DBRS Comments on the Q2 2009 Earnings of People’s United Financial, Inc. – Senior at A (low)

DBRS has today commented on the Q2 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 $27.4 million for the quarter, up modestly from $26.7 million in the previous quarter, but down from $43.0 million in Q2 2008. Securities gains, higher bank service charges and strong mortgage banking results more than offset higher loan loss provisioning, margin compression and an FDIC special assessment of $8.4 million resulting in a return of average tangible assets of 0.57%. DBRS notes that People’s benefited from strong deposit and core loan growth during the quarter, which demonstrates franchise strength, as People’s continues to take advantage of its fortress balance sheet.

While asset quality remains a strength, the Company is not immune to the recession and has seen levels of nonperforming assets (NPAs) increase over the past several quarters. In addition to the one large $16.9 million share national credit (SNC) that the Company detailed on its last quarterly call, residential mortgages and PCLC (the Company’s equipment financing business) contributed to the $40 million increase in total NPAs. NPAs now represent 1.25% of loans, REO and repossessed assets compared to 0.97% in Q1 2009 and 0.60% a year ago. Positively, net charge-offs (NCOs) were down modestly to $6 million, or 0.16% (annualized) of average loans, from the prior quarter. Given the environment, management prudently increased the loan loss reserve by 6 basis points (bps) to 1.15% of total loans. Looking forward, the Company is most concerned with Commercial Real Estate and PCLC, but still believes loss content within the overall loan portfolio will be minimal given its sound underwriting even with increasing NPAs.

Average deposits grew a robust $540 million, or 15% annualized, during the quarter. This extra liquidity was invested in Fed Funds, which had a negative carry. As a result, the net interest margin (NIM) declined another 13 bps to 3.12% during the quarter. With attractive loan yields, deposit costs repricing lower, combined with the fact that the Fed can not lower interest rates any further, should help the margin expand in coming quarters. Meanwhile, loans excluding the SNC portfolio grew 6% (annualized) during the quarter, as the Company remains a willing lender to creditworthy customers.

Management continues to believe that acquisitions are the best use of excess capital rather than repurchasing shares. Acquisitions within the Northeast corridor that runs from Maine to Washington D.C. remains the primary focus, but the Company stated it would entertain FDIC-assisted deals out of footprint, if the deal made financial sense. People’s does expect to see more potential opportunities over the remainder of the year, even with the recent market rally in bank stocks.

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 continue generating operating results and maintaining credit fundamentals expected of banks in its rating range.

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.