People's Nears Smithtown Merger - Analyst Blog

People's United Financial (PBCT) and Smithtown Bancorp (SMTB) are progressing well with the merger activities. The merger, which was announced in July this year will see People's United acquire Smithtown Bancorp in a cash and stock transaction. At that time, the transaction was valued at around $60 million, or $4.00 per share. The companies expect the merger to be completed on November 30, 2010. 

Smithtown Bancorp will merge into People's United, and Bank of Smithtown –Smithtown Bancorp's banking subsidiary – will simultaneously merge into People's United Bank, People's United's banking subsidiary. The actual value to be paid upon closing to each Smithtown Bancorp shareholder will depend on the average People's United stock price shortly prior to completion of the merger and certain other conditions.  

Last week, the shareholders of Smithtown Bancorp approved the merger with over 96% votes being cast in favor of the merger. All required regulatory approvals have also been received. Yesterday, the preliminary results of elections made by Smithtown stockholders for the form of merger consideration were announced. 

As of November 19, 2010, Smithtown had 14,967,508 shares of common stock outstanding. Of this, the holders of nearly 5.85 million shares or 39.1% elected to receive cash while holders of around 4.68 million shares, or 31.3%, elected to receive People's United common stock.

However, the holders of 4.413 million shares, or 29.6%, offered elections expressing no preference regarding the form of merger consideration or did not make a valid election. The merger now remains subject to the satisfaction of customary closing conditions. People's United shareholder approval is not required. 

People's United continues to benefit from a healthy business portfolio that has grown inorganically over time. While the R.C. Knox and Chittenden acquisitions continue to generate income flow, Financial Federal complements its existing business lines – particularly PCLC – its equipment financing subsidiary. Its purchase of the deposits and banking operations of Butler Bank represents an excellent opportunity for expansion in the greater Boston area.

Third Quarter Results

People's United third quarter 2010 operating earnings per share of 8 cents was below the Zacks Consensus Estimate of 10 cents. The modest sequential decrease in results was attributed to a higher provision for loan losses, partly offset by an improvement in the net interest margin (NIM), as well as lower non-interest expenses. 

Our Take 

People's United is trying to overcome the challenging economic environment through opportunistic acquisitions and a stable NIM. The announcement of recent acquisitions coupled with reported positive earnings reflects strength in capital and liquidity of the company.

However, the company's operating leverage and balance sheet remain sensitive to weak credit quality, increasing loan loss provisions and higher net charge-offs against decreasing non-interest income. 

People's United currently retains its Zacks #3 Rank, which translates to a short-term Hold rating.