DBRS Rates People’s United Financial, Inc. at A (low)

DBRS has today assigned ratings to People’s United Financial, Inc. (People’s or the Company) and its principal banking subsidiary, People’s United Bank. At the request of the Company, DBRS has withdrawn its ratings on the Company’s other six banking subsidiaries that had comprised the former Chittenden Corporation (Chittenden). These bank subsidiaries include Flagship Bank & Trust Company, Chittenden Trust Company, Ocean National Bank, The Bank of Western Massachusetts, Merrill Merchants Bank and Maine Bank & Trust. Chittenden was acquired by People’s on January 1, 2008. The ratings assigned are indicated in the table below. The trend for all ratings is Stable.

People’s ratings reflect a strong New England franchise that is underpinned by significant core deposit funding, excellent asset quality and robust liquidity. As a result, DBRS believes People’s will be able to continue to deliver consistent, high quality earnings even in today’s difficult operating environment. The ratings also consider the elevated integration risk in regards to the large Chittenden acquisition and below-peer levels of non-interest income. While People’s does have significant excess capital even after the acquisition, DBRS notes that the excess capital will eventually be deployed to fund further acquisitions, stock buybacks and organic growth. The Company remains in the market for acquisitions and DBRS would not view favorably any attempt by People’s to integrate multiple acquisitions at the same time.

The Company generates strong sustainable earnings, driven by a very low cost of funds of 2.45% that has played an important role in net interest margin improvement and consistent fee-based revenues. Moreover, People’s core earnings from continuing operations reflect relative stability due to a robust and defensible core deposit base and conservative underwriting standards. Profitability metrics remain above the respective medians for banks similarly rated by DBRS. While consistent, non-interest income as a percentage of revenue trails peers.

After completing a second step conversion to a fully public stock holding company in April 2007, People’s raised $3.3 billion in capital with the intent to acquire banks in contiguous or near-contiguous markets. In June 2007, the Company announced the acquisition of Chittenden, a $7.4 billion in assets commercial bank headquartered in Burlington, Vermont. The acquisition creates a strong New England franchise with over 300 branches across six states. Included within the footprint are the leading deposit market shares in affluent Fairfield County, Connecticut and the state of Vermont. The deal combines two high-performing banks with similar businesses and balance sheets that have little overlap in terms of footprint. While this will make expense saves more difficult to achieve, the deal enhances People’s geographic diversification. Of concern, People’s has traditionally not been an active acquirer. This combined with the relatively large size of the acquisition heightens integration risk. Mitigating this concern, People’s intends to maintain Chittenden’s successful multi-bank operating structure with independent charters and branding will remain the same, which, in DBRS’s view, lessens integration risk. If poorly executed, the integration could lead to a loss of customers that would impact future earnings. DBRS is mindful that all acquisitions have some inherent risks. In the Company’s case, integration risk is higher as People’s has not been an active acquirer in the past. Concerning the integration of Chittenden as well as future acquisitions, DBRS will carefully monitor the Company’s progress in achieving a seamless integration and achieving anticipated economic benefits. DBRS will also assess the robustness of People’s operating systems and processes as well as the experience and depth of management to operate safely as a larger and geographically more diversified bank.

Once an underperforming bank, People’s has significantly improved its operating performance while decreasing credit risk since the sale of its credit card portfolio in early 2004. From 2001 to 2003, ROA averaged a weak 56 bps, while net charge-offs (NCOs) averaged almost 40 bps of average loans. Since 2005, NCOs have never been above 10 bps for the year and in Q4 2007 People’s reported a solid ROA of 1.37%. Overall, asset quality remains strong with NPAs to total loans, REO and repossessed assets of 0.29% and NCOs to average loans of 0.10%. Including Chittenden, these metrics total approximately 0.42% and 0.10%, respectively, which compares favorably with similarly rated peers.

Capital remains robust even after the acquisition. Post merger, People’s estimates the tangible equity ratio will still be close to 20%. The Company intends to pursue other acquisitions and has applied for permission to begin an early share repurchase, which will eventually erode its excess capital to levels more normal for banks in its ratings range. The Company’s liquidity position is excellent driven by sizeable core deposits and cash and cash equivalents of $3.4 billion. People’s maintains a minimal securities portfolio, but has access to ample sources of liquidity including FHLB advances.

DBRS notes that organic loan and deposit growth have been a challenge for People’s. While People’s has not needed the funding, the loan portfolio has actually decreased over the past year. The Company’s decision to sell all newly originated residential mortgages has more than offset loan growth in other asset classes. With a footprint located amongst much larger competitors and other local banks, competition will remain intense. Importantly, People’s is not suffering from any asset quality issues and has ample capital. This permits People’s to actively pursue new business in the current adverse market conditions, which should help future growth prospects.

Going forward, DBRS expects that People’s will continue to produce solid operating performance and sound financial fundamentals based on its strong balance sheet and improving fundamentals. These expectations support the Stable ratings trend. Upward ratings momentum could result from the successful integration of Chittenden and an increase in its fee income contribution. Negative ratings pressure could result from a poorly executed integration of Chittenden that results in customer attrition, another announced major acquisition prior to the complete integration of Chittenden, or marked and sustained deterioration in asset quality that would lead to weaker earnings.

People’s, a diversified financial services provider, headquartered in Fairfield County, Connecticut, reported $13.56 billion in assets, $8.9 billion in deposits and $4.5 billion in shareholders’ equity at December 31, 2007. On a combined basis, People’s/Chittenden will have approximately $21 billion in assets and $15 billion in deposits.

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