Most banking companies are struggling to shore up equity, but People's United Financial Inc. has the opposite problem: nearly $3 billion of excess capital.
Philip R. Sherringham, the $21.1 billion-asset Bridgeport, Conn., thrift company's chief executive, said he is searching for acquisitions.
He concedes they are hard to find now. Nevertheless, "over the next two to five years it is very possible that we double, maybe triple our asset size, and that is a statement that most banks right now can't even think about," Mr. Sherringham said in an interview last week.
People's capital and asset quality are so strong that "nothing that the credit cycle can throw at us will prevent us from executing on our expansion," he said.
However, conducting due diligence in the current market environment is tricky, Mr. Sherringham said. Potential sellers often have lofty price expectations, he said, and many potential deals would prevent People's from generating an internal rate of return of at least 20%.
But Mr. Sherringham said he has little desire to expand through other methods. For example, he will not grow in the mortgage business, as some competitors have started doing, because the returns are too low. He also said he has no plans to open branches in his overbanked market. (People's said this year that it plans to sell 20 of its 304 branches to cut expenses, though it also expects to open at least one this year.)
And the company's commercial loan book can only expand so fast, Mr. Sherringham said. "The organic opportunities certainly exist," but "if your strategy is to grow organically, it'll take you forever."
The ideal target "is a commercial-oriented" company "anywhere from Maine to Washington," he said, mapping out a territory larger than People's current New England and New York markets. He did not name potential sellers, but he did say that waiting too long might not be a good idea for his company.
Before becoming the CEO in February, after the death of John A. Klein, Mr. Sherringham had been People's chief financial officer since 2003. He will retain that job until People's finds a successor. "We are getting closer" to hiring a CFO, he said, but it might take another month for the company to make an offer.
An investment banker, who requested anonymity, cited the $17.2 billion asset Webster Financial Corp. of Waterbury, Conn., as a possible target that "would give them a huge commercial presence in Connecticut."
Acquiring the $13 billion-asset Valley National Bancorp of Wayne, N.J., "would be a bigger bite" but also would be "a good deal," the investment banker said.
A spokesman for Webster said, "We are committed to being New England's bank and are making progress toward our goal."
Valley National did not respond to a request for comment.
Theodore Kovaleff, an analyst at Sky Capital LLC, who owns People's stock, said the $8.2 billion-asset New Alliance Bancshares Inc. of New Haven, Conn., and the $6.4 billion-asset Provident Financial Services Inc. of Jersey City would make good targets. (He also owns shares in both of those companies.)
New Alliance would not discuss the speculation. Provident did not return a call for comment.
People's last acquisition was in January, when it bought the $6 billion-asset Chittenden Corp. of Burlington, Vt., for $1.9 billion.
Until the next deal comes , "the growth is coming from the commercial side" of People's, Mr. Sherringham said.
His company expects commercial and industrial loans to grow about 8% this year. There are a number of small manufacturing companies in its markets that have received "an influx of orders from Europe" because of the weak dollar, he said.
In the first quarter the manufacturing part of People's C&I loan book grew 69% from a year earlier, to $652.8 million, in part because of the Chittenden purchase. As of March 31 manufacturing made up 23% of the $2.8 billion C&I portfolio — a percentage virtually unchanged from a year earlier.
People's has not expanded its commercial real estate portfolio in three years, Mr. Sherringham said; now might be the time to expand it while paying attention to underwriting standards.
"So many conduits have gone out of that business, so many other players have pulled back, that we now get to look at deals" that were not available to People's three years ago and offer very attractive spreads, he said. People's has $4.5 billion of CRE loans on the book, $2.7 billion of which it inherited from Chittenden.
Commercial loans, excluding commercial real estate loans, make up 13.2% of its assets, a figure well below the 20% cap imposed on federal thrifts by law.
Thrifts also are barred from holding more than 10% of their assets in C&I loans larger than $2 million. Its main regulator, the Office of Thrift Supervision, has granted a waiver, but Mr. Sherringham said the limit "could be an issue in the long run" if People's expands its commercial lending at the expected rate.
Some observers said they want Mr. Sherringham to be more forceful in spending the excess cash.
James Abbott, an analyst with Friedman, Billings, Ramsey & Co. Inc., said that if People's cannot make deals, "they should be doing a lot more in the way of buybacks."
It announced a plan in April to buy back 5% of its shares.
Ken A. Zerbe, a Morgan Stanley analyst, wrote in a research report issued June 3, "We expect management to redeploy its capital through sizable share repurchases."
Sky Capital's Mr. Kovaleff said he hopes for "a sizable share buyback" this quarter.
But Mr. Sherringham was lukewarm about the idea. "As a banker, you'd prefer acquisitions to buybacks," he said, even though "buybacks are always an option."
First-quarter results from People's illustrate how the excess capital is crimping profits. Net income fell 55%, to $15.1 million, though excluding several one-time charges would raise the total to $48.3 million, he said.
The net interest margin fell 33 basis points, to 3.68%, catching some analysts by surprise.
"Six months ago, we were earning 5.25% on that cash, and now we are earning 2%," Mr. Sherringham said.
"At this point we could earn a lot more on our capital and boost our earnings in the short term. You can buy bonds that yield 13%, CDOs even more. But you'd take on more credit risk, and more liquidity risk, and interest rate risk, and I have no interest in that right now," he said. "I like to think of ourselves as old-fashioned, simple bankers."
