DBRS Comments on the Q1 Earnings of People’s United Financial, Inc. – Senior at A (low)

DBRS has today commented on the Q1 2009 earnings of People’s United Financial, Inc. (People’s or the Company). DBRS rates the Company’s Issuer & Senior Debt at A (low) with a Stable trend. People’s reported net income of $26.7 million for the quarter, down from $35.4 million in the previous quarter, but up from $15.1 million in Q1 2008. Continued margin pressure and lower fee income led to lower earnings on a sequential quarter basis. In the year ago quarter, the Company incurred significant merger-related and other one-time charges that more than offset higher net interest income. While financial fundamentals have deteriorated from historically low interest rates and a recessionary economy, People’s is facing today’s difficult operating environment from a position of strength and should be one of the beneficiaries once the environment begins to improve.

Asset quality deteriorated, but remains strong relative to other banking peers. Specifically, nonperforming assets (NPAs) increased approximately 50% to $142 million during the quarter. The increase was primarily related to one large shared national credit (SNC) and residential mortgage loans. As a result, NPAs reached 0.97% of loans, REO and repossessed assets in the first quarter compared to 0.64% in Q4 2008 and 0.46% a year ago. After the quarter closed, another SNC went to nonaccrual status, which would have increased NPAs to 1.08% of loans, REO and repossessed assets. DBRS notes that the $672.3 million SNC portfolio is in run-off mode and had not encountered any credit problems until just recently. Meanwhile, net charge-offs remained low 0.18% of average loans (annualized) compared to 0.16% for the fourth quarter and 0.08% a year earlier. The Company does not expect any losses resulting from the Q1 nonperforming SNC nor a large increase in absolute NCOs going forward. Loan loss provisioning exceeded NCOs resulting in a modest reserve build to 1.09% of total loans.

With the net interest margin (NIM) compressing 30 basis points to 3.25% during the quarter, net interest income declined $10.5 million despite solid core loan growth. Excluding the excess capital, the NIM would have been 3.66%, a decrease of 28 basis points from Q4 2008. With the Fed unable to lower interest rates any further, NIM should be at or near bottom, especially given the improvement in loan spreads.

Besides lower net interest income, sequential quarterly earnings were also hurt by lower non-interest income. Specifically, lower investment management fees and bank service charges more than offset incremental one-time securities gains of $5.2 million. Overall, the $26.7 million in net income equated to a return on tangible assets of 0.57% and a return on assets of 0.53%.

During the quarter, People’s announced plans to convert its core banking systems to Metavante. The systems conversions are expected to take place in Q1 2010 for the Southern New England franchise followed by the Northern New England franchise in Q2 2010. Once converted, the Company expects at least $16 million in annualized savings.

The Company still plans on deploying its excess capital into an acquisition, but is in no hurry to rush into a deal given the difficult operating environment. DBRS notes that People’s did increase its annual stock dividend by one penny a share at a time when most banks have cut their dividends substantially.

Given the Company’s strong New England franchise that is underpinned by significant core deposit funding, strong asset quality, excess capital and robust liquidity, DBRS believes People’s will to continue generating operating results and maintaining credit fundamentals expected of banks in its rating range.

Note:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodologies are Rating Banks and Bank Holding Companies Operating in the United States, and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.