was saying.

Phil Sherringham

The overall Florida exposure is $36 million. The Shared National Credit that went nonperforming yesterday is about half of that at $17 million, and I know you are curious, so I’ll tell you relax. The rest of the Florida exposure is just fine.

Paul Burner

…which is two other credits.

Damon Delmonte – KBW

Just with regard to the conversion to Metavante, you said the southern New England franchise would be the first quarter of 2010 and the northern would be in the second quarter. Have you guys quantified any type of cost savings associated with the system?

Phil Sherringham

We are looking at about roughly at $16 million annualized, but that’s probably likely to be higher, but at this point that’s our preliminary assessment.

Paul Burner

We’ve challenged our head of administrative services to come up with some additional savings, but we feel pretty comfortable with the $16 million annual run rate. Unfortunately that won’t kick in until the second half.

Operator

(Operator Instructions) Your next question comes from the line of [Amana Larsen] with Raymond James.

Amana Larsen – Raymond James

I wanted to know about competition on the CRE side, what are you seeing in terms of pricing?

Phil Sherringham

Well, as we sort of alluded to in my initial comments, competition is much reduced on the CRE side. As a result, pricing has obviously improved and very significantly. To give you an idea, we’d say that spreads on those credits that we’re taking today are probably up about 100 basis points on average compared to a year ago.

Amana Larsen – Raymond James

Do you have an outlook on margin now? I know previously you discussed that possibly 1Q09 would have been the bottom, but obviously the non-accruals have come up a bit. Is that the possibility that it will be the bottom for the margin?

Phil Sherringham

Both Paul and my comments is that basically we were at or near the bottom.

Operator

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

Collyn Gilbert – Stifel Nicolaus

First on the NIM, do you know what the spread is that you are getting on the new business versus what is rolling off?

Phil Sherringham

What I just discussed in terms of CRE possibly applies to C&I also. Spread has significantly improved on the new business compared to the business that is going off, if you will, and by significantly we would mean at least 100 basis points or more sometimes actually. 100 to 150 basis points of incremental spread.

Collyn Gilbert – Stifel Nicolaus

That’s spread, that much better yield?

Phil Sherringham

Yes, both C&I and CRE.

Collyn Gilbert – Stifel Nicolaus

Do you have an efficiency ratio target with your systems conversion? I know that’s obviously not going to be happening until next year, but just where you think a goal would be of the organization to get the efficiency ratio to?

Phil Sherringham

Yeah. We have a long term target of about 55%, but candidly it’s going to happen only when the capital is deployed through acquisitions or whatever. At that point, we will target 55 or lower.

Collyn Gilbert – Stifel Nicolaus

But as long you have the excess capital, do you think …..

Phil Sherringham

As long we have the excess capital combined with the current rate environment, it depresses our interest income obviously. Our ratio is candidly distorted. I wouldn’t read much into it. It looks silly right now at about 73 or 74%, I think, but that’s not because our expenses are out of sync or anything. It’s because our income is reduced due to margin combined mind you, and it’s importantly to also to note with the pressures on fee income, so we are addressing an environment today where our revenues are under pressure for reasons we discussed on both the net interest income side and the non-interest income side, and as a result, you’ve got what you’ve got.

Paul Burner

I might add last quarter we actually showed you a pro forma that with our current expense base with a 5% fed funds rate, the efficiency ratio actually drops to 57.5%, so the core bank asset sensitivity is working against the efficiency ratio as well as the excess capital, and that will correct itself once the economy starts to recover and rates go up.

Collyn Gilbert – Stifel Nicolaus

You had given us the LTVs on the resi NPLs, but do you have the LTVs for the other nonperforming categories?

Paul Burner

Because we measure residentials as a whole block, it’s more commoditized, we sort of add things together. Given the one-off nature on commercial, it’s really a case by case review.

Collyn Gilbert – Stifel Nicolaus

Did you take a specific reserve against the $16 million SNC credit that was added in the first quarter?

Paul Burner

No, we didn’t. Actually, we feel very good about the project. That’s what I was trying to do by giving you examples there. I personally believe we’ll get out of that without a loss.

Collyn Gilbert – Stifel Nicolaus

I know your levels on the resi book has been pretty much insignificant, but do you have a sense of what the timing is in terms of the non-accruals to losses, which asked another way would be what’s the timeline that you’re seeing in terms of your foreclosures?

Paul Burner

It’s certainly stretching out. We’re really trying to work with our borrowers quite a bit, but right now, I’d say the timeframe is elongating given the marketing cycle on properties.

Phil Sherringham

And the amount of foreclosures in the system in general. I think the process has slowed down considerably, and that probably applies across the industry frankly.

Collyn Gilbert – Stifel Nicolaus

I know New York and New Jersey have pretty stiff laws benefiting the homeowner. Is that the same way in Connecticut too, that you can be in your home for as much as 18 to 24 months before you’re forced to foreclose?

Phil Sherringham

That sounds long here frankly, 18 to 24 months, but it takes a while. Probably not as long as that, but it takes a while.

Operator

Your next question comes from the line of Matt Kelley with Sterne Agee.

Matt Kelley – Sterne Agee

Just a question on the $29 million worth of headwinds, could you give us just a recap on how those broke down between the systems upgrades and the operational improvements that you’re making versus FDIC premiums and other items? How that $29 million break down for the headwinds?

Paul Burner

About a third of it was just the general lift in FDIC assessments, $9 million. Frankly the $29 million didn’t anticipate consideration to a special FDIC assessment which is still up in the air, but our ongoing FDIC assessments given our current level of deposits will impact us by about $9 million. The other $20 million is really a combination of annual merit increases, the investments in employees, healthcare and benefits, pension actually has changed, discount rates dropped for everyone this year, rent increases, volume increases, and a portion for the systems conversion. I will say the systems conversion is not really known, and we’re operating with a range of estimates at this stage, but that’s really the composition therein.

Matt Kelley – Sterne Agee

Just getting back to the SNC, you said the balance at quarter end was $667 million?

Paul Burner

Actually at quarter end, it was $672.3 million, so it came up just a little bit. A portion of the portfolio relates to lines, and we had a little bit of an increase in the lines.

Matt Kelley – Sterne Agee

What was the breakdown between the C&I and the CRE at quarter end on the $672? I know at the end of the year, it was 290 in commercial real estate and 374 in C&I.

Paul Burner

About 32% is core C&I and 47% is commercial real estate, and the balance is the REIT portion of the C&I portfolio.

Matt Kelley – Sterne Agee

Could we just get a recap on how that works, the REIT portion?

Paul Burner

We manage the REITs separately. We feel very comfortable with the REIT exposure. I think our real attention has been focused on commercial estate because of the pressure of the segment. We’ve gone through as we do with our constant monitoring, and we feel very comfortable with the portfolio overall. Our weakest links we gave you some color on.

Matt Kelley – Sterne Agee

The 32% in the C&I, that’d be $250 million, what is the available lines versus that $215 that’s drawn?

Phil Sherringham

We don’t have the answer to that question right now. We can get back to you on that.

Matt Kelley – Sterne Agee

Is it a meaningful number? I think that’s what people would be concerned about, how the SNC portfolio could actually grow over time if lines are drawn.

Phil Sherringham

As you know, we put this portfolio a year ago, and candidly it hasn’t declined as fast as we might have expected due to the facts that you just alluded, i.e., the fact that quite a few of those C&I borrowers have indeed drawn their lines down already. Frankly, we haven’t complained about it either because overall it’s a very good portfolio. What exactly the remaining lines are right now, I can’t tell you, but we can get back to you on that.

Matt Kelley – Sterne Agee

Can you just clarify what the difference is between permanent financing on the commercial real estate, the 47% versus the REIT, how are those different?

Phil Sherringham

I just wanted to ask our Chief Commercial Lending Officer, Brian Dreyer, to answer it for you.

Brian Dreyer

The REIT loans are lines of credit to national REITs, many of which are investment grade. The permanent commercial real estate loans are just that, permanent commercial real estate loans to an enormous variety of customers.

Matt Kelley – Sterne Agee

The $16 million loan in the SNC portfolio that did go bad this quarter, what market was that?

Phil Sherringham

It was in the South.

Matt Kelley – Sterne Agee

But not Florida?

Paul Burner

Not Florida, no.

Operator

Your next question comes from the line of Steven Moss with Janney Montgomery Scott.

Steven Moss – Janney Montgomery Scott

One question with regard to deposits. What are you seeing for competition and inflows, and also what do you expect for the cost of funds on the CD side over the next 6 to 12 months?

Phil Sherringham

As you know, our cost of funds has actually gone down in the quarter to 142, so down about 25 basis points compared to the prior quarter. We expect the trend to continue to a certain extent in terms of pricing. We keep dropping our rates, so cost of funds is going to go down too. In terms of flows, flows have been actually pretty good as you know and have seen in the first quarter. Some of that we expect is a little seasonal, so we’re not sure it’s going to continue at the same rate in the second quarter, but overall, our competition on the deposit side doesn’t give us a lot of cause for concern. We’re still in a position where candidly we don’t need a lot of deposits, given the fact that our loan portfolio is essentially flat and is expected to remain essentially flat for the rest of the year. Remember, you have offsetting factors. You have good growth in commercial, CRE, C&I, PCLC, etc., and good growth in home equity side, but offset by shrinking mortgage portfolio and shrinking albeit at a lower rate SNC portfolio, so what’s happened actually this quarter is we’ve had an increase in deposits that we couldn’t deploy in loans and in our securities portfolios, i.e., short-term investments as a result of that, so we’re not particularly anxious for a lot more of core deposit growth at this point.

Operator

Your next question is a followup question from the line of Steven Alexopoulos with JP Morgan.

Steven Alexopoulos – JP Morgan

Can you give us some color on the pipeline of deals you’re being presented with? I am just curious if you’re seeing more opportunities than you did, say, last quarter.

Phil Sherringham

Yes, we’re seeing a lot more opportunities on both the C&I front and the CRE front. We’re taking business away from the competition basically.

Steven Alexopoulos – JP Morgan

I’m actually referring to acquisition opportunities.

Phil Sherringham

Okay, I’m sorry. Let me switch gears. The opportunities I think are still pretty good, and we’re still very actively in the search mode. That’s all I can really say.

Steven Alexopoulos – JP Morgan

You don’t think the rally we’ve seen recently postpones or may limit the opportunities near term for you?

Phil Sherringham

Not necessarily, no.

Operator

This concludes our question and answer session. I would now like to turn the call over to management for closing remarks.

Phil Sherringham

Thank you all, and we’ll see you next quarter.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect.

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Source: People’s United Financial, Inc., Q1 2009 Earnings Call Transcript

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