Photo: Steve Gardner

When it comes to banks, I like mine plain vanilla.

People's United Financial (NASDAQ:PBCT) is a small bank that fits squarely in plain-vanilla territory. The company's balance sheet is clean, simple, and understandable, made up primarily of loans to businesses and individuals.

Its funding sources are equally plain. Nearly a fifth of deposits are non-interest bearing, while $12.8 billion of its $28 billion in assets are sourced from savings, checking, and money market accounts paying an average of .22%. People's United Financial has the hard part of banking figured out -- its funding costs average 0.39%.

Rewarding shareholders
Perhaps the best feature of People's United Financial is its dividend. The company currently pays shareholders $0.16 per quarter, for a yield of 4.4% -- significantly more than your average bank stock. And in the past year, it's slashed its share count by nearly 8%.

But that's where the magic ends. Other than its established branch network, low cost deposits, and its dividend, People's United Financial is just another bank. In the last few years, it watched its net interest margins fall with interest rates. Declining margins plus new regulatory costs have put pressure on its expenses. This isn't a small bank problem. Even big, national banks like Bank of America have faced problems using cost cuts as a way to drive income. Bank of America's efficiency ratio teetered at 77% for 2013, well above its peers.

Expenses remain People United Financial's biggest challenge. The company's efficiency ratio last read 63.7%, although it has a long-term goal to take it down to 55%. How Peoples United Financial gets to 55% from 63.7% is a true mystery. Management has said before that it would do it by holding expenses constant, and growing assets.

Growing assets, unfortunately, often means an acquisition.

The bank that should sell, not buy
People's United Financial shouldn't be a buyer; it should be a seller. The company has plenty going for it -- charge offs are limited to 0.18% of loans, its deposits are cheap, and it owns share in some of New England's best territory for bank branches.

That makes it an easy acquisition target for any number of banks. It's a way into New England. A way into low-cost deposits. As far as digestability, its history of keeping loan losses low -- nonperforming assets haven't touched 2% of total assets in the last decade -- makes it a comfortable acquisition target.

What People's United Financial needs is an operator, someone willing to slice through its expenses and cut costs. The current management team knows this is the key to driving earnings, but cost containment hasn't provided meaningful cuts in expenses as a percentage of revenue.

From here, it seems to be a simple story. Capitalize on the bank's impressive loan performance, and potential synergies, by selling out. Or, risk a high-priced acquisition of a lower quality bank and wait for rising rates, not cost-cutting, to drive the bottom line.

It's swallow, or be swallowed. For People's United, being swallowed looks like the better alternative for shareholders. 

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Jordan Wathen has no position in any stocks mentioned. The Motley Fool recommends Bank of America. The Motley Fool owns shares of Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.