People’s United Financial Inc. Q3 2009 Earnings Call Transcript

| About: People's United (PBCT)

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

Q3 2009 Earnings Call

October 16, 2009; 11:00 am ET

Executives

Philip Sherringham - President & Chief Executive Officer

Paul Burner - Chief Financial Officer

Brian Dreyer - Senior Executive Vice President of Commercial Banking Group

Analysts

Bob Ramsey - FBR Capital Markets

Steven Alexopoulos - JP Morgan

Mark Fitzgibbon - Sandler O’Neill

Damon Delmonte - KBW

Brian Foran - Goldman Sachs

David Hochstim - Buckingham Research Group

Ken Zerbe - Morgan Stanley

Collyn Gilbert - Stifel Nicolaus

Christopher Nolan - Maxim Group

Rick Weiss – Janney

Matthew Kelley - Sterne, Agee & Leach

Operator

Good day, ladies and gentlemen and welcome to the People’s United Financial Inc. third quarter earnings conference call. My name is Filando and I will be your coordinator for today. At this time all participants are in listen-only mode. Following the prepared remarks, there will be a question-and-answer session. (Operator Instructions)

I would now like to turn the presentation over to Mr. Philip Sherringham, President and Chief Executive Officer of People’s United Financial Inc. Please proceed sir.

Philip Sherringham

Thank you. Good morning, everyone and welcome to the third quarter 2009 earnings conference call of People’s United Financial. I’m Philip Sherringham, President and CEO and I will be presenting our results today with Paul Burner our CFO. Other members or our management team are here with us and may answer questions as appropriate.

Before we move on to the presentation, I would like to remind you all, to please be sure to read our forward-looking statements on slide one. Now I would like to start with a few comments about the macro environment, prior to discussing the quarter’s results. As I state in the press release, we believe that the worst news maybe behind us.

However, we still see many reasons to remain cautious. We’re experiencing deep cyclical trends. Unemployment remains high, banks of feeling at rates not seen since the early 1990s. Consumers continue to de-leverage and all order are still high. With that as a backdrop, we expect there will be a long time before we get back to high GDP rates, which are not driven primarily by federal stimulus spending.

On each look note further the $2.2 trillion of asset held by the feds, which represents 16% of the second quarter’09 annualized GDP and 140% increase in assets held by the August 2008 level to be reminded of the significant support the Government is providing to the US Financial System as a whole.

In this environment and given the excess of the previous years many lenders cannot continue to support their existing clients, much less build new relationships. While there are certain new fewer new projects being launched and investments made we continue to provide funding for some business plans and support our clients in their growth.

Similarly, we are seeing opportunities to take market share in our core business, this weaker economic environment great opportunities for us to efficiently deploy our capital. Specifically the number of financial institutions seeking capital or restructuring continues to rise. We are ideally positioned with approximate $2.5 billion of excess liquidity.

Indeed, we have undertaken more due diligence in the third quarter and in the second. In fact we seen consist increases in opportunity to the past year. We know that you have been hearing this from us for a while. However, our investment decisions which have included pasting an opportunities have been the right ones and we do feel we are getting closer to executing one or more well past acquisitions as we continue to grow into our capital base.

Now today we thought we try something a little different instead of boring you as we apparently usually do according to our Investor Relations anyway, with a rehashing of the press release moving to focus on selective slides that address issues of net interest margin, asset quality and our overall strategy. This will have the quarterly benefits of providing you with more time for Q-and-A.

So now on to slide two, net income for the third quarter was $26.8 million or $0.08 a share. This quarters results reflect an increase in the net interest margin despite pressure associated with the historically low interest rate environment and the company’s asset sensitive balance sheet, as well as an increase in the provision for loan losses due in part, to the partial charge-off of a previously disclosed non-performing shared national credit.

A significant factor now performed this quarter with our first increase in the net margin and interest margin since last year’s third quarter. The margin was 319 up seven basis points, or 2% from a second quarter ‘09. We’ll speak to that in greater detail a bit later, that was partially offset by higher net loan charge-offs, that increase for the quarter to 44 basis points of average loans on an annualized basis, compared to 16 basis points in the second quarter, while our ratio of NPS loans, REO and repossessed assets increased to 1.35% from 1.25% in the second quarter.

Again we believe our asset quality has held up remarkably well both on a relative and absolute basis through this most recent recession cycle and most of the bad news is substantially behind us. We’re pleased that our industry leading tangible equity ratio remains strong at 18.6%.

With that, I’ll hand it over to Paul, to provide you details on the quarter. Paul.

Paul Burner

Thank you, Philip and good morning everyone. I’d like to start with slide six. We’re happy to note that the seven basis point improvement in the net interest margin to 3.19% was the result of our yield on loans increasing four basis points in our cost of depositing dropping 13 basis points. We would expect modest increases in succeeding orders even with the fed funds at 25 basis points.

Let’s skip ahead to slide nine. We continue to feel comfortable about our asset quality even in the current environment because of the strength of our initial underwriting as well as monitoring, resolution and loss control practices. We’ve said often in the past, we’re not immune to significant prolonged economic weakness of the kind we’re experiencing and in fact had a ten basis point increase in our non-performing, but our experience is much better than other banks, and in fact our third quarter NPAs are roughly one third of those of our peers in the top 50 banks as of the second quarter.

On the next slide, we break our NPAs down by major product lines. The increases this quarter were in commercial real estate, home equity and C&I loans, while the residential mortgage declined by $1.6 million.

Slide 11, provides a deeper dice into our residential loan asset quality. As you can see on the left of the page, the third quarter is 188 basis points of NPAs, for us compares favorably to the top 50 in our peer bearings last quarter. Our net charge-offs were about 25% of the level of our peer group in the top 50. Generally we had low average loan to values at origination and current FICO scores of 725 and again I’d remind you that we stop portfolio in residential loans at the end of 2006.

Finally of our $49.8 million of residential NPAs, approximately two thirds have current loan to values of less than 90% suggesting minimal loss content for the overall portfolio, and again our practice is to obtain updated appraisals at 90 days past two.

Slide 12, provides more detail look at our home equity performance, which continues to be better than that of our peers. Utilization rates remain relatively flat at 47.5% for quarter. We continue to feel this portfolio is an important part of our retail customer relationships and we remain pleased with the low level of charge-offs significantly ahead of our peer group and the industry in general.

The next slide illustrates asset quality for our C&I portfolio, while the level of non-performers increased somewhat during the quarter, it still remains a relatively low levels. We continue to feel that we will experience limited loss content from the non-performing loans due to our initial underwriting, as well as on going credit administration practices.

Portfolio is well diversified, continues to focus on core middle market customer, where we’re able to provide better service than larger banks. Additionally PCLC, our equipment finance business, finances mission critical equipment that maintains value coupled with our workout resolution processes we’ve been able to limit process in this portfolio.

As you can see on the left on slide 14, in the third quarter, our NPAs as a percentage of loans for a commercial real estate at 149 basis points, compares favorably with our peer group at 285 in the top 50 banks at 315 basis points from the second quarter. Our NCO ratio increased to 57 basis points, from four basis points the previous quarter predominantly due to a $6.1 million partial charge-off taken on a Florida shared national credit, which we’ve discussed in the past two calls.

Florida construction has declined to less than $30 million, which comprises two credits, this one and another which is performing. We remain comfortable with the credit of our CRE portfolio. Shared national credit balances and outstanding continue to decline as expected since we stopped booking new loans at the beginning of 2008. Outstandings have dropped $25 million in the third quarter and $126 million since the end of 2007.

Aggregate exposure dropped $26 million the third quarter, and $237 million from year end 2007. Now, the numbers here are about $22 million higher for all periods than what you saw last quarter, as two credits were reclassified to snicks, there are about half a dozen reasons why loans can be exempted from snick status, however there are no other loans in our portfolio that will be considered snicks, but for an exemption.

Slide 16, the slide shows our credit exposure to geography on real estate side, and the industry sectors for the C&I component as you can see both portfolios are well diversified. The next slide reflects our charge-off experience over the past few years. Our 44 basis points in the third quarter are about 20% of both the top 50 banks in our peer group as of last quarter. For the nine months ended September 30, the charge-offs were 26 basis points. Due to our strong underwriting, we do not expect significant increases in our loan loss levels.

On slide 18, we take a look at our Texas ratio, if you look it as relative to the industry, there is no comparison. Now, hand it back to Philip for closing comments.

Philip Sherringham

Thanks, Paul. To conclude, I’d like to highlight again our advantageous 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 non-performing loans and very low loss content within the portfolio. We have a low cost stable deposit based and loyal satisfied customers. We have excellent growth opportunities ahead of us both organically and through acquisitions.

To that point, we continued to focus on proactively seeking acquisition opportunities within our stated highly desirable Northeast region from Maine to Washington DC. We are also however open to the possibility of assisted transactions potentially even in other geographies to the extent that FDIC transactions may not be available in the Northeast and we’ll evaluate them as they can. In addition, given our asset sensitivity we’re poised for leveraged earnings growth when the economy recovers and as interest rates begin to increase.

This concludes our abbreviated presentation and now, we’ll be happy to answer any questions you may have.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Bob Ramsey - FBR Capital Markets.

Bob Ramsey - FBR Capital Markets

Philip, you said at the start of the call that, you believe we’re getting closer to finding an acquisition. Is that just because of the passing of time or is there anything tangible, which pops that statement?

Philip Sherringham

Passage of time is certainly a factor, but there may be something else. Obviously, I can’t comment on specifics.

Bob Ramsey - FBR Capital Markets

In terms of sort of IRR hurdle rates, last quarter you all said that you were targeting something in the high-teens. Is that still what you guys are looking for?

Philip Sherringham

Ideally, yes. Having said this, I want to point out that in this environment again the changes in accounting in particular a high-teens today would be significantly higher compared to it what it was two years ago. In other words, an 18% IRR in today’s environment could very well be like 25% two years ago.

As you know, the major difference is, as we’ve explained, I think on the last call, the fact that as a result of FAS 141(NYSE:R), we are now obligations to markdown the loan portfolio, I mean acquire bank up fronts, which is a significant hit which impacts of course the IRR. Another factor that impacts IRR negatively is of course the multiples that we are not using to value the terminal cash flows of an acquisition.

So one thing I guess is two years ago we produced the content of 20% IRR, but this was pre FAS 141(R) and with higher multiples. So today things have changed a little bit but as a result at 15% IRR, in today’s world, it is going to 20% plus two years ago easily.

Bob Ramsey - FBR Capital Markets

Are you seeing any increase or decrease since sort of the flow of assisted transactions that are being marketed and then maybe outside of assisted transactions, given the reason sort of strength and financials at least since last quarter, are you seeing sellers that are more open to selling at this point at closer to market prices?

Philip Sherringham

Well, first of all we are seeing a significant increase in the flow of assisted transactions; I think that so much in the public domain, but the came in as fast and furious at this point. In terms of, open back transactions it is very much individual situation, every banks different, every potential acquisition candidates has their own issues. What we hope that at some point we wound be able to read on something reasonable.

Operator

Your next question comes from Steven Alexopoulos - JP Morgan

Steven Alexopoulos - JP Morgan

Regarding the deals that you look that which alluded to, can you frame for us that mix perhaps of what is FDIC versus non-FDIC and maybe want your current exploring?

Philip Sherringham

Well, it is pretty much evenly spread. It is almost 50:50. We’re looking at a combination of FDIC deals and others. I don’t see the preponderance of one situation or another.

Steven Alexopoulos - JP Morgan

Then given your comment, obviously 141(R) to IRR threshold, what’s the minimum that we should expect that you would entertain?

Philip Sherringham

Well, going back, I mean the minimum I’ll go back to our cost of capital; it would have to be somewhat higher than that anyway, cost of capital we still think is 10% or 11%, and it will change very much, the interest environment is being reasonably stable in terms of long term rates there, but, I would say, we are going to do as high as we can. It would certainly be including the write downs loan portfolio anywhere from 13, 14, 15, and up, it has to be there. We are seeing opportunities, in the case of FDIC deals, the internal rate returns to be much higher that’s clear.

Steven Alexopoulos - JP Morgan

Did you disclose with the specific reserves or on the two share national credits and non-performer think the balances $27 million or so.

Paul Burner

We just took a charge on, as I highlighted on one non-performer, $6.1 million which we believe is the level of loss content in that portfolio, but we actually did not specifically release specific reserves.

Operator

Your next question comes from Mark Fitzgibbon - Sandler O’Neill

Mark Fitzgibbon - Sandler O’Neill

So, hypothetically you mentioned in assisted transaction and doing one that might be in other geographies. Let suppose hypothetically you found in a system sale on the West Coast, say California. Do you feel like you have the staff, the people that you could move into a new geography to run the company, because obviously the geographic separation creates a host of issues? Do you feel like you could that in permanently run bicoastal franchises?

Philip Sherringham

On a specific geography, but the answer is absolutely positively yes. We have been very successful of bring our decent slide basis. If you think about it we run a multistage franchise as it is, and we have operations in Burlington, Vermont and those are no closer arguably than more distant geographies in terms of driving time versus jumping on airplanes. So, we’re very comfortable, we have the management breadth and depth to handle this kind of situation absolutely. Otherwise a person wouldn’t be looking at it.

Mark Fitzgibbon - Sandler O’Neill

Then second question I had for you is about the margin. I wondered if you could help us about think about the margin moving ahead has much of the deposit reprising that’s going to occur already happened?

Philip Sherringham

Not all of it, much of it has, but not all of it, so I suspect that again assuming for that nothing happened in the Fed funds prompt and as rates stayed at 25 basis points all for the rest of the year. I think you can expect further modest improvement in the margin underlie in modest.

Mark Fitzgibbon - Sandler O’Neill

Then last question, I wondered, if you can just give us the 30 to 89 day delinquencies in the TDRs for the quarter?

Paul Burner

We don’t have any TDRs. Our TDRs or NMPRs and we don’t have junior delinquencies.

Mark Fitzgibbon - Sandler O’Neill

It broadly gives us a sense for how those are tracking is this.

Philip Sherringham

Which one specifically?

Mark Fitzgibbon - Sandler O’Neill

The 30 to 89 day delinquencies up or down or flat versus second quarter?

Paul Burner

Things are very stable for us. It really feels like credit overall is stabilizing. If we go back to sort of our outlook a few months ago, and where we are right now, we’re very comfortable that where we thought we would be. It’s really the reasons we have put the comments in the press release. We’re very comfortable with our credit position, and believe we’ve seen and identified the worst thing behind us at this point.

Philip Sherringham

Yes, so there’s no significant wrap up in junior delinquencies, so that’s your question.

Operator

Your next question comes from Damon Delmonte - KBW.

Damon Delmonte - KBW

Could you provide a little color around the commercial real estate growths that you guys continue to see maybe what types of loans you’re adding to the portfolio? Typically, what’s the size of the loan and what geographic location?

Brian Dreyer

I’ve run commercial. The size of deals between 10 and 20, the quality of the deals has really been first rate. Many credit tenants, home offices of well-known companies and organizations, variety of industries and with excellent rates and spreads that we hadn’t seen in quite some time and mostly coming out of either competitors, or conduits, or insurance companies, or institutions that I think are capital short and trying to shrink your balance sheets.

Damon Delmonte - KBW

Are these primarily in New England or are these extending into New York?

Brian Dreyer

Yes, some of them are in New York. Some of the rent in New England certainly all of them have been in the geographic footprint that we generally talk about, which is Maine and Washington DC.

Damon Delmonte - KBW

Have you seen any deterioration in commercial real estate in the Fairfield County area this past quarter?

Brian Dreyer

Not in our portfolio.

Damon Delmonte - KBW

Then slightly regarding deposit growth, would you say this is coming more from new accounts or from your current customers, just putting more into their own accounts?

Bob D’Amore

I think we’re seeing a little bit of both. We are again cross selling and it’s part of our initiative. We are also seeing some new accounts coming with many of the promotions we’ve been running.

Operator

Your next question comes from Brian Foran - Goldman Sachs.

Brian Foran - Goldman Sachs

Again just following up on the commercial real estate, can you give us just specifically what a new loan looks like in terms of LTV and debt service coverage and that absolutely yields your earning?

Brian Dreyer

It’s very hard to tell you, what a loan looks like. I mean a loans look differently, most loan to values though are between 50% and maybe 75%. The spreads anywhere from 300 to 400 basis points, above our cost of funds, plus often fees, debt service coverage, I think in every larger new commercial real estate loan, the debt surface coverage were over 1.25% and generally closer to 1.4% or 1.5%.

Brian Foran - Goldman Sachs

Then just, can you remind us as we think about the deal opportunity in IRRs, kind of what’s the minimum capital ratio you would feel comfortable going down to overtime and any kind of long term ranges of ROEs?

Philip Sherringham

Absolutely, overtime was to deploy the capital, I think we’ll be aiming for tangible common equity ratio somewhere around 6%. Keep in mind that actually much higher they’ve looks, because since we’re going for the acquisition and since that I’ve pointed out. The company has not force us to take the date upfront in terms of the marketable loan portfolios.

You’re talking about a very clean loan portfolio, once they’ve been markdown by the definition would require less capital. So I think if we stick to the 6% plus tangible common equity ratio as we grow into our capital base that should be of adequate given our business mix and our risk profile and then in terms of long term, ROEs looking at 20% plus.

Operator

Your next question comes from David Hochstim - Buckingham Research Group.

David Hochstim - Buckingham Research Group

I wonder if you could give us some color on C&I lending environment, and sort of what’s happening there competitively and how you’re gaining share.

Brian Dreyer

The problem C&I environment is that we’re attracting new customers and how we’re taking share. The problem is that the level of business activity is so low right now, that utilization rates on lines are down. So it’s hard to move the needle in terms of absolute dollars.

Spreads are up, and our commercial deposits have been up, but it’s very tough and our commercial deposits have been up, but it’s very tough to the move the absolute dollars in various portfolios and the other I would say, that it’s lumpy, there’s growth opportunities in Southern Connecticut or in Connecticut and certain areas, in Massachusetts and Westchester, but very, very flat in Northern New England.

David Hochstim - Buckingham Research Group

How was pricing changed?

Brian Dreyer

Pricing changes, yes the spreads were up and virtually every new loan as a floor, which is I must say, I never though rates could get down as well as they have and floor are certainly appropriate even it’s too bad, we didn’t think of them earlier.

David Hochstim - Buckingham Research Group

So how much wider spreads today than six months or 12 months ago? Do you have any long run?

Brian Dreyer

That will be 25% wider.

David Hochstim - Buckingham Research Group

Do you have any sense over the last month or two as the environment team like it’s improving enough of that, you’d see a loan demand pickup in six or 12 months…?

Brian Dreyer

I think loan demand has been reasonably brisk all year, mostly because of the lack of competition, not because of the demand for loans is all that great. I don’t think it’s rather picked up or slacked off. In terms of what’s going on out there, I think the really bad quarters were the fourth quarter of last year and the first quarter, things starting to stabilize in the second quarter and I think they’re more stabilize now, albeit at a very low level.

Operator

Your next question comes from Ken Zerbe - Morgan Stanley.

Ken Zerbe - Morgan Stanley

Going back to commercial real estate, taking a little bit longer view, for the last about three, six, nine months, I guess people are more concerned about deterioration in CRE over the next couple of years. Do you believe in that the concept are that the likelihood that commercial real estate even though your portfolio is performing very well right now could start to see deterioration, over the next one or two years, back to see continue to increase fall and then if not for yourself do you believe it may happen for the industry?

Philip Sherringham

Yes, actually we do believe it may happen for the industry and I think distinguish remain sale at this point. As you know we are comfortable with our own portfolio. We think for the industry it maybe a very different story.

Ken Zerbe - Morgan Stanley

I guess just because you are better underwriters and answer to overall.

Operator

Your next question comes from Collyn Gilbert - Stifel Nicolaus

Collyn Gilbert - Stifel Nicolaus

First when you indicated that the bad news was behind you on the credit front are you seeing credit starting to stabilize, what does that mean for your reserve levels going forward?

Philip Sherringham

I want to qualify this statement little bit we are not saying welcome to part from on, analogy, I would like to use it again that side as we see later we don’t coming trains, we are not out yet necessarily. We don’t think we are going to see a precipitous decline in non-performing asset levels. We think there maybe some more marginal increases in the coming quarters, but we don see anything big, we really don’t.

So now in terms of provisioning, obviously we have, as you all know we have built up operation this year, through the third quarter, it including a $5.5 million additions on top of charge-offs at this time. We are very comfortable but we are right now we are cautiously optimistic we need to continue to build in the provision and going forward, but will take it a separate time obviously.

Collyn Gilbert - Stifel Nicolaus

What you think your capacity to grow fee income, and maybe along those lines kind of discuss some of what, the organic revenue growth opportunities could be within the organization?

Philip Sherringham

Well, if you look at of the components of our fee income, I would start with basically a service charge on deposit accounts, and there I think we have seen an industry-wise trend to be compression and decline in this area. There’s talk about new legislation I add some curve also fees the banks in general including ourselves a charge on certain accounts so we will have to here also I think.

Basically at the end of day that’s a function of gross and deposit balances themselves which are doing quite nicely. Another source of fee income for us that being going up nicely recently, is gains of residential loans, as you know we are not portfolio mortgages, but originating quiet a few and we are selling all them and again and in the third quarter, quarter were about $5.2 million nice edition to our fee income if you will.

In terms of wealth management, there I guess the story depends very much on what happens to the equity markets going forward. At this point fairly optimistic there, because obviously as we all know if we must recovered a great deal and price for future progress maybe and you’ll see. If that happens obviously fee income will go up there too. So its kind of mix picture depends on what you look I’d more cautious on bank service charges frankly and somewhat more optimistic on the wealth management looking forward.

Collyn Gilbert - Stifel Nicolaus

Then in terms of the question obviously everyone goes to ask it. On the acquisition strategy, joining the past few months we seen deals get done, that you didn’t do, that you won’t do, and weather when I say, I mean it can be because you didn’t do the due diligence or you did the due diligence and choose the past, I guess some recent deals that would come to mind would be like hardly sale colonial that city PMC ranges, provident bank shares.

So I guess kind of what I would like to hear kind of wonder is what is it that you see is the opportunity that perhaps we don’t see as investors or the market seeing, and maybe when you answer that try to say way from theoreticals.

Philip Sherringham

That’s going to be difficult, if probably and possibly we can’t be always specific. We’ve looked indeed as some of the deals you just mentioned and we passed. Primarily, because either we weren’t comfortable with the asset quality of those companies, or we weren’t comfortable with some of the geographic footprints involved, the market we’ve not presently attractive within where we are, and so on. It made more sense for other companies to pursue them I suppose than it did for us. Those I feel it still generalities, but that’s what I have to stick with here.

In going forward, we’re still looking for commercial OEMs or franchises ideally of course in the Northeast as we defined it Maine to Washington, DC. There’s a little quite a few of those around we were not.

We’re engaged in conversation with some of them at some point some of those conversation, we’re pretty sure we will lead to something. When it comes to the FDIC transactions, the profitability of those transactions and the increase in the shorter value that could result from those transaction is very, very compelling, which is why again we’ll consider looking at mortgage and geographies if we find something attractive there.

Collyn Gilbert - Stifel Nicolaus

Let me ask you on that point, because what has changed in your views to say that you might jump geographies to do when FDIC has to deal?

Philip Sherringham

I think, we said this for a while, and so in that sense it’s not really a change. Again, it’s driven primarily by the extremely attractive economics of those transactions attractive, we think that’s compelling. Assuming of course, we end up with something that actually makes sense operationally. It would have to be fairly large for us to be interested, we’re not going to move to Texas or five branches or something. By the way, I should add, we’re also looking potentially at non-banks there would be effective genius there too.

Collyn Gilbert - Stifel Nicolaus

Then just one more point on the acquisition strategy, is there a priority or did you see the landscape and obviously you are seeing plenty of deals and the environment is changing in a rapid clip around us and you weigh the FDIC deals, for they could you seen even mix of FDIC versus non-FDIC. Maybe would you consider, have you looked and thought maybe kind of an aggressive rollout strategy of a lot of smaller banks? I mean we know that there’s not going to be, at least in the near term large FDIC deals in the Northeast. As you say, your talk in the banks, would it be like a rollout, where you we could see and do simultaneous deals at once?

Philip Sherringham

We can certainly multitask around here. So, I wouldn’t exclude that. It all depends on the geographies. Again recently, given the amount of capital we have to apply, we tend to focus on larger deals, and we’ll still focus on larger deals as opposed to a ton of small ones we could rollout to use your phrasing, but we’re excluding that at all. Again, we’re equal opportunity to acquire in that and as I said that before, we’re looking in banks operating banks, FDIC deals and possibly also non-banks.

Operator

Your next question comes from Christopher Nolan - Maxim Group.

Christopher Nolan - Maxim Group

A question, recently you’ve stated that you have sufficient excess capital to acquire and franchise with up to $40 billion in assets. Should we gauge our expectations towards a larger deal which might is actually in terms of assets larger than your current $20 billion?

Philip Sherringham

I certainly wouldn’t exclude that, but it could be two or three, $15 billion deals. It could be almost anything. The $40 billion at this point it represents that the seating if you will in terms of what we could do overall without raising more capital.

Christopher Nolan - Maxim Group

Brian, generally what are the cap rates, where the change in cap rates you’ve seen for commercial property in general in last six months? We’ve been seeing them going up a 100 basis points in general, or less so? Can you give us color on that?

Philip Sherringham

Chief Credit Officer and I would you looking at one another and we think it maybe a couple hundred basis points.

Christopher Nolan - Maxim Group

So if last question is since you may comment earlier in terms you’ve seen the attractive pricing in terms of residential loan sales, should we be factoring in higher levels gains or similar level of gains that we saw in this each quarters?

Philip Sherringham

That’s all a function of originations frankly, and originations despite in the second quarter. This comedown a bit, so I won’t predict that’s a function of mortgage rates and what happens there. So I don’t think necessarily you can do that.

Christopher Nolan - Maxim Group

Just the last one here is, if you’re looking some of these FDIC deals, where they might be a large franchise, would there be any consideration actually moving the company out of Bridgeport, if you’re potentially buying a franchise, which maybe larger than what PBCT is current yet?

Philip Sherringham

You should come and visit more often, but this quarter is actually not all that unpleasant. As I stated earlier, I think we believe we can operate at a descent price environment as we are today. So at this point there’s no consideration of that.

Operator

Your next question comes from Rick Weiss - Janney.

Rick Weiss - Janney

I was wondering, when you’re talking about possibly integrating a bank and a distant location, what were some of the bigger challenges that you faced with the Chittenden deal? Do you think either differently or just kind of how you’re do and you integrate something in simple states of lag?

Philip Sherringham

The challenges are a multiple obviously at all levels. The first challenge is maybe a cultural challenge, make sure that the values that we have, that we can get important are sort of translated to the company we just acquired. In the case of Chittenden, it wasn’t a very hard because we have made things in common.

As we highlight that in a of course of several former conference call, there was some difference in terms of underwriting, there are more collateral in there, more of a cash flow lender, things like that, but in terms of the focus on the customer, the relationship in each of the business, we were in fact very similar.

So I think that’s probably one of the major challenge makes me worse, they gives a Chittenden, then I did very well and we end up with that absolutely minimal turnover in terms of employees and essentially no loss of our major customers, that’s fundamental.

In the case of a FDIC transaction, it’s a little different because you’re really starting from a company that’s been severely damaged, whose culture and management essentially failed and so in a sense, arguably that’s easier because you can come in and you can set the standards to what you let likely to be upfront. It should be somewhat easier.

When you buy an existing company, especially one that should to be successful looking at a group of people who have been very successful, they have their value, they’ve stuck with them, they’ve done well, and so when you need to make adjustments it takes more time, I think. So arguably that’s actually easier.

Rick Weiss - Janney

In non-FDIC deals, people that you’ve talking to or any kind of would you expect them to be the stock deal or stock in cash kind of transactions?

Philip Sherringham

We’ve got a great amount of flexibility there. On the surface, we like stock deals, and most of the potential sellers like our stock anyway. So might it could be a combination of stock and cash, even if the stock deals. At some point we have enough powder to repurchase some of the shares issue to create. We think it’s desirable.

Obviously, for the past couple of years, it’s been frankly very comfortable to a point running with very larger levels of capital. We won’t do this forever obviously, but we’ll see how things are developed on the economic front that we will what happens. So what’s more programmatic have could do cash deals, we could do stock deals, we could do a combination.

Rick Weiss - Janney

My final question would be, since like a lot of people now are hoping to do FDIC deal, so as a result of that of the terms of the FDCI giving are they less favorable less generous now to acquires anywhere a month or couple of months ago?

Philip Sherringham

Not particularly, I think what’s happening is an FDIC this simply more competition of deals right now as people gain confidence those people that are qualified to do those deals and its not everyone as you understand basically you need excess capital to the FDIC deal.

You need to be able to recapitalize your remaining or gaining as a result of that deal and again not everyone qualifies, so my sense is the basic structure of the FDIC deals. Yes, its evolving to certain extend, but I think in general we could see simply more competition to some deals specially their client potentially attractive deals in attractive geographies.

Rick Weiss - Janney

Would it show up like the FDIC now won’t guarantee say 100% of losses, but maybe 90 or even less than that, several people want to do in FDIC kind of transaction?

Philip Sherringham

Well I mean that as far as I know hasn’t changed recently. What the FDIC does is, when they’re appointed receiver of a company they end up establishing a threshold above which they will cover 95% of losses and below which they only cover 80% of losses. That’s the general framework and that remains in place.

Operator

Your next question comes from Bob Ramsey - FBR Capital Markets

Bob Ramsey - FBR Capital Markets

You mentioned you are also looking at non-banks transactions, could you just touch on what types of businesses out said of the bank arena you see attract that you see that are attracive?

Philip Sherringham

To point very open mined about the possibilities, the primary focus is still depositories just so you know. However we could be looking at anything from asset managers to finance companies to things like that.

Operator

Your final question comes from Matthew Kelley - Sterne, Agee & Leach

Matthew Kelley - Sterne, Agee & Leach

The write down that you took on the shared national credit this quarter was that reflective of results of the exam that was completed in September?

Philip Sherringham

Yes.

Matthew Kelley - Sterne, Agee & Leach

Then a bulk of the C&I assured natural credits is exposed to the REIT industry maybe just give us a little bit of update and how you are feeling about that $115 million exposure to REIT that’s operating accounts and lines of credit the public and private type real estate or organizations maybe talk about that piece a little bit that seems like one that I mean keep to close eye on as we go deeper into the real estate prices?

Brian Dreyer

It is not really the predominance of our national accounts, the C&I core business is larger, but their national rates are many investment grade and none of which are non-accrual and I mean there is much can say other than that.

Matthew Kelley - Sterne, Agee & Leach

Actually maybe just a follow-up question for you, Brian, when customers are having loans of about maturity, talk about the dynamic of reprising given, the fact that I said earlier the cap rates are up several 100 basis points that implies of pretty significant decline in value, our customers dealing with the additional equity need to be posted in transactions with the market having change so much in terms of valuation. Second quarter could you talk about just the securitization defaults that you are seeing and highlights impacting pricing the market and unlimitedly loss severity on commercial real estate?

Brian Dreyer

Well, the former question, when we have things that are maturing generally speaking, loan is paid down rather far. Well I guess I don’t worry too much ago what the value is, so we aren’t really having a problem with our maturing loans, our loans mature even if it was a 10 year loan or a 20 year schedule, it’s still pretty far and of course the loan was made generally speaking quite sometime ago and price of that even though the value are down now over what they were maybe a coupe of years ago they’re probably not down over what they were seven years ago.

I am not sure what I think about your second question to tell you the truth. I’m not sure what the answer is.

Matthew Kelley - Sterne, Agee & Leach

I guess the thing I am really driving toward us. How do you think loss of area is going to be impacted by presumably a large supply of properties default and go through for sales from trustees coming out of securitizations?

Brian Dreyer

Well, I mean certain markets I am sure it’s; it is going to be a problem. It also depends on how things were underwritten, were do you have buildings that have a lot of vacancy now, do you have a big leases that are rolling over? As Phillip implied earlier when we underwrite we certainly like to have leases still term in as with maturities and we want to see loans paid down during the course of the loan.

We look at the possibility of lease rollover and manage that very carefully on the underwriting process. Not everybody does. So to the extent that people have not and lease rates go down and you just don’t have the cash flow, the fixed cash flow in a real estate project, the value is going to go down and some loans could be underwater and some properties can’t be refinanced without somebody taking a loss. I mean that’s I don’t mean to be indirect about it but that’s basic economics of it.

Matthew Kelley - Sterne, Agee & Leach

Question for Paul and Phillip, where do you guy stand the exam cycle with the OTS?

Philip Sherringham

Well, also we can’t comment using our own on the results of that other than that we can’t count else, we won’t. But we got the results we are still smiling.

Matthew Kelley - Sterne, Agee & Leach

When was it completed?

Paul Burner

This quarter.

Philip Sherringham

This quarter.

Matthew Kelley - Sterne, Agee & Leach

Just last question, getting back to potential acquisitions, if you want able to comfortable with credit trends in Philadelphia, Pittsburgh, Baltimore, how do you get comfortable with those trends in Atlanta, Sacramento, where ever those potential other market deals might take you?

Philip Sherringham

Guess what, we don’t have to. I mean obviously, the FDIC gross as a loss share by definition I full of loss is it essentially minimal on that existent. Going toward it is a matter of how we grow portfolio in those markets and as the economy recover we come our abilities to do that.

Brian Dreyer

We didn’t like existing portfolios in the mid Atlantic area for instance. It doesn’t mean they’re going forward very comfortable doing business in the mid Atlantic area we would be it seems applies Texas, California etc. Existing portfolio was concern that’s a nice thing FDIC who wants to buy about it.

Matthew Kelley - Sterne, Agee & Leach

I mean it really just the financial matter of the transaction.

Brian Dreyer

It was more than that because we are operators. As I have said many times before and for us to do a FDIC, as we not more than attractive financial transaction, all FDIC deals are half hand attractive financially. In our case we need that plus we need the fact that we have an operating franchise that we like in a market we think is supportive of the type of business model we have. So it is a combination of two factors for us to go ahead and be like this.

Operator

At this time, we have no further questions in queue. I would now like to turn the call back over to Mr. Sherringham for closing remarks.

Philip Sherringham

Very good and we appreciate all your questions and look forward to the fourth quarter call early next year I guess. Thank you very much and good weekend.

Operator

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

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