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

Q3 2010 Earnings Conference Call

October 22, 2010 11 AM ET

Executives

Peter Goulding – VP, IR

John Barnes – President and CEO

Paul Burner – SVP and CFO

Brian Dreyer – Senior EVP, Commercial Banking Group

Analysts

Mark Fitzgibbon – Sandler O’Neill

Ken Zerbe – Morgan Stanley

Damon DelMonte – Keefe, Bruyette, & Woods, Inc.

Christopher Nolan – CRT Capital Group LLC

Bob Ramsey – FBR Capital Markets & Co.

Richard Weiss – Janney Montgomery Scott LLC

Collyn Gilbert – Stifel, Nicolaus & Co., Inc.

Matthew Kelley – Sterne Agee & Leach Inc.

Steven Alexopoulos – JP Morgan Chase & Co.

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the People’s United Financial Incorporated Third Quarter Earnings Conference Call. My name is Katina and I will be your coordinator for today.

(Operator Instructions) I would now like to turn the presentation over to your host for today’s call, 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, President and Chief Executive Officer; Paul Burner, our Chief Financial Officer; and other members of our 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.

John Barnes

Thank you, Peter. Good morning, everyone, and thank you for joining us today. As you know, today, we’ll be reviewing our earnings for the third quarter and we look forward to your questions after our comments are complete.

Before we go through these slides, I’d like to share with you some of my perspective on our two primary strategic objectives. First, to optimize the existing business and second, to sufficiently deploy our excess capital.

With regard to optimizing our business, we believe we have a more robust opportunities set relative to many in the industry. We continue to work towards additional revenue synergies made available from completed acquisitions over the last several years. We have active initiatives currently underway relative to these opportunities in all of our business lines.

Certainly, the acquisitions of Bank of Smithtown and RiverBank and our branch openings in Boston all of which we expect to close by year end will create additional opportunity to enhance revenue going forward.

On the capital deployment front, we have an organized acquisition plan and a targeted effort is underway. Our management team has continued to build relationships within the industry, which we believe will lead to attractive combinations. The challenge, of course, has always relates to different views on price.

Today, we feel sellers are becoming more realistic with respect to price as a result of challenges facing the industry. The value of the synergies from consolidation relative to the value available following an independent path should add momentum to these conversations.

On Slide three, we’ve provided an overview of our third quarter results.

Operating net income for the quarter was $27.7 million or $0.08 per share, excluding $5.3 million or $0.01 per share for one-time cost related to the system conversion and mergers. Net interest margin exceeded – excuse me, expanded by five basis points from 3.8% in the second quarter to 3.73% in the third quarter as a result of a higher investment yield and lower deposit cost.

Asset quality remains strong. However, net charge-offs grew to 57 basis points versus 46 basis points in the prior quarter. As we discussed in the press release, two construction projects represent 45% of the quarter’s net charge-offs. These credits did have specific reserves against them.

Given the increase in NPAs and the climate of persistently high unemployment and weak economics, we felt it was prudent to cover our net charge-offs.

Importantly, we continue to feel comfortable that our asset quality metrics will remain at low levels.

Finally, while growth and commercial banking portfolio was offset by declines in our residential mortgage and consumer lending, we are pleased by our strong pipeline for commercial and residential mortgages as we move into the fourth quarter.

Slide four addresses our current initiatives. Our system conversion is complete and we are now operating as single scalable platform. The rebranding of our branches in the Vermont, New Hampshire, Massachusetts and Maine markets is also effectively complete.

Our acquisitions of Smithtown Bancorp and LSB Corp. are both expected to close next month – providing, of course, that all the necessary shareholder and regulatory approvals take place.

Additionally, we are set to open our Boston branches in the Prudential Center and on Financial Street before year ends.

During the third quarter, we repurchased $25 million of our common stock equal to 1.9 million shares and an average price of $13.29. This was limited because of the stock component of our pending Bank of Smithtown transactions. The repurchase program was affected through open market purchases.

We will continue to evaluate the returns available to us via the share repurchases relative to the rest of our capital deployment opportunities.

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

Paul Burner

Thank you, Jack, and good morning to you all. As Jack mentioned, our overall net interest margin expanded to 3.73%, up five basis points from the second quarter driven by higher investment yields and lower deposit cost. In the third quarter, we had $800 million more on securities on average than in the second quarter.

We made investments of $500 million in callable agencies at the holding company and an additional $300 million of 15-year agency mortgage-backed pass-through at the bank.

The duration of the securities portfolio declined slightly to 2.36 years. Despite the investments, we remained highly assets sensitive; such the earnings will increase by $40 million for every 100 basis point increase in the Fed Funds rate.

Moving on to Slide six, NPAs increased to 2.18% from 2.01% of loans in REO. Compared to the second quarter average of our peer group and the top 50 banks, however, our ratio is less than half their levels. We continue to feel comfortable with our asset quality in the current environment.

On Slide seven, in the Commercial and Equipment Financing segment, while NPLs increased 10 basis points, net charge-offs in the Commercial and Equipment Financing segment dropped to 37 basis points annualized for the quarter from 92 basis points last quarter. This equates to $4.7 million in the third quarter versus $11.7 million in the second quarter for a $7 million decline.

This is actually a good moment to reflect on the lumpiness we discussed last quarter given our low level of charge-offs as a starting point, a single creditor too can cause the annualized charge-offs in any one quarter to move meaningfully. Last quarter, that movement in this category was up. And this quarter in this category that movement was down.

Page 13 of the press release itemizes charge-off levels by loan category. And you’ll notice that within the Equipment Finance subsegment, charge-offs declined to $1.6 million this quarter from $3.7 million in the second quarter.

On Slide 8, you can see a breakout of our commercial real estate by their performance. And NPAs were 1.55%, compared to 1.23% in the second quarter, while NCOs rose to 98 basis points from 35 basis points is a result of the two construction projects. This equates to $13.5 million in the third quarter versus $4.8 million in the second quarter for on $8.7 million increase.

It’s worth noting that only 99% of the commercial real estate charge-offs in this quarter were construction related. And in fact, year-to-date, 94% of commercial real estate charge-offs have been in construction. Our portfolio remains well diversified and we believe we’ll continue to see strong portfolio growth opportunities.

Slide 9 illustrates our residential loan credit performance. As you can see, our NPLs have increased to 3.67%. Unfortunately, non-performing residential mortgage resolution continues to take much longer than previously as a result of a much lower foreclosure process in the courts.

Our loss content has been low as you can see in the bottom chart and we believe it will continue to be at low levels because we have low loan to value at originations, and because approximately 85% of our non-performing loans have current loan to values of less than 90%. We feel good about the residential mortgage pipeline of originations.

On Slide 10, you can see our Home Equity non-performing loans continue at low levels comparable to those in the second quarter. Our net charge-offs were up a bit at 26 basis points, but still significantly below industry levels. Utilization rates remain stable at 49%. We continue to feel that Home Equity offering 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 of over the last three to four quarters is consistent with the current weak economic environment. And year-to-date, our charge-offs have averaged 43 basis points.

Slide 12 speaks to our competitive advantage relative to the industry with regard to asset quality and capital. And with that, I’ll now hand it back to Jack to wrap it up before we open it up for your questions

John Barnes

Thanks, Paul.

In summary on Slide 13, we believe we continue to offer a compelling investment opportunity. We operate from a position of competitive strength and intend to enhance this position by continuing to focus on improving our operating performance. We’ll continue to pursue capital deployments through well-priced acquisitions, while maintaining a strong dividend and evaluating the returns available from share repurchases.

Further, given the multiyear deleveraging process and the increased regulatory pressures in the sector, we believe potential partners are becoming more interested in combination discussions.

Finally, we are significantly more asset sensitive than our peers. So, when rates finally do rise, we will have a disproportionate positive impact on our interest income.

This concludes our presentation, and I will be happy to answer any questions you might have.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from the line of Mark Fitzgibbon representing Sandler O’Neill.

Mark Fitzgibbon – Sandler O’Neill

Good morning, gentlemen.

John Barnes

Good morning, Mark.

Mark Fitzgibbon – Sandler O’Neill

I’m wondering if you could perhaps share with us your thoughts on the margins over the next quarter or two, and also give us a sense for whether we should expect much more of that $1.2 billion in short-term funds that you have to be deployed into securities.

John Barnes

Well, I guess the first part of the question, as we look forward and think about the impact of the acquisitions on our margin, we feel like it will be with the purchase accounting that transition should be billing neutral. And based on our overall view of existing portfolio, cost of funds, et cetera, we’re feeling pretty good about being able to maintain in this range.

And I’ll let Paul address the investment portfolio. As you can tell, we’ve been working to try to make good progress there and we’ll continue to work it while we avoid going too far out in the duration.

Paul Burner

Yes, I guess I wanted to add, Mark, is our overall assets despite the investing that we’ve done on our overall asset sensitivity has really remained pretty constant. As we look forward and look at sort of the legacy business, putting aside the acquisitions for a moment, we actually see a moderate upward bias with regard to the net interest margin. And I would say it’s really sort of moderate.

So, I think as Jack said, we feel very good about the maintenance there. And we want to keep our powder dry with regard to asset sensitivity so that we do benefit, we felt the pain of lower earnings through the lower rate cycle and we look forward to earnings growing as rates eventually increase. In the interim, with our pricing actions, we think we can continue to deliver the net interest margin we have and seek a little bit of improvement there.

Mark Fitzgibbon – Sandler O’Neill

And should we be expecting the provision to roughly match charge-offs do you think in coming quarters?

John Barnes

Well, no. This gets us into this – what we realized this quarter was given the fact that we did have a couple of credits that we needed to recognize and that NPAs increased, we felt it was the right move. I would expect, and our comments about expecting asset quality to remain at lower levels would mean that we’ll find the right balance there as we go forward, but I wouldn’t want to predict that we’ll absolutely match or not in future quarters.

Mark Fitzgibbon – Sandler O’Neill

Okay. And then lastly, you said the pipeline was strong in residential and commercial. Could you may be share some numbers with us, give us a sense on roughly how big those pipelines are?

John Barnes

Sure, I think we’ve talked about giving you all a flavor for that and may be I’d ask Brian to speak to some of the activity we see right now in the commercial side first. Can you do that one?

Brian Dreyer

Brian Dreyer. I’m not going to give you specific numbers because we don’t disclose those, but I will give you some color.

First, you have to look at our individual businesses because things are different depending upon which business you’re talking about. But our biggest business is our Commercial Real Estate Finance business, and that’s been strong and it remains strong and the pipelines are very good. It’s interesting; almost everything is a refinance opportunity. Many, many of those, not most, are credit great tenants.

There’s almost no new construction and the vast majority of the deals are in office and retail. It’s across the footprint but we have definite concentrations in Fairfield County, and inside 128 in the Boston market, and also, in New York and New Jersey.

As far as C&I is concerned, I would say that’s reasonably strong. Again, concentrated in Connecticut, some in New York, particularly in Brooklyn and Westchester. Although we just committed and we’re in the process of closing a $50 million deal, that’s 5-0 in Vermont, will be the agent, that’s probably the biggest deal in Vermont this year and may be in a couple of years, I’m not really sure.

The problem in C&I is our utilization rates and our lines of credit are running about 45% and that’s about flat from last year. We really seen no increase and whereas the normal rate in our portfolios generally is around 65%. So, there’s a lot of demand that is just not there right now compared to what our commitments are.

In terms of what you’re going to see in the future, we are about to deploy new C&I teams inside 128 as soon as those Boston branches open, and we have high expectations for what they might be able to achieve. And we’re also ready to put teams on the ground as soon as the Smithtown acquisition closes to really start calling aggressively in Long Island and in the New York City.

As far as the Equipment Finance businesses are concerned, the PCLC business is reasonably strong. And it’s mostly in the direct channel, direct sales channel and it’s across the board in most of our business lines. It’s not what it’s been in past years, but I still would say reasonably strong.

As opposed to Financial Federal, which is now just changed its name to People’s United Equipment Finance, the business is very slow there. There is a big construction concentration and I don’t think it’s a surprise to anybody that the construction industry is very slow. So, there just aren’t a lot of business opportunities and there still shrinkage in that portfolio.

So, as we go forward, we’re seeing and we’re going to see, decent increases, modest increases in some portfolios, stronger increases in others. But overall, I feel pretty good considering the economy that we’re all facing.

Mark Fitzgibbon – Sandler O’Neill

Thank you.

Paul Burner

So, just to add and kind of finish the second part of the equation. We’ve got a couple of million dollar pipeline in the residential side. And as you know, that’s what we see going into the portfolio. I think this quarter, we had the goal of stemming the tide on the shrinkage in the residential portfolio, and our group teams have done – working hard to do that. While we had a slight decline this quarter, we really turned a corner, we believe. And we’re looking at several hundred million dollars closing as we move forward.

Mark Fitzgibbon – Sandler O’Neill

Thank you.

John Barnes

Yes.

Operator

Your next question comes from the line of Ken Zerbe representing Morgan Stanley. Please proceed.

Ken Zerbe – Morgan Stanley

Thank you. I was hoping if you could site just a little bit about buybacks. First, may be just remind all of us what the restrictions are that you currently have right now. Because obviously, you have buyback some shares but not a lot, and what are your plans after Smithtown closes?

And then how do you view buybacks broadly speaking in relation to the fact that you mentioned you’ve actually use shares at some point or maybe you won’t to actually do an acquisition? Thanks.

Paul Burner

Hi, Ken. It’s Paul. With regard to restrictions, we actually have been blocked out for some time now because we’re using our stock as a portion of the consideration for the Smithtown acquisition. And we will remain blocked out until after the Shareholders’ Meeting, which is November 19th or 20th. So, we do have to remain out of the market until then, and then could resume.

With regard to our overall posture, I’ll pass it back to you, Jack.

John Barnes

So, if I would suggest to all of you that the posture that we’ve portrayed in the last several quarters remains intact, if you will. With shares value dropping to levels where we think it’s attractive versus our future earnings expectations and valuations, then we’ll move into the market and continue to buy under the approved plan. We are talking about it regularly, internally and with the Board, and we’re evaluating the size of our repurchase plan and also our activity, and it’s really an ongoing process and that’s about it.

Ken Zerbe – Morgan Stanley

Okay. No, that makes sense. And then maybe just a related question, when you think about the cash that you’re putting into agencies, I understand it’s fairly short duration. May be talk about your ability to pull that out if you do find a sizable acquisition? Are those securities, I guess, monetizable in a very short manner without taking any losses?

Paul Burner

Well, they are. Unfortunately, as rates have continued downward, actually, we take a gain. But I guess the philosophy is we’re just putting a portion of the excess capital that’s what the holding company or investing a term or keeping a portion in cash. And we’re keeping the durations such that you know even – I mean as with the River and Smithtown acquisition, there’s unfortunately, a few month period between deal announcement and the closing.

But I guess the way we look at it as if the market moved around a little and we wanted the $500 million to fund an acquisition a little earlier and we have to take $0.5 million charge that would really be de minimis. Meanwhile, we don’t think we’ll be using it. So, we prefer to get income back up. Clearly, it’s not money we put into 30-year mortgages.

Ken Zerbe – Morgan Stanley

Yes.

Paul Burner

Because as long as we’re keeping it relatively short term and as part of our cash flow forecast.

Ken Zerbe – Morgan Stanley

All right. Thank you.

Operator

The next question comes from the line of Damon DelMonte representing KBW.

Damon DelMonte – Keefe, Bruyette, & Woods, Inc.

Hi, good morning. How are you guys?

John Barnes

Good morning, Damon. Good.

Damon DelMonte – Keefe, Bruyette, & Woods, Inc.

With respect to asset quality, you know NPLs do continue to rise. They have been over the last four, five quarters albeit you are still at relatively lower rates compared to some of your larger peers throughout the region in the country. But can you give us any sense of – are you comfortable with reaching a cresting level anytime soon?

John Barnes

Well, I’d go back to my kind of opening remarks. We’re very comfortable that our asset quality and metrics are going to remain at low levels. And I go back to our track record and our confidence in our underwriting, and actually also, our confidence in our customers, we’re very pleased with how our customers have navigated through this economic downturn and the length of it, and we remain very solidly comfortable with both aspects of that.

That said, you get to this issue of predicting levels and in the way we operate is to kind of deal with reality and what’s in front of us at the time. So, given our track record and given our current view, we feel very strongly that we’re in a – and we’ll continue to be in a solid plays. But what happens in the economy and the environment is, to me, there remains a lot of uncertainty and we have to wait and see what happens.

Damon DelMonte – Keefe, Bruyette, & Woods, Inc.

Okay. Can you talk a little bit what drove the commercial real estate increase for non-performers that was up to $85 million this quarter from $67 million last quarter?

John Barnes

So, my recollection, generally, as we look at that increase, it really came in a very granular way. I think the largest edition was $2 million. And then below that there were some – just reminding me on – I’m thinking of the C&I. So, in the C&I, the largest was $2 million and then there was a lot of other smaller loans roughly $15 million or so that were added.

In the commercial real estate, we did have an $8 million deal that was added and then three others that were a variety of projects in kind of $2 million to $3 million range.

Damon DelMonte – Keefe, Bruyette, & Woods, Inc.

Are these all in market loans or are these part of the shared national credit portfolio?

John Barnes

Three of them were Shared National Credit.

Damon DelMonte – Keefe, Bruyette, & Woods, Inc.

Okay. And do you have the balance of credit size assets at the end of the quarter?

John Barnes

We don’t have that handy.

Damon DelMonte – Keefe, Bruyette, & Woods, Inc.

Okay. And I guess just as to kind of – to follow through...

Paul Burner

[Inaudible]. Damon, to just …

Damon DelMonte – Keefe, Bruyette, & Woods, Inc.

Sure.

Paul Burner

We are [inaudible] reacting; we don’t have the number in front of us. But I think we have reviewed it and talked about it in the last few days. And our message to you would be that it has remained stable level of criticized assets, have remained stable through the last three or four quarters.

Damon DelMonte – Keefe, Bruyette, & Woods, Inc.

Okay. And then, this is kind of goes back to when Brian was giving color on prospects for loan growth. You mentioned a large deal in Vermont of $50 million. Is that a size of a credit that you guys would keep or is that something that you would maybe you partial out to some other banks as well?

Brian Dreyer

This is Brian, again. We’re going to age into credit we’ve already arranged for People to take pieces.

Damon DelMonte – Keefe, Bruyette, & Woods, Inc.

Okay. And then just lastly, you also mentioned about your C&I teams ready to hit the ground up in the route 128 quarter in the Boston area. Were those recent hires that you listed out from other banks in the Boston area or are they people that you’re moving up from Bridgeport?

Paul Burner

The people who – the fellows who are going to run the teams are long-term People’s employees who have been in similar jobs in other markets. Some of the new people will be new hires; some will also be transferred in from other places in our business, our present business.

John Barnes

And …

Damon DelMonte – Keefe, Bruyette, & Woods, Inc.

Okay, great. Thank you very much.

John Barnes

This is Jack. I just want to add to that something because I’m very encouraged by it. We not only have the movement of some of the folks that Brian described, but if you think about our operation in Portsmouth, New Hampshire, many of the folks and those officers have been active in calling in to Boston and within 128, and the Riverbank folks also very active along the 128 quarter.

So, we really have a group of experienced people on the ground and familiar with the territory and we really feel good about our momentum there.

Damon DelMonte – Keefe, Bruyette, & Woods, Inc.

Great, thank you very much.

John Barnes

Thank you.

Operator

The next question comes from the line of Christopher Nolan representing CRT Capital. Please proceed.

Christopher Nolan – CRT Capital Group LLC

Hi, thanks for taking my call. The comments on the slow loan growth at federal, should we interpret this in terms of the accretion from that acquisition as tracking below expectations?

Paul Burner

No.

Christopher Nolan – CRT Capital Group LLC

Yes?

Paul Burner

No. We’ve actually seen some – we’ve seen some improvement margin over and above what we had, and we’ve also seen some reduction in expenses, and we’ve been very also very comfortable with the credit, the credits performing very well. So, overall, we’re very pleased and we are looking forward to our eventual rebound and in growth.

Christopher Nolan – CRT Capital Group LLC

Okay. And then should we look forward to any sort of expense savings once given that the system conversion is completed? And if so, is there any way you can quantify that?

John Barnes

Yes, we’ve talked about that in the past and we have moved through a number of stages through the project, if you will, in the last year to address our expense savings that we expected. We talked about savings in the range on an analyzed operating basis of $10 million, and we continue to believe that we will achieve those goals.

Christopher Nolan – CRT Capital Group LLC

Should we expect the savings to begin immediately or is that something that’s sort of [inaudible]?

John Barnes

Well, it’s actually – some of it began to impact – following first quarter in the event in Connecticut in February, and then some kicked in after the July event in New England, and we continue to work on settling the conversion and getting things moved out and adjusting our overhead and enjoying a different cost structure in the services that we get related to the core. And all of that well, as is and will continue to be phasing in through the end of the year.

Christopher Nolan – CRT Capital Group LLC

Great. And then just turning to the efficiency ratio, it’s pretty high compared to similar-sized institutions. Is there is any sort of initiatives or plans to improve operating leverage?

John Barnes

Well, I’d say two things there. First, it is very high compared to our peers and we recognize that. If you kind of either look at giving the excess capital a fair normalized rate, if you will, of return, and you put that revenue into the equation, you’d see that we’re kind of in line, I would call it, with our peers. I think we calculated generally in the high 50s.

But that said, we recognized also that initiatives around expense savings and being an efficiently run company is important. And things like the core conversion initiative and moving through that are critical and we’re constantly working on initiatives to improve our operating performance, and that includes becoming more efficient and getting an efficiency level that we’ll be pleased with, and it will be somewhere in that mid-50 range.

Christopher Nolan – CRT Capital Group LLC

Any timing on that?

John Barnes

Well, it really will depend a lot on capital deployment.

Paul Burner

Chris, actually it’s Paul. Let me just sort of add. If we do a pro forma today given the asset sensitivity I mentioned, each 1% increase in the Fed Funds rate adding $40 million, if we just sort of do a fast forward to a 5% Fed Funds rate with our exact same balance sheet, that’s where our efficiency ratio would actually drop too – because our revenue increase associated with 5% Fed Funds rate. The efficiency ratio would drop to now the 58% level.

So, the very fact that we have been so asset sensitive in the declining rate environment is we felt the pain of that in revenue loss. It’s actually unfortunately caused our efficiency to go up year-over-year.

Christopher Nolan – CRT Capital Group LLC

Okay. Thanks, Paul.

Operator

The next question comes from the line of Bob Ramsey representing FBR. Please proceed.

Bob Ramsey – FBR Capital Markets & Co.

Hey, good morning. I guess along the same lines of efficiency. Could you talked about the incremental cost of the new teams in Boston and Long Island? Is that already baked into the third quarter or is there going to be any other uptick in expenses for those new teams?

John Barnes

Well, there’s a lot of specific dynamics in that. But I think as you could hear Brian describing, we’ve got some long-term employees from various markets where we are operating moving in to Boston. And then we have folks on the ground that will be relocating from different offices around Boston into the Boston office. We will undoubtedly add a few new people, but we don’t think there’s any kind of a size or material impact there on comp with those programs.

Bob Ramsey – FBR Capital Markets & Co.

Okay, great. You were giving some interesting sort of pro forma efficiency numbers. Where do you all – once you get Smithtown and LSB, and where are you sort of thinking about efficiency for 2011 with rates where they are today?

John Barnes

Well, I can’t say that I have something that’s clear in my mind what that will play out. But if you assume rates are where they are today, it will, again, depend upon how much capital that we can get deployed and move the lower yielding excess capital into something of higher return.

Bob Ramsey – FBR Capital Markets & Co.

Okay. And then maybe the last question I’ll ask has to do with loans. I know you talked a lot about the pipeline. It sounds like the trends are encouraging there. But, of course, pay downs or a headwind as well. Given where the pipelines are, are you optimistic to see net loan growth in the fourth quarter?

John Barnes

We are.

Bob Ramsey – FBR Capital Markets & Co.

Okay. Thank you.

John Barnes

Thank you.

Operator

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

Richard Weiss – Janney Montgomery Scott LLC

Hi, good morning.

John Barnes

Good morning, Rick.

Richard Weiss – Janney Montgomery Scott LLC

I was wondering if you could talk a little bit about M&A and what you’re seeing out there. Would you expect a much more activity in 2011?

John Barnes

Yes, we do, actually. I think some of my opening remarks are trying to address our view of that. I think it’s very, very clear to me from opportunities to have conversations with both and the content of those discussions that there’s a lot of challenges in the business right now, and depending on your relative position, it’s very difficult to develop next year’s plan. And so, I do see that greater willingness to have the conversation and to look at the option of selling versus continuing to go it alone. It seems to be there is more momentum there than even two quarters ago.

Richard Weiss – Janney Montgomery Scott LLC

Are some of the hang-ups possibly over pricing or would it be the uncertainty within the regulatory environment? I guess, on the part of the – than certainly on pricing for both sides and maybe on the part of the buyers, maybe on what they think capital requirement would be next year. Do these matters, would be get solved before the results [ph] flood the deals?

John Barnes

I think people are kind of forming their views on both sides of those issues. I do agree that the buyers need to be very thoughtful about expectations, as well as the sellers evaluating their prospects for growing earnings on an independent path. So, all of those dynamic, I think, continue to and will always play into it and the environment is difficult to the …

Richard Weiss – Janney Montgomery Scott LLC

Okay. And finally, one question on loan pricing. Are you seeing the pricing being more competitive these days or even bordering on irrational?

John Barnes

Not at all. I think I’ll let Brian speak to it. And I don’t see any change in spreads, dramatic change or any irrationality in entering things.

Richard Weiss – Janney Montgomery Scott LLC

Okay, thanks. I have gotten like I guess other companies which we’re talking about pricing, different tones, so …

John Barnes

Okay.

Richard Weiss – Janney Montgomery Scott LLC

I kind of get mixed messages, I guess.

John Barnes

Sure. I’ll let Brian speak to that.

Brian Dreyer

I would not say irrational. I think there has been some shrinkage in spreads, particularly in commercial real estate finance. And the days when you could get really attractive floors on floating rate loans are coming to an end. So, I think we’ve gotten pretty far to one end of the pendulum in terms of the magnitude of spreads and it’s come back to something more normal. But nowhere near irrational as it was say, three years ago.

Richard Weiss – Janney Montgomery Scott LLC

Okay. Thank you very much.

John Barnes

Thank you.

Operator

The next question comes from the line of Collyn Gilbert representing Stifel, Nicolaus. Please proceed.

Collyn Gilbert – Stifel, Nicolaus & Co., Inc.

Thanks. Good morning, guys.

John Barnes

Good morning.

Collyn Gilbert – Stifel, Nicolaus & Co., Inc.

Just to kick it off, quickly wanted to clarify. Jack, did you say that you do expect net loan growth in the fourth quarter?

John Barnes

Yes.

Collyn Gilbert – Stifel, Nicolaus & Co., Inc.

Okay. Well that kind of answers, I guess, but I’m still would love more color. Brian, on your comment on that you made earlier just about feeling good sort of considering the economy maybe how does that feeling compared to where you sat last quarter and may be just give me some specifics as to what’s driving that specifically?

Brian Dreyer

I think I feel about the same as I did in the last year. I don’t think the economy is any better. We’re closer to an election. Thank God, but we’re in a unique position here. We’ve got really attractive markets opening up for us. We’re going to be the biggest bank calling in Boston that has a home office in New England, and that’s a big deal and we’re finally going to have troops on the ground in Long Island and closer to New York City, and that’s a big deal. And we’re just seeing all across our footprint opportunities for us. So, I’m sort of excited about that.

Collyn Gilbert – Stifel, Nicolaus & Co., Inc.

Okay, that’s helpful. That’s great, thanks. And …

John Barnes

[Inaudible].

Collyn Gilbert – Stifel, Nicolaus & Co., Inc.

Yes.

John Barnes

It’s like also calling – sorry, it’s Jack. I just …

Collyn Gilbert – Stifel, Nicolaus & Co., Inc.

Yes.

John Barnes

If you look at the numbers, I know you’ll see that the commercial real estate in the C&I portfolios did have growth last quarter, this third quarter. And there was shrinkage in the [inaudible] portfolio and others that caused us to be flat, but commercial groups did have growth.

Collyn Gilbert – Stifel, Nicolaus & Co., Inc.

Okay. Okay, that’s helpful. Thanks.

Jack, just following up on the buyback questions. Can you remind us what the current authorization is outstanding?

John Barnes

$17 – I’m getting help here, $17 million.

Collyn Gilbert – Stifel, Nicolaus & Co., Inc.

Okay. Help me with the quick math. So that was when you initiated that that wouldn’t have been 5%? No, yes, would’ve been probably 5%, right? Yes, Okay.

John Barnes

5% of shares, yes.

Collyn Gilbert – Stifel, Nicolaus & Co., Inc.

Right, okay. Can you just sort of frame the buyback position? I guess, I’m just struggling with – you’ve been consistent in your commentary when appropriate evaluating alternatives on the buyback. But I guess I just need to understand kind of what goes in to those methodologies as I look at the buyback as a return alternative for this capital, especially and nobody has spoken [inaudible] to where your stock is today.

But just give a little bit more color, if you could on why you still – I guess I could ask it differently. Why are you not more rigid and saying, “We will be buying bank our stock more aggressively,” assuming that the stock is at this level?

John Barnes

Well, because I think I don’t want to come out and say will, “We will be doing it,” because that we are continually discussing it with the management group and the board, and it’s not – we don’t have a clear definitive position that we’re going to march forward with. There’s a lot of dynamics around that, as you know, and if whether we have capital deployed in other ways, that might change our position in 30 days or whether we have a change in the stock price, et cetera. That position could change.

So, that’s why, I guess I articulated the way I do. And I think it is something that we’re going to evaluate on an ongoing basis. We’ve clearly demonstrated now that with the price at these levels, we believe it’s an appropriate investment for us. And it certainly, you can interpret from the last two quarters that with the stock at these levels, we believe it’s an appropriate action the way to deploy the capital.

Collyn Gilbert – Stifel, Nicolaus & Co., Inc.

Okay.

John Barnes

And we’re certainly not moving off of that view.

Collyn Gilbert – Stifel, Nicolaus & Co., Inc.

Yes. I mean right offering the average cost; we obviously know where your price point it.

John Barnes

Yes.

Collyn Gilbert – Stifel, Nicolaus & Co., Inc.

But I’m just – I was just kind of thinking about size, okay. And then extending that conversation or that question a little bit further, I mean you guys are running a very, very tight balance sheet. And Paul, you had mentioned the asset sensitivity position and strategy and philosophy hasn’t changed that much. What do we assume by that? I mean is it – and may be that ties into my question in terms of potential size of acquisition.

As you look at the market, do you see kind of larger deals coming down the pipe? I mean, how do we think about or how do you guys think about kind of where you’re going to get the best return on may be a size of acquisition?

Paul Burner

Well, I think just first of all, if we could get an appropriate – an acquisition at a larger size, we’d deploy capital, more capital more quickly. And so, you can assume that that would be more attractive to us. Let’s say, given equivalent return views on a large and a small deal, for sure, and we are working hard to make some progress there.

But we also kind of go back to our discussion over the last few quarters; we’ve clearly opened our lens, so to speak, and are looking at deals of $1 billion or up to say $5 billion or larger. And if it’s strategically valuable to us, if the franchise that we’re looking is very attractive because of location or other reasons, then we’re going to look at it.

So, we don’t want to be locked into just doing sizable deals and getting ourselves in a spot where we don’t make progress, and we continue to have that view. So, large is better and we’re working on it.

Collyn Gilbert – Stifel, Nicolaus & Co., Inc.

Okay.

John Barnes

And Collyn, I think the other side, which I’d like to respond with this. I mean theoretically we could go raise $20 billion tomorrow and invest in mortgage-backed securities, but that would help our EPS in a very short-term. But it would really hurt us in the longer term to put assets on the book with a 2% to 3% yield. And so that’s why we sort of talked about we wanted to do things around the edges, but we want to preserve the upside for what we believe will be a good capital deployment opportunities, opportunities to deleverage a little bit, but also, retain our profile so that we benefit when rates do go up.

Collyn Gilbert – Stifel, Nicolaus & Co., Inc.

Yes. No, I understand. You guys know I respect the strategy that you’ve been employing. It’s just – I guess looking for maybe a little bit more nimbleness within that strategy considering the environment that we sit in and the fear that this environment is prolonged for a longer period, and that’s all.

Just shifting gears quickly and I’ll let somebody else hop in. On mortgage banking, can you just offer your view on mortgage banking? It’s not been a huge business for you all. Is it something that you would to want to expand into? Is it that the restructure – I mean not in place to higher volumes. I mean we’re just seeing a lot of banks really posting some sizable growth this quarter, and just kind of want to get your philosophy on that.

John Barnes

Well, I would say that we have been very committed to mortgage banking for a long time, and we continue to be and actually have high expectations there. We’ve had a strong retail origination for us throughout our footprint for really a quite some time. And we’ve also worked hard to develop our initiative to originate and take applications through the branches and we continue to make progress there.

And so, if you’re – I think may be if you’re looking at numbers that seem on a relative basis, smaller, it may be because while we’re taking the gains in the secondary sales with the 30-year production, we’re also starting to book …

Collyn Gilbert – Stifel, Nicolaus & Co., Inc.

Sure.

John Barnes

The more favorably structured deals for our balance sheet to stop that runoff. So, we’re very committed to having a strong mortgage banking operation. We’re a huge retail franchise in New England and we’ve got a lot of customers looking to us to supply that product and we’re very eager to help them.

Collyn Gilbert – Stifel, Nicolaus & Co., Inc.

Okay, that’s helpful. Thanks very much, guys. I appreciate it.

John Barnes

Yes.

Operator

The next question comes from the line of Matthew Kelley representing Sterne Agee. Please proceed.

Matthew Kelley – Sterne Agee & Leach Inc.

Yes, hi. I just wanted to clarify on the securities purchases. You guys said you did $800 million in the third quarter. What are you anticipating in the fourth quarter in terms of dollar amount of purchases or is it done in terms of the large-scale purchases?

John Barnes

Now, we – toward the end, really what I said, Matthew, is we owned $800 million more in securities on average in the third quarter than we did in the second quarter. We did purchase at the end of the third quarter some additional securities with a shorter duration in the pass-through and that was within the bank. And so we – next quarter, we’ll see probably an increase of about $400 million quarter-over-quarter.

Matthew Kelley – Sterne Agee & Leach Inc.

Okay, got you. In terms of the securities to asset ratio, I mean that’ll get you kind of the mid-teens. Is that that way you want to be or?

Paul Burner

I think there’s not really a specific target per se there. I think it’s much more about – I think sort of going back to Collyn’s point, a moment ago or wanting to be a bit nimble and increase yield a little bit, but maintaining an eye on the duration. And we expect rates to stay low over short of the next year, but not wanting to extend ourselves too much.

Matthew Kelley – Sterne Agee & Leach Inc.

Okay. Then a question for Brian, I wonder if you could give us a little bit of commentary on current rates in the third quarter or origination rates in the third quarter versus where they those rates are now on office and retail type collateral [inaudible] or originating kind of A class, B class or rate and yield deal commentary for the third quarter and then where those are now?

Brian Dreyer

Beginning in the third quarter, the spreads would’ve been higher. When you say rates, I’m assuming you’re talking about spreads.

Matthew Kelley – Sterne Agee & Leach Inc.

Yes.

Brian Dreyer

But toward the end of the third quarter and the fourth quarter, I think they’ll be fairly stable based on what I’ve seen in the backlog, most of which is already committed.

Matthew Kelley – Sterne Agee & Leach Inc.

What do you mean? In terms of office-type projects, are those around the 4% range, 4.5% for high-quality stuff?

Brian Dreyer

It depends on the whether it’s floating or fixed. And a lot of the interim loans are floating right now, three-year loans, five-year loans, waiting to see what the permanent markets will do. So, you can’t really generalize.

Matthew Kelley – Sterne Agee & Leach Inc.

Is that what you’re doing though? I’m trying to get a sense of …

Brian Dreyer

Yes.

Matthew Kelley – Sterne Agee & Leach Inc.

Where those assets coming on to your balance sheets, at what yields?

Brian Dreyer

In what absolute yields or?

Matthew Kelley – Sterne Agee & Leach Inc.

Yes. Absolute yields, yes.

Brian Dreyer

[Inaudible] around 5%, 4% or 4.5 to 5%.

Matthew Kelley – Sterne Agee & Leach Inc.

All right, got you. Okay. Another question, just looking at the current earnings run rate. I mean you guys are earning $0.08 or $0.09 a quarter, annualized 32%, 36%. And then Smithtown and Lawrence, at $0.10, get you in the low to mid-40s. Current consensus sitting out there right now at, I think it’s like $0.59. I mean it implies a lot of organic growth.

What do you think the combined organic growth rate is once Smithtown and Lawrence are integrated?

John Barnes

Right. I think it implies some organic growth and it also implies some capital deployment and an expectation that we would follow up with more acquisitions. So, in terms of organic growth, we are what I would call, expecting, let’s say, somewhere in that 5% to 10% growth rate depending on the business, and all of them we view differently. But what I would call rational growth rates and especially in this environment.

Matthew Kelley – Sterne Agee & Leach Inc.

Right, right. And still looking for that $0.10 accretion from the Smithtown and Lawrence transactions?

John Barnes

Yes.

Matthew Kelley – Sterne Agee & Leach Inc.

Okay. Thank you.

John Barnes

Thank you.

Operator

(Operator Instructions) Your next question comes from the line of Steven Alexopoulos representing JP Morgan. Please proceed.

Steven Alexopoulos – JP Morgan Chase & Co.

Hey, good morning, everyone.

John Barnes

Good morning, Steve.

Steven Alexopoulos – JP Morgan Chase & Co.

Jack, maybe I’ll start. I want to follow-up on Collyn’s capital deployment questions. I guess generally speaking, the past few years, People’s has been a story of sitting on excess capital waiting for the right deals. But we know the Board has changed leadership at the bank, where they brought you in to accelerate this pace of capital deployment.

So far, you’ve done a good job, a couple of deals, bought back some stock. Curious as when you look at 2011, can you help us think about your view as well as maybe the Board’s view on what is an acceptable pace of capital deployment? And if deals do not materialize, is there a minimum amount of capital that you’re planning to use via share buyback or other tools?

John Barnes

So, I think basically, there is no specific timeframe that the Board has laid out in front of me or the management group, as it relates to capital deployment pace. I think whenever I think of this subject, I think of our investors and the Board message, which is the last thing we want to do is allow the deal and do something just to force something for the wrong reason, and that always remains in the front of all of our minds. So, I think that’s kind of an important starting point.

As it relates to whether deals materialize in a reasonable timeframe, if they don’t, and will we considered changes in our posture to buybacks or special dividend or other alternatives, the answer is absolutely, yes. And when I talk about us regularly re-examining our posture and alternatives there, those conversations certainly do come up. But we definitely remain primarily focused on deploying the capital through acquisitions, and realizing on our strategic plan to deploy the capital and grow the franchise and realize on that capital in that fashion.

Steven Alexopoulos – JP Morgan Chase & Co.

Jack, is it safe for us to assume that if these deals do not materialize, though, that a portion of this capital would’ve been used for share buyback, which was not the case over say the past two years?

John Barnes

I guess I want to make sure I understand your question. Can we assume that if something doesn’t materialize that we would act and do something else?

Steven Alexopoulos – JP Morgan Chase & Co.

In terms of buying bank your own stock or something …

John Barnes

Well, I mean I …

Steven Alexopoulos – JP Morgan Chase & Co.

What [inaudible] we’d do for the past two years?

John Barnes

Yes, I got you. I go back to my comments earlier that I think the last two quarters they have established that we are willing, when we believe the value there to exercise the opportunity to buy back shares, and we do continue to be very open to that especially at these levels.

Steven Alexopoulos – JP Morgan Chase & Co.

Okay. And maybe I’ll follow-up with Paul. When you model out deal opportunities out there, are there many that are better risk adjusted return than buying back your stock today here in the $0.12 range?

Paul Burner

Hi. Yes, I mean I obviously it depends upon the assumptions that go into the IRR model, but that’s the very reason that we’re retaining the capital. I mean that’s our first priority is to deploy it and you know have an internal rate of return exceeding 15% through growing the franchise and adding to the franchise. But that really is preferable other things being equal to a share repurchase.

Steven Alexopoulos – JP Morgan Chase & Co.

Okay. And maybe just one final one, are you able guys able to do due diligence in acquisitions today before you – are you in a stage with Smithtown and LSB where you could do that or do we need to have these close or the system conversions take place?

John Barnes

No, no, absolutely. We’re more than able to do that.

Steven Alexopoulos – JP Morgan Chase & Co.

Okay, thanks.

Operator

Ladies and gentlemen, this will conclude the time we have for questions. I’d now like to turn the call back to Mr. Goulding for closing remarks.

Peter Goulding

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

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes your presentation. You may now disconnect. Good day.

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