People’s United Financial Q2 2010 Earnings Call Transcript

Jul.16.10 | About: People's United (PBCT)

People’s United Financial (NASDAQ:PBCT)

Q2 2010 Earnings Call

July 16, 2010 11:00 am ET

Executives

Peter Goulding - VP, IR

Jack Barnes - Interim CEO, Senior EVP & CAO

Paul Burner - Senior EVP & CFO

Brian Dreyer - Senior EVP, Commercial Banking

Chantal Simon - EVP & CRO

Analysts

Steven Alexopoulos - JPMorgan

Ken Zerbe - Morgan Stanley

Bob Ramsey - FBR Capital

David Hochstim - Buckingham Research Group

Christopher Nolan - Maxim Group

Damon DelMonte - KBW

Mike Shafir - Sterne Agee

Collyn Gilbert - Stifel Nicolaus

David Darst - Guggenheim Securities

Mac Hodgson - SunTrust

Rick Weiss - Janney

Ken Bruce - Bank of America Merrill Lynch

Presentation

Operator

Good day ladies and gentlemen and welcome to the People’s United Financial Incorporated second quarter earnings conference call. My name is Eric. I’ll be your audio coordinator for today. (Operator Instructions). As a reminder, the conference is being recorded for replay purposes.

I would now like to turn the presentation over to Mr. Peter Goulding, Vice President of Investor Relations for People’s United Financial. Please proceed sir.

Peter Goulding

Good morning and thank you for joining us for today’s call. Jack Barnes, Interim President and Chief Executive Officer; Paul Burner, our Chief Financial Officer; and other members of the management team are gathered for the call.

Before we get started, please remember to refer to our forward-looking statements on slide one of our presentation which is posted on our website www.peoples.com under Investor Relations.

With that, I’ll turn the call over to Jack.

Jack Barnes

Thank you, Peter. Good morning again and welcome to the People’s United Financial Second Quarter 2010 Earnings Conference Call.

As you can see on slide two, this call has a dual purpose, both to outline our second quarter 2010 results and to provide detail on our two acquisitions announced yesterday.

On slide three, we provide an overview of our second quarter results. Operating net income for the quarter was $31.8 million or the $0.09 per share, excluding $23.2 million pre-tax or $0.05 per share of one time cost related to the former CEO’s separation agreement, merger related and system’s convergence cost.

The quarter’s results reflect continued growth in our core loan portfolios and deposits despite continued economic challenges.

The margin increased to 3.68% compared to 3.47% in the first quarter, primarily due to the full quarter benefit of the financial federal acquisition. Net charge-off increased to $17.8 million or 46 basis points from 26 basis points in the prior quarter. Both non-interest income and non-interest expense are higher primarily as a result of the acquisition of Financial Federal and Butler Bank.

On slide four, during the second quarter, we made significant progress in our systems conversion project. In fact this weekend, we will complete our core systems conversions including our customers in Vermont, New Hampshire, Massachusetts and Maine markets.

At the same time, we will be re-branding our branches in those markets to People’s United Bank. We are pleased to have reached this milestone which will provide instant recognition of the People’s United brand from Maine to New York.

Additionally, we continue to focus on organic growth with two new locations expected to be open in downtown Boston before year-end. These branches will provide an important extension of our growing footprints in the Greater Boston area.

During the second quarter, we repurchased $52 million of our common stock equal to 3.7 million shares at an average price of $13.98. The repurchase program was affected through open market purchases. We will continue to evaluate the returns available to us, by our share repurchases, relative to the rest of our capital deployment opportunities.

Finally, we have maintained our focus on becoming a preferred acquirer in the North East. We were pleased to announce yesterday our acquisition of Smithtown Bancorp and LSB Corp. which we will discuss in greater detail later in this call.

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

Paul Burner

Thank you Jack and good morning to you all. As Jack mentioned, our overall net interest margin increased to 3.68%, up 21 basis points from the 3.47% in the fourth quarter. The core margin improvement was primarily due to the acquisition of Financial Federal as well as lower deposit costs. As a reminder, Financial Federal closed on February 19.

Respectively, we see additional opportunity for improvement. You’ll notice on our June 30th balance sheet, an increase in the available for sale securities, we are now more willing to temporarily deploy excess capital in short-term investments yielding more than the fed funds rate than we previously have. This moderate change is in recognition that fund rates will likely remain low well into 2011. Investments to date have been concentrated in short-term agency debentures yielding approximately 90 basis points.

Moving on to slide six is unemployment remains high and the economy remains weak. We saw an additional increase in non-performing assets in the quarter. NPAs increased to 2.01% from 174 of loans in REO.

Compared to the first quarter average of our peer group in the top 50 banks however, our ratio remains extraordinarily healthy and less than half their levels and we continue to feel comfortable with our asset quality in the current environment. The acquisition of Financial Federal and Butler Bank served to increase the NPAs to loan ratio over the last couple of quarters as the ratio includes their REO and repos.

Slide seven. Net charge-offs in the commercial and equipment financing segment increased to 92 basis points annualized for the quarter from 15 basis points last quarter. The difference is $8.4 million which consisted of one CNI charge-off of $6 million and one equipment financing charge off of $2.4 million which are larger than normal individual charge-offs for those businesses.

On slide 8, you can see a breakout of our commercial real estate credit performance, our NPAs continue to hold steady at 1.23% while our net charge-offs dropped to 35 basis points annualized. Our portfolio is well diversified and we believe we will continue to see strong portfolio growth opportunities.

Slide 9 illustrates our residential loan credit performance. As you can see our NPLs have increased to 3.4%, non-performing residential mortgage resolution is taking much longer than previously as a result of a much lower foreclosure process in the chorus. As you can see in the bottom chart, our loss content has been low and we believe it will continue to be low because we have (both) loan-to-values at origination and because approximately 83% of our non-performing loans have loan-to-value ratios less than 90%. This just leaves 14 million of non-performing loans, with loan-to-values greater than 90%. Given attractive spreads we have again began holding some residential mortgages in portfolio.

On slide 10, you can see our home equity NPLs continue to be low, our net charge-offs declined again in the quarter to three basis points and utilizations rates are steady at 48%. We continue to feel this is an important part of our retail customer relationships.

Slide 11, reflects our charge off experience over the past few years. We believe that the range over the last three to four quarters is consistent with the current weak economic environment.

And slide 12 speaks to our competitive advantage rather to the industry with charge above asset quality and capital. With that I would now handed back to Jack to describe the acquisitions we announced yesterday.

Jack Barnes

Thank you, Paul. I’m pleased to talk about these two transactions. Slide 14, illustrates the maps which show that Smithtown Bancorp and LSB acquisitions announced yesterday support our stated acquisition strategy of growth and contiguous and near contiguous markets.

Smithtown Bancorp is based on Long Island with $2.4 billion in assets in 30 branches. It operates as Bank of Smithtown and is the largest commercial bank headquartered on Long Island. We are excited about the attractive branch network situated in high traffic locations and equipped in most cases with multilane drivers. We have also learned that Bank of Smithtown employee’s quality of training and commitment to their customers is very similar to our award-winning customer service experience.

In total, Smithtown represents a natural extension of our brand within the New York City metro area and is an excellent compliment to our existing commitment to convenience and customer service.

LSB Corp with $800 million in assets and seven branches operates as RiverBank, a commercial bank headquartered in North Andover. We’ve been impressed with the team at LSB and look forward to working with them as we grow the combined franchise. LSB Corp is an excellent extension of our commitment to the Greater Boston and Massachusetts markets in a logical next step forward in our Butler Bank acquisition which closed in April.

With respect to Butler, you should know that after three months we are pleased to have retained 97% of our customer deposits well ahead of our expectations despite aggressive competitive efforts. We expect LSB and Butler in combination to be further supported by the opening of our two branches later this year in downtown Boston. The seven-day branch location in the Prudential Center and a large branch in the heart of financial district which will contain wealth management and commercial banking personnel.

As the largest bank headquarter in New England, its only natural for us to be actively growing in the largest city in New England.

Slide 15 provides some detail that we’ve just discussed and slide 16 summarizes our rational for expansion into these attractive contiguous markets, most importantly both field exceed our internal financial hurdles. We expect a greater than 15% internal return of rate and significant EPS accretion, in addition we expect tangible book value delusion to be earned back period of approximately five years.

On slide 17, you see an overview of both bank loan portfolios. As of March 31, Smithtown Bancorp had a loan balance of $2 billion. NPAs made up 10.3% of loans and over the previous 12 months they charge off 1.8% of loans. We believe the 10.4% is the conservative estimate of our cumulative future loan losses. For the same period end LSB Corp had a loan balance of approximately $500 million, NPAs made up 2% of loans and over the previous 12 months they charged off 18 basis points of loans. We believe 3% is conservative estimate of cumulative future loan losses.

In slide 18, Smithtown Bancorp has deposit balances of 1.9 billion at a cost of 1.7% and 58% of deposits are in checking, savings and money market accounts. LSB Corp has deposit balance of approximately 500 million at a cost of 1.8% and 55% of deposits are in checking, savings and money market accounts. Given our strong retail and commercial banking model we believe we will be able to significantly lower these deposit costs over time.

Slide 19 provides a summary of key terms of the transactions. Smithtown Bancorp and LSB Corp shareholder approval and regulatory approval is needed. I would note that People’s United shareholder approval is not needed for either of these transactions. We intend to repurchase the shares being issued in conjunction with the Smithtown transaction and we expect both of these transactions to close in the fourth quarter of this year.

Slide 20 outlines key metrics and assumptions. We believe this is conservative pricing as we are paying 0.5% times changeable book for Smithtown and 1.5 changeable book for LSB. You will note we are assuming a very achievable 15% cost savings for Smithtown and 30% for LSB.

On slide 21 you can see the pro forma impact. These transactions increase our assets by $3 billion and deposits by 2.5 billion and add 37 branches to our network. We also expect earnings accretion of approximately $0.10 per share and as stated earlier, we expect to earn the tangible book value dilution back within five years.

In summary on slide 22, we are confident in how we are positioned. We have a strong balance sheet with a pro-forma tangible capital ratio of 15%. Moreover, we are beginning to execute on a strong opportunity set. We closed Financial Federal and Butler in the first half of 2010, announced the acquisitions of Smithtown Bancorp and LSB Corp, and our acquisition pipeline remains robust. We continue to drive growth and profitability improvements within our core businesses and are integrating our closed and recently announced acquisitions. In addition we constantly evaluate the returns available by our share repurchases and dividend payout.

This concludes our presentation. And now, we will be happy to answer any of the questions you may have.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Steven Alexopoulos with JPMorgan. Please proceed.

Steven Alexopoulos - JPMorgan

Jack, given the condition of Smithtown and the work required essentially to turn it around, does this take you out of the market for acquisitions for a period of time whether the case where it’s relatively small and you could be back in the market near term?

Jack Barnes

You know, we definitely view it in the second way you described that, Steve. Given our size and the experienced commercial staff and workout staff that we have and our assessment of the portfolio, we are very confident that we can work with the folks at Smithtown to move through those issues in an orderly way and well within our recourses.

Steven Alexopoulos - JPMorgan

Okay. Maybe secondly, Jack, who did the pipeline of opportunities from, I know you talked about. Did they look a lot more like Smithtown where they require some work but they are relatively cheap? Are they more like LSB? Which do you prefer out of those?

Jack Barnes

I really think you are all very different, right. And I think that both types of transactions will be available, I think as we have discussed in the past there are some institutions that the economic cycle has hit harder and they are out there working through their issues and there are also many open banks that are struggling with the existing challenges in the economic cycle to grow earnings and to deal with pending issues like reg reform and more willing to talk to us then they may have been in the past.

Steven Alexopoulos - JPMorgan

And maybe just finally, the size of what might be in the pipeline. Is it similar to these two or any larger ones out there?

Jack Barnes

No, really, I don’t want to go to any specific descriptions at this point. I would say they hit range if you will.

Steven Alexopoulos - JPMorgan

Okay, fair enough. Thanks Jack.

Operator

And your next question comes from the line of Ken Zerbe with Morgan Stanley. Please proceed.

Ken Zerbe - Morgan Stanley

Thanks. So, could you just talk about the rational to some extent for doing a lot of small deals, because I guess the big concern and what I mean by that is, just the big concern is can you effectively continue an acquisition strategy where it’s a billion here, a billion there, because that’s going to take a lot of time and a lot of the resources to eventually redeploy your excess capital or is somewhere in your plans the potential for a much larger deal? There might be a little bit of in it, easier to integrate than many small ones?

Jack Barnes

Well so, really what we want to be is opportunistic and we are certainly not bossing ourselves into $1 billion or 2 billion deals and understand what you’re looking at today, but I guess I would reinforce that we believe there are opportunities through the range of deal sizes that would be attractive to us and it’s just a matter of continuing to work at that and seize the opportunity as they come up.

Ken Zerbe - Morgan Stanley

Okay, no, understood. I know it’s hard to answer. The other question I had just, if you think about Boston, maybe talk a little bit about your longer term strategy there, approximately two de novo branches is a good start but it seems that you would need to a little bit more or a lot more density in that market, to be really successful?

Jack Barnes

Basically, I’d say we agree with you and we are working the approach to Boston in several ways. We’d love to acquire if that possibility is developed, but if not, we intend to be in Boston and be very noticeable. We have a long-term presence on the commercial banking side already and we think our brand recognition is just going to increase by the acquisition of LSB and being more active in the greater Boston area and we considered a very important market as we said in the opening to the largest bank headquarter in New England.

Ken Zerbe - Morgan Stanley

And the last question I had, just on buybacks. Maybe talk a little bit about your outlook or how aggressive or not aggressive you might want to be with using the capital for buybacks going forward?

Jack Barnes

Well, I guess I would address that by noting that you see that we took action in the quarter to act under the authorized buyback plan. We will continue to examine where the stock is and the attractiveness of what we believe investing in the franchise offers and we have illustrated a willingness to buyback and I think you can take that as evidence that when we see that those returns are attractive, we’ll act.

Operator

Your next question comes from the line of Bob Ramsey with FBR Capital. Please proceed.

Bob Ramsey - FBR Capital

Could you talk about how you think about tangible book value dilution, sort of what’s acceptable is a five-year earn-back period, a good guideline for future deals? Is that the maximum-minimum, the utilized peg or kind of your approach?

Jack Barnes

Basically, we are satisfied if you will with the five-year period. We think it’s a good result. We generally view it depending on the opportunity and the type of deal that somewhere in the range of up to 10 years in some cases might make sense. So I definitely wouldn’t want folks to feel like if it’s more than five, we wouldn’t entertain it. But as we all know, each opportunity is different.

Bob Ramsey - FBR Capital

You also mentioned that you are all again portfolioing residential mortgages in the portfolio. Could you just touch on, are these all variable rate or are you doing fixed rate, what sort of yield you are putting on at the margin?

Jack Barnes

We are basically looking in the 4% range plus or minus depending on you know some of them are one year ARMs. We’ve also got 3/1, 5/1, 7/1 products out there. We are holding some 10/1 and some 15 year fix. So it’s a mix across that range. We’ve got the products out there and those customers that are looking at a more variable rate of product, we are looking to hold and we are offering some of our commercial and wealth management customers, jumbos that are underwritten to our standards but priced and structured the way we would like them.

Bob Ramsey - FBR Capital

And so where are you portfoliong to jumbo 15 year fix?

Jack Barnes

Where are we portfolioing?

Bob Ramsey - FBR Capital

In terms of yield, so is that at 4%, at 5%, at 6%?

Jack Barnes

Most of them are in the 4% range.

Paul Burner

It would have the 4% handle.

Bob Ramsey - FBR Capital

And maybe could you also touch on the securities purchases that you all made in the quarter sort of what the average yield and type of security is that you are putting in the portfolio?

Paul Burner

Sure. Actually I mentioned in the remarks, you know the bulk of what we purchased were short term agency securities and we really get it to enhance the yield on the excess capital we’ve been holding rather than just having instead of the bad earning 25 basis points. You’ve got about a 90 basis point yield on approximately $600 million. So just doing things a little bit more at the margin to improve yield, and we won’t need that capital until the securities mature.

Bob Ramsey - FBR Capital

And then maybe final question and I’ll move on. Are you guys still considering the sister deals outside of the New England market or the North Eastern market, are you more now focused on staying to the Northeast?

Jack Barnes

We are definitely more focused on thing in New England mid-Atlantic regions, Northeast. We don’t want to firmly exclude ourselves from an opportunity but realistically we don’t see many of those coming up as we move forward. But if they do, we’ll look selectively at what might be out there.

Operator

Your next question comes from the line of David Hochstim with Buckingham Research Group. Please proceed.

David Hochstim - Buckingham Research Group

Thanks for taking my question. I wonder if you can give us some color on what you saw over the course of the second quarter in terms of commercial loan demand, is there a meaningful change there early and any weakness lately?

Paul Burner

We have Brian Dreyer in the room and I’ll ask him to speak here for a minute, but I would say generally there is a good flow on that thing because week-to-week the loan committee activity we do discuss and we’ve had some very busy ones and some less so but feeling pretty good all in all.

Brian Dreyer

[C&I] lending is been pretty brisk but the utilization rates are lower and until the economy really gets going again, we get those utilization rates up. You are not going to really see the earning assets but we are putting on significant new customers.

Commercial real estate finance, there have been lots of opportunities and if you look at the ending balance you will see some rather the average balance, you will see some pretty good growth there. And they are really high quality deals with household names recurrence, so a kind of business that in the past, we wouldn’t necessarily see. We are seeing it now and we are booking it.

Equipment finance, starting to get some uptick in PCLC, had some good closing months, couple of good closing months in a row. We are feeling little better about it. Trucking is better. Transportation is better than it was in particular. Financial Federal, it has not had robust growth, very difficult finding loans in their markets and they are concentrating on construction as you probably know, and no there just isn’t that much equipment being purchased right now, so you can’t force growth at the expense of credit quality.

David Hochstim - Buckingham Research Group

Looking at that, I guess what you are describing seems to be an increase in demand. Really I think the economy is showing some signs of improving or we are seeing because we have changes in activity week-to-week, I mean you are seeing the deterioration in the last few weeks or July look worse than June?

Brian Dreyer

Its tough to say that one month is better than another month but what I would say is that big business and big names are doing pretty well; small business, micro business and even small and middle market business, these people are still very worried, very concerned about where the economy is going and where politics are going and where taxes are going, and until they feel more secure, I don’t think you are going to see demand really pick up in mainstream as they say. Big business, yes; small business, not so much.

David Hochstim - Buckingham Research Group

And then just back to the steel pipeline question, I wonder, when you described some companies just kind of thinking are being more interested in potentially talking to you because of the economic environment, the regulatory environment, is that to say the pipeline of deals in the Northeast has increased recently?

Brian Dreyer

Particularly for commercial real estate, office buildings with really solid tenants, we’ve seen a good increase all of this year. It’s been remarkable.

David Hochstim - Buckingham Research Group

And then sort of unrelated question separately, can you give us some estimate, you think the Durbin amendment would have an effect of a couple of pennies a share and none that we interchange, that’s reduced?

Jack Barnes

We are looking at that and we are not ready to say exactly what we think the impact will be until we understand exactly how the Fed develops the approach but we do expect it will have some impact in and of itself. The question is what will we do to counteract it?

Operator

Your next question comes from the line of Christopher Nolan with Maxim Group. Please proceed.

Christopher Nolan - Maxim Group

Good morning. The guidance for accretions from the acquisitions, does that include improvements in deposit costs for Smithtown and RiverBank?

Paul Burner

It does include some improvement but not a lot in the first year. We just can’t do a whole lot. We really want to get things converted and have them enjoy our customer experience before we make any dramatic changes.

Christopher Nolan - Maxim Group

Okay, so there maybe some upside to the accretion in the years beyond 2011, possibly?

Paul Burner

Possibly.

Christopher Nolan - Maxim Group

And Paul, any outlook on the margin for the second half of the year?

Paul Burner

Hey, I think the big pop came as a result of Financial Federal. I think we do have some room for improvement by little more actively investing the excess capital is sort of one category I mentioned. We started deposit cost drop a few basis points second quarter versus first quarter. We’re getting good yields on the loans, the loan demand that Brian was talking about. So, I think we’ve got an opportunity for some marginal improvements, particularly as we continue to grow our loan portfolio.

Christopher Nolan - Maxim Group

Great, and the pickup in net charge-offs of commercials, is that related to FIF or something else?

Paul Burner

What I mentioned was sort of the area that popped was the commercial and equipment financing, and it sort of went from 15 to 92 basis points. I sort of highlighted for both CNI, there was $1.6 million charge-off, and for equipment financing there was a 2.4 million charge-off. If you look at those two business segments, they normally don’t have charge-offs of that magnitude. And I personally consider that is sort of an anomaly. And because our absolute level of charge-offs have been so low historically that occasionally when we do take a charge or two, it can blip things a bit. So, I think it’s not that we’re resetting to a new level, it’s just we took a couple larger than normal ones from those two business lines.

Christopher Nolan - Maxim Group

Great. And the final question, in terms of the progress with system conversion, can we start seeing improvements in the operating expense base and/or the efficiency ratio?

Paul Burner

I think we’ve addressed that in the past and continue to have the same view. We made some progress on that front in the first phase. This is completion of the final phase II and we’ll start to see progress in the second half of the year and then into next year as we move through the transition to operating on one system and the new metrics around that pricing and settling the conversion and our efficiencies related to that.

Christopher Nolan - Maxim Group

Great, thank you for taking my questions.

Paul Burner

Thanks.

Operator

Your next question comes from the line of Sachin Shah with Capstone Global Markets. Please proceed.

Sachin Shah - Capstone Global Markets

Hi, good morning. Just wanted to find out as far as some of the regulatory approvals, what approvals are needed, except the shareholder vote, to get this deal completed? And when you say the fourth quarter you expect the deal should be completed, any kind of timeframe for that?

Jack Barnes

The primary approvals are from the OTS in the regulatory front, and Smithtown and LSB shareholders do need to approve. And we would expect and hope that those events happen October, November, towards the fourth quarter and then we would move to close in that timeframe, that’s the expectation.

Sachin Shah - Capstone Global Markets

Couple questions I have about valuation because for Smithtown you’re paying 60 million, which is lower than LSB. On a price and tangible book, it’s lower than LSB, although Smithtown is generating slightly better cost savings at $2 million in loan, its $0.09 accretive in 2011. I’m just trying to understand the rationale why you’re paying lower than LSB? Is there something I’m missing here?

Jack Barnes

Well, there is a significant loan mark on Smithtown that relate to challenges that have existed in the portfolio, primarily around construction development lending that was hit hard in the downturn.

Sachin Shah - Capstone Global Markets

Okay.

Jack Barnes

And that has impacted that value.

Sachin Shah - Capstone Global Markets

Okay, so it’s still accretive. The loan marks are still there but it’s still going to be a lot more accretive than LSB, and that’s the reason why the lower valuation?

Jack Barnes

That’s correct.

Sachin Shah - Capstone Global Markets

Okay, just one final question about the background. I think you mentioned before about some of these companies coming to you, and you talked about the acquisition strategy going forward. Can you maybe talk about how this transaction came to be in both of these transactions? Did they approach you because of some of the challenges that they were seeing?

Jack Barnes

Well, I don’t want to provide too much color. Let me say, we were brought together with the management folks and investment bankers, and things progressed.

Sachin Shah - Capstone Global Markets

Okay, thank you very much.

Jack Barnes

Thank you.

Operator

Your next question comes from the line of Damon DelMonte with KBW. Please proceed.

Damon DelMonte - KBW

Hi, good morning, guys. How are you?

Jack Barnes

Good morning, good.

Damon DelMonte - KBW

I was wondering if you could tell us with regard to the Smithtown acquisition, is there any protection in the event that credit quality deteriorates between now and when the time of the deal closes.

Jack Barnes

No, there isn’t.

Damon DelMonte - KBW

Okay. Could you maybe walk us through of your due-diligence process on that loan portfolio, just given the significant amount of stress that is under right now?

Jack Barnes

Could you just clarify that? I apologize.

Damon DelMonte - KBW

Yeah. In your due-diligence process to make a bid to acquire Smithtown, could you just kind of walk us through some of the exercises you all undertook in order to become comfortable with the loan portfolio?

Jack Barnes

Sure. I think as we indicated in the file, we did full due-diligence including extensive file review. We actually looked at a very high percentage of the dollars outstanding, and we had a pretty large team do that, very familiar with the market. And we spent time in the market, and we basically, portfolio by portfolio broke down and built mark that you see on the overall loan portfolio. It varies by loan type as you’d imagine, and we’re very comfortable with where we landed.

Damon DelMonte - KBW

Okay, thank you. Also you indicated you intend to repurchase the shares that you will issue in this transaction. Is that something that you would do in the open market or would you try to do something in the form of a block trade?

Jack Barnes

Very likely to be open market.

Damon DelMonte - KBW

Okay and are you eligible to begin repurchasing stock on Monday?

Paul Burner

We’re actually are turning to reviewing that given our using some stock on Smithtown transaction so I haven’t heard that one. Our blockout officers would normally be lifted on Monday.

Damon DelMonte - KBW

Okay, and then I guess with regards to Reg E which will take effect in mid-august, could you provide us with an update as to any expectation of lost fees?

Paul Burner

You are talking about the overdraft impact?

Damon DelMonte - KBW

Yes.

Paul Burner

We’ve been in approximately the $10 to $15 million range which depends a lot on the response we are giving back in the op 10 issue and we’re still moving through that. The response has been pretty good to date.

Damon DelMonte - KBW

Okay, and I guess just lastly Paul could you give us a little perspective on the provision going forward, given that it was higher this quarter than last quarter?

Paul Burner

I think it feels as though we’re at or sort of close to the high watermark as it relates to NPAs and I think quarter-to-quarter as I sort of mentioned what sort of elevated at this time with sort of two particular names. We may have that one quarter and another in another quarter type of thing. I’d say overall feel very confident our reserving level, sort of where we are with regard to the economic cycle, like sort of be surprised at this stage if we need to do any building. I might just add I mean the credits we took; we actually had specific reserves against the credits. It’s just in this economic environment it doesn’t seem like the right thing to do would be to pull down reserves by taking charges against the specific reserve. So still got plenty of concern about the economic environment and we are like everyone else hopeful that we get into a growth environment and be it slow but that said, we are very cautious about the outlook. So we will maintain our historic approach to that.

Operator

Your next question comes from the line of Mike Shafir with Sterne Agee. Please proceed.

Mike Shafir - Sterne Agee

I was just wondering specifically on the Smithtown transaction, it looks like the 10.4% mark would it play to around $206 million on that loan portfolio and with them reporting about $91.2 million in the most recent quarter of tangible common equity? As we think about kind of a math on that, what kind of goodwill number is going to be created from this transaction?

Paul Burner

It could be about a $136 million.

Mike Shafir - Sterne Agee

And obviously with the due diligence that you guys went through, you feel like that adequately marked portfolio even through you’re essentially wiping out all the equity in Smithtown. You are wiping all the equity.

Paul Burner

Correct. And we said, we are confident in the mark.

Operator

Your next question comes from a line of Collyn Gilbert, with Stifel Nicolaus. Please proceed.

Collyn Gilbert - Stifel Nicolaus

Just to follow-up on the reserve question Paul, could you just give a little bit of color as to what you outlook for the equipment finance portfolio and the increase that we saw this quarter and then maybe some colors to the specific reserves allocated to that portfolio?

Paul Burner

We have just in terms of our own metrics as it relates to equipment leasing we obviously look at things very closely and we see sort of leading indicators in terms of the NPLs based upon our internal loan ranking. There was an increase I mean that’s really the category that increased couple of resist. They kind of put about 50:50, I personally think would expect with sort of certain leading indicator well, actually let me step back Brain are you comfortable to make any sort of comments on that?

Brian Dreyer

Not really. I don’t want to predict the future.

Paul Burner

Yeah, Collyn you know we are watching it very closely as we have been I guess I seem little uncomfortable making forward looking statements I think we will see it where it ends up.

Collyn Gilbert - Stifel Nicolaus

Okay, let me take it backwards then and maybe I missed it. I didn’t know if there was indication last quarter and maybe it didn’t come up in lot of questioning that there was deterioration, are you guys were expecting deterioration in equipment finance portfolio. I mean this was a big jump on a link quarter basis I am just trying to reconcile if that was kind of a one off or if the trend that’s an industry trend.

Paul Burner

No, I think it was more of a one off. This is not problematic for People’s United, I mean this is just within sort of our loan mix, it’s the one of the ones that is just a little bit more elevated. In terms of the quarter, what was sort of unusual was take a 2.4 million charge which I mentioned and that really caused a bit of a bump not just in our equipment financing charge off ratio but it actually had an impact in terms of People’s United’s charge off ratio. But I am remarking on the 2.4 million and I think our loss content, we do a very good job of underwriting. I think our loss content on the non performers continues to be low, and our reserves against that portfolio are very, very strong.

Collyn Gilbert - Stifel Nicolaus

Okay, go ahead, was that Brain.

Brian Dreyer

The other thing you are seeing is don’t forget most of the year end statements come in that quarter. They get analyzed and things just get downgraded when the statements don’t look very good. Sometimes they end up on non-performing.

Collyn Gilbert - Stifel Nicolaus

Right, that’s a good point. But Paul when you kind of gave your more general views of credit, I mean within that though would be clearly reflecting an outlook in equipment finance.

Paul Burner

No absolutely I feel good with regard to credit overall its just one category that’s a little more elevated.

Collyn Gilbert - Stifel Nicolaus

Got you, that’s helpful. Thanks. And then Jack not to beat a dead horse on the Smithtown but can you just give a couple of things, one is in terms of maybe when discussions were started with this bank, can you offer any color as to that?

Jack Barnes

Well during the quarter it moved along pretty fast and I can’t exactly remember, but during the second quarter.

Collyn Gilbert - Stiefel Nicolaus

Okay. That’s helpful. And then, as it relates, and I am not familiar with these guys too much but just looking at the loans and obviously you said the challenges that they ran into was on the construction development side. With it, the structure of the loans, was it a specific geography because the ratio is relative to other banks in this market. We’re not seeing them to be anywhere close to that, even on the construction and development side. So just trying to understand what Smithtown was doing that led to this kind of deterioration?

Jack Barnes

Well, I don’t know that the portfolio that we’re talking about was in Long Islands if you will. It’s not out of territory or anything. It’s a mix of land development, residential and commercial development loans that are impacted by the general economic environment in a variety of ways, right. Each loan is different so.

Collyn Gilbert - Stiefel Nicolaus

Okay.

Jack Barnes

But I would say the market itself, the real estate market and the development is Long Islands, and so I am sure if there were similar developments in the market, they would have been impacted by the cycle.

Collyn Gilbert - Stiefel Nicolaus

Okay, alright. That’s helpful. And then just finally, in terms of the repurchases that you made this quarter the $3.7 million were you needing to be out of the market for a good portion of the quarter because of the negotiations with these two transactions. Did that affect your ability to repurchase?

Jack Barnes

Well, it absolutely did, both in terms of the transactions and our windows.

Collyn Gilbert - Stiefel Nicolaus

Okay. That was all I had, thank you.

Operator

Your next question comes from the line of David Darst with Guggenheim Securities. Please proceed.

David Darst - Guggenheim Securities

Could you give us any other incremental changes that you plan within the current loan portfolio or strategy? Anything similar to what you did with extending the securities portfolio this quarter?

Jack Barnes

In terms of what we might do in the loan portfolio?

David Darst - Guggenheim Securities

Correct or in any portfolios you would like to focus on and maybe that are incremental changes today versus what you would have done last year?

Jack Barnes

Well, I think probably one area of focus that we are working on is the small business portfolio. We’ve had a long history of being very successful there, we’ve got some emphasis and new programs going on there, and as Brian indicated earlier, that is challenging in this economic environment but we have such a strong customer base in that area that we want to leverage that. We are doing and continue to do some club deals but and as Brian mentioned, the activity is encouraging as of late with high quality opportunities. But really all of those things we have done in the past and where I would say always trying to advance our success and the efforts that we put into being successful and that’s ongoing.

David Darst - Guggenheim Securities

Okay. Could you give us any guidance on what the interest margins assumptions are that used for the earnings accretion?

Jack Barnes

I didn’t follow that, I’m sorry could you…

David Darst - Guggenheim Securities

What were the net interest margin assumptions that you’ve used for the combined acquisitions for next year?

Jack Barnes

I actually don’t have that in front of me. We are expecting the net interest margin to widen but I just don’t have the details.

David Darst - Guggenheim Securities

And then from a repurchase perspective, are you implying that you’ll be consistently active in the market at some level rather than considering a large repurchase?

Jack Barnes

I think as we said in the past, we’re continually evaluating our approach to the repurchases and that’s an ongoing thing and so we’re not putting a stake in the ground on any approach or any amount right now.

Operator

Next question comes from the line of Mac Hodgson from SunTrust. Please proceed.

Mac Hodgson - SunTrust

Most of my questions are answered, just a couple more. One was on the two acquisitions, when I look at loan portfolios, those had pretty high concentrations in commercial real estate, I was wondering if you could just give any, sort of quick snapshot of what the mix is with NCRE, types of properties, things like that.

Jack Barnes

You want to address that?

Chantal Simon

Sure. For Smithtown, there was a mix of office buildings, mix use, some retail condo, so you know kind of a general mix I would say but it is kind of centric Long Island, New York City area. So this is what you would typically see there, and so that’s their kind of mix. They were the biggest commercial real estate portfolio that we bought.

Mac Hodgson - SunTrust

And how much of the CRE was investor owned versus unoccupied?

Chantal Simon

I am not sure I have that breakdown in front of me.

Jack Barnes

We don’t have that detail brought into the room, and that was Chantal Simon just elaborating just to let you know who is answering. I think that in both cases our strong feeling was there are a well diversified mix of properties in markets that we know well and we were very comfortable with the type of lending that was going on and the structure and the properties being lent again.

Mac Hodgson - SunTrust

And just one other question, given where the pro forma intangible common equity ratio is going down to 15% and then just in light of the buyback and the decision of maybe add some stuffs there and that’s in portfolio and things like that, how much excess capital do you feel the company has on a pro forma basis that they can deploy?

Jack Barnes

Well we were at our general range of talking about $2.5 billion, and so we just committed to about 150. So it’s in that area of $2.3 billion.

Paul Burner

We don’t feel there is any absolute level that we can’t deploy. I mean we are considering a lot of things and we are also considering the merits of repurchases. If we were to repurchase more and want to do an acquisition that would necessitate a little more capital, we could just go out and raise it. I mean that’s the advantage of being a good, well managed profitable bank. So it’s not at all or nothing rationing type of exercise.

Operator

Your next question comes from the line of Rick Weiss with Janney.

Rick Weiss - Janney

Wondering if there was anything you saw in the Dodd-Frank bill that either presents kind of the owner’s conditions for you to operate in or any kind of opportunities that you might see?

Jack Barnes

So the question was regarding the expected impact from the Dodd-Frank bill. Now we are most concerned about the impact on the interchanged income that we enjoy from the debit card activity and other fronts we are concerned about how the consumer protection agency develops and what that might mean to our expense and our ability to deal with new regulations. But for now so much of it needs to be defined and the rules developed by the regulators that it’s very hard to anticipate beyond that and there are certain things that don’t impact us in anyway so those are the two key areas that we have been focused on.

Rick Weiss - Janney

Okay, let me ask you this I hope this is not too awkward but I was wondering what the timing would be, regarding the CEO, like the permanent position?

Jack Barnes

The board has been working through that process you know kind of as we had indicated and so we’ve been looking at July, August as the conclusion to that, in my sense from the board recently as that things are moving along so we would expect something reasonably soon.

Operator

(Operator Instructions).

Jack Barnes

I think we got time for one more.

Operator

Your final question comes from the line of Ken Bruce with Bank of America Merrill Lynch. Please proceed.

Ken Bruce - Bank of America Merrill Lynch

It’s interesting, you go from almost a state of paralysis one quarter into a company that looks like it’s in a hurry, announced two acquisitions, share buyback, dividend increase, beefing up the securities portfolio, actions which are obviously helping to deploy the excess capital. I guess what I’m interested in is from your perspective what should investors expect in terms of a horizon for how long will it to take the deploy the remaining $2.3 billion in excess capital? Is this going to be something where you are looking at a couple acquisitions a year and this could take some time? Or what’s your sense as to the timing?

Jack Barnes

I think we are working to be opportunistic and as we look over the horizon the couple of things kind of strike me in that question and thought process, we first of all don’t want to do deal that doesn’t make sense for us. And so we don’t want to feel pushed or pressured to deploy the capital in a specific timeline. And second we do believe that the type of deals that we are talking about today are attractive and move us along, making progress towards the type of company and the level of performance that we hope to achieve. If something larger comes along that is a nice opportunity and is a good strategic fit for us, we’ll be glad to look at it and we are working at it and would plan to keep doing that but if it takes a little longer for all the right reasons then that will be the timeline.

Ken Bruce - Bank of America Merrill Lynch

Great and just in terms of how you are looking at the share buyback as an alternative against that acquisition back drop. How are you going to think through, where are you willing to reinvest into the company versus acquire?

Jack Barnes

Well in a kind of as we have demonstrated this quarter when the stock value get to a point where we believe that its the right investment then we are going to make it. And I think that the company has demonstrated that now. You will be measured always and looking at that along with our other alternatives and I think as Paul indicated, we are not concerned with not having excess capital if you will in the sense that we believe given our condition that we could raise capital if we need to so its all going to depend on how we progress through time.

Ken Bruce - Bank of America Merrill Lynch

Okay and then maybe lastly, of the $0.10 in accretion that you are expecting of these two deals, how much of that will be discount accretion?

Jack Barnes

Very little.

Paul Burner

So I guess we can follow up with you with the details but we don’t think it’s significant.

Ken Bruce - Bank of America Merrill Lynch

So of that mark, most of that is just expected loss in the portfolio?

Paul Burner

Thank you. Okay so thank you again for joining us today. We appreciate your interest and support of People’s United. If you should have any additional questions please feel free to contact me at 203-338-6799. Thank you all and appreciate it.

Operator

Ladies and gentlemen thank you for your participation in today’s conference. This concludes our presentation. You may now disconnect and have a good day.

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