DBRS Confirms People’s United Financial, Inc. at A (low); Trend Stable

DBRS has today confirmed all ratings of People’s United Financial, Inc. (People’s or the Company) and its banking subsidiary, including the Company’s Issuer & Senior Debt rating at A (low). The trend for all ratings remains Stable. The ratings action follows a detailed review of the Company’s operating results, financial fundamentals and future prospects.

The Company’s ratings reflect its strong New England franchise that is underpinned by significant core deposit funding and strong asset quality. The ratings also take into account limited non-interest income, an upcoming systems conversion scheduled in 2010 and a shared national credit (SNC) portfolio that has begun showing signs of stress. While People’s currently has approximately $2.5 billion in excess capital, DBRS notes that the Company plans to eventually deploy this capital towards another acquisition. Consequently, DBRS does not assign any benefit to the ratings regarding the excess capital.

As the largest independent bank located within New England, the Company has created a valuable franchise with the acquisition of Chittenden Corporation (Chittenden), which closed on January 1, 2008. People’s has the top deposit market share in affluent Fairfield County, Connecticut and also maintains the largest deposit market share in Vermont. The balance sheet is supported by a low-cost funding profile that has very little reliance on wholesale funding. Indeed, at 11% (at December 31, 2008), People’s has the lowest reliance on wholesale funding among all DBRS rated banks. Positively, the balance sheet is funded almost entirely through deposits and equity. At the end of the first quarter, the Company’s cost of funds was a very low 1.42%.

Unlike most banks, asset quality remains healthy even with the up tick in nonperforming assets (NPAs) seen in Q1 2009. Specifically, NPAs increased approximately 50% to $142 million during the first 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 asset quality holding up well, the Company has not been forced to take outsized loan loss provisioning to cover NCOs and build the loan loss reserve. Consequently, People’s has remained solidly profitable through out this difficult operating period. While the recessionary economy and low interest rates have and will lower profitability relative to recent historical standards, DBRS expects People’s to perform better than most banks given the health of its balance sheet. Overall, the Company reported net income of $26.7 million in Q1 09, which equated to a return on assets of 0.53%.

Despite having wealth management, brokerage and insurance businesses, non-interest income contributed 32.4% of total revenues in 2008. This total increased to 33.6% in Q1 09, but still lags the contribution of fees exhibited by many banks within its rating category. DBRS notes that non-interest revenues have been pressured by the declines in the equity markets and lower consumer spending.

One of the main focuses of management is the upcoming core banking systems conversion. The Southern New England franchise will convert in Q1 10 followed by the Northern New England franchise in Q2 10. Once completed, the Company will finally have been able to combine the back offices of People’s and Chittenden, which will result in additional cost savings that are estimated to be at least $16 million annually. DBRS notes that systems conversions can be difficult and could potentially lead to the loss of customers if executed poorly. If successful and asset quality remains strong relative to peers, the ratings could be upgraded.

People’s United Financial, Inc., a diversified financial services provider headquartered in Fairfield County, CT, reported $20.7 billion in assets at March 31, 2009.

Notes:
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.