Dear Mr. Berko: My broker recommends that I buy 500 shares of People United Financial Inc. that sells for $19.40, roughly a $10,000 investment. He says the stock has done well in the past five years, that management is acquisition-minded and that this bank has a good balance sheet because it has no subprime loans. He thinks this is one of the good banks and that the stock could move to between $23 and $25 this year as the subprime fiasco begins to wind down. Please give me your thoughts. — D.G., Syracuse, N.Y.

Dear D.G.: Peoples United Financial Inc. (PBCT-$18.43) is a Bridgeport, Conn.-based regional bank holding company with an attractive balance sheet, a strong capital position and, yes, zero subprime exposure. I guess small-town banks from the original 13 states don't cotton to the breed of bigger Yankee banks that troll the gutters for profits.

Unlike Bank of America, Citigroup, Wachovia and the like, PCBT's Tier 1 capital, the heartbeat measure of a banks' health, is almost five times the FDIC's criteria for "well capitalized." In fact PBCT's cash position exceeds 45 percent of the company's market capitalization. Founded in 1842, this blue blood bank has 302 branches in Massachusetts, New Hampshire, Maine, Vermont and Connecticut. Its January purchase of Vermont's Chittenden Bank should push gross revenues from $893 million in 2007 to about $1.26 billion in 2008 and improve earnings from 51 cents a share in 2007 to an expected 60 cents for 2008. And if PCBT management continues to reduce costs and improve economies of scale, the worker bees at Standard & Poor's believe PBCT can earn 75 cents in 2009. The shares trade at 1.3 times its $15.50 book value; its loans equal its deposits; net interest margins are about 3.8 percent, there are 340 million shares out; and the 60 cent dividend, which exceeds 2007 earnings by 9 cents, yields 3.3 percent. Janney Montgomery Scott LLC has a "buy" recommendation on PBCT, Keefe Bruyett & Woods Inc. is neutral while Standard & Poor's gives it a 5-star ranking and suggest the stock will trade at $20 this year.

People United has had a good five year-run. It split twice — 3-for-2 in 2005 and 2-for-1 in 2007 — and a $10,000 investment made in 2005 would be worth $32,000 today. Not bad, that!

The shares have had a good run, as your broker indicated, but most banks enjoyed similar successes during the past five years. However, I'm not interested in this bank's past because its future is where its importance lies.

So, at a trailing profits-to-earnings ratio of 35 and a dividend payout 20 percent higher than earnings I would not be a buyer. The investment services following PBCT believe revenues and earnings will rise but I'm not as sanguine about its share price.

I think PBCT's loan growth (recent acquisition included) will be in the low double digits this year and I think that its loan loss ratio will increase significantly over 2008. Banks make money by lending money at rates higher than their money costs. But I don't see much loan demand this year or next. The consumer is over his bellybutton by half with installment debt, and in inflation-adjusted dollars the consumer is earning less than he did five years ago. He's really pulling in his horns.

The government inflation rate is 5.4 percent but the real inflation rate is closer to 8.9 percent. The Government reports unemployment at 6.1 percent however the real unemployment rate is closer to 10.3 percent and rising. The housing market is collapsing, credit card delinquencies are reaching epidemic levels and an increasing number of borrowers are falling behind in their home equity loans. This scenario suggests that PBCT and other banks will not experience meaningful loan growth.

While there is much good to be said about PBCT, I cannot say that its earnings and its consumer loan growth will be meaningful. That is why I disagree with your broker. The stock will trade at the $23 range this year. However, the next two years could be good for PBCT to make acquisitions in New Hampshire, Maine and Vermont, build its deposit base and grow its loan portfolio via acquisition. But this year does not look like a good year for you to buy the stock.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, FL 33429 or e-mail him at malber@comcast.net. To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.

COPYRIGHT 2008 CREATORS SYNDICATE, INC.

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