DBRS Comments on People’s United Financial, Inc.’s 3Q12 Earnings – Senior at A (low)

DBRS, Inc. (DBRS) has today commented on the 3Q12 financial results 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 $62.2 million for the quarter, down from $64.6 million in 2Q12, but up from $51.5 million a year ago. On an operating basis, excluding merger-related expenses and other non-core items, the Company reported earnings of $64.4 million in 3Q12, down from $67.0 million sequentially.

Highlights of the quarter include strong loan growth, continued strong asset quality, solid non-interest revenue growth and modest positive operating leverage even with margin pressure and a full quarter’s worth of costs associated with the Citizens Financial Group branch acquisition that closed during 2Q12.

During the quarter, loans grew an annualized 8.8%, even with the acquired portfolio declining $383 million. The growth was driven by strong commercial banking growth (mortgage warehouse lending and equipment finance had strong originations), and to a lesser extent, retail growth. Moreover, loan pipelines remain strong particularly in the New York City and Boston MSAs.

While loan growth was strong, net interest income declined modestly to $234.8 million reflecting margin pressure. Specifically, the margin compressed seven basis points to 3.89% during the quarter primarily from lower loan yields. On an operating basis, the margin declined six basis points to 3.82%. The margin is likely to remain under pressure in coming quarters. Meanwhile, non-interest income improved $5.7 million to $81.4 million sequentially, primarily from higher loan prepayment fees and seasonal insurance revenues.

Expenses increased $3.2 million to $208.9 million driven by having a full quarter’s worth of expenses related to the branch acquisition in 2Q12 that added $6.9 million in the quarter in incremental expenses. Overall, core operating revenues increased 1.9%, while core operating expenses increased 1.6% resulting in modest operating leverage. Currently at 61.4%, the efficiency ratio continues to improve with the Company targeting an eventual efficiency ratio of 55%.

Asset quality metrics remain stronger than those of most banking peers. During the quarter, non-performing assets (NPAs) and net charge-offs (NCOs) both improved. Specifically, NPAs as a percentage of originated loans, REO and repossessed assets improved to a strong 1.59% compared to 1.67% in 2Q12. DBRS notes that the improvement was primarily based on loan growth, not significant improvements in NPAs, which only declined $500,000 during the quarter. The acquired portfolio saw significant improvements with non-performing loans declining $34.6 million during the quarter to $202.0 million. Meanwhile, NCOs of $9.4 million, or a very manageable 0.18% of average loans (annualized; lowest level since 2Q09), improved from $13.5 million, or 0.26%, in 2Q12. This included $4.8 million related to loans with specific reserves established in prior quarters. Peoples continued its practice of provisioning for loan losses equal to the level of charge-offs within the originated portfolio. In addition, the Company provisioned $5.7 million for the acquired portfolio.

Capital remains robust with a tangible equity ratio of 11.2%. The Company noted that it estimates that Basel III as currently understood would have a 50 basis point to 100 basis point negative impact on its risk-based capital ratios. After making multiple acquisitions, Peoples is now focused on optimizing its existing businesses and efficiently deploying capital, and management does not believe any additional acquisitions are imminent.

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

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organizations. Other methodologies used include the DBRS Criteria – Intrinsic and Support Assessments and Rating Bank Subordinated Debt and Hybrid Instruments with Discretionary Payments. All can be found on the DBRS website under Methodologies.

The sources of information used for this rating include company documents, the Federal Reserve, the Federal Deposit Insurance Corporation and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Michael Driscoll
Approver: Roger Lister
Initial Rating Date: 26 February 2008
Most Recent Rating Update: 9 August 2012

For additional information on this rating, please refer to the linking document under Related Research.