DBRS Comments on the Q3 2009 Earnings of People’s United Financial, Inc. – Senior at A (low)

DBRS has today commented on the Q3 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 $26.8 million for the quarter, up from $25.3 million in the previous quarter, but down from $46.0 million in Q3 2008. On a sequential quarter basis, net interest margin expansion, better results from fee-based businesses and solid expense control (even excluding the Q2 2009 FDIC special assessment) more than offset incremental provisioning costs of $7.5 million and lower securities gains. Net income of $26.8 million equated to a return of average tangible assets of 0.53%. Other highlights of the quarter include continued solid deposit and core loan growth. DBRS notes that the core loan growth is being more than offset by lower balances in the shared national credit (SNC) and residential mortgage portfolios, which the Company stopped portfolioing at the end of 2006. This dynamic combined with deposit growth, has resulted in People’s using the excess funding to grow the securities portfolio and increase earning assets.

Nonperforming assets (NPAs) and net charge-offs (NCOs) continue to increase given the difficult operating environment, but asset quality remains a relative strength to most other banking peers. More importantly, there are signs of credit stabilization at the Company. During the quarter, NPAs increased within the commercial real estate, equipment financing and consumer portfolios. The $192.7 million in NPAs represents 1.35% of loans, REO and repossessed assets compared to 1.25% in Q2 2009 and 0.64% a year ago. Meanwhile, NCOs increased $10 million during the quarter to 0.44% of average loans (annualized) from 0.16% in the second quarter. NCOs included $6.1 million, or 38% of all NCOs, related to one SNC in Florida. DBRS notes that the SNC portfolio totaled $614.2 million and has been in run-off mode since early 2008. Moreover, Company has only two SNC construction loans in Florida totaling less than $30 million. Provisions exceeded charge-offs by $5.5 million, which built the loan loss reserve as a percentage of total loans to an adequate 1.21%, especially given the signs of stabilization and a conservatively written loan portfolio. Asset quality clearly remains a strength for People’s and has allowed them to actively pursue new creditworthy relationships.

The Company’s net interest margin (NIM) finally expanded after a year of contraction. Specifically, NIM increased 7 basis points during the quarter to 3.65%. NIM benefited from lower deposit costs and better spreads on newly originated loans. Loan spreads should remain higher than normal as many competitors are not actively lending to protect capital, which should benefit NIM even in this low rate environment and the Company’s asset-sensitive balance sheet.

While talks over prospective deals picked up during the quarter, People’s has yet to announce a transaction. However, management did indicate they felt a deal was more imminent than in the past. The Company’s priority remains buying a commercially-oriented bank within the Northeast corridor that runs from Maine to Washington D.C. Additionally, management feels it has the breadth and depth to smoothly integrate and operate an FDIC-assisted deal out-of-footprint and will pursue deals that are attractive financially. Non-banks such as asset managers and finance companies are under consideration as well. With $2.5 billion in excess capital, People’s could acquire approximately $40 billion in assets, either through a large transaction or multiple smaller ones, without needing to raise additional capital.

DBRS notes that quarterly results for the prior three quarters had to be revised as the Company was inadvertently under accruing certain operating expenses. The cumulative reduction in earnings totaled $6.3 million, which is not material.

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.