DBRS Comments on PBCT’s 4Q12 Earnings – Senior at A (low)

DBRS, Inc. (DBRS) has today commented on the 4Q12 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 $61.2 million for the quarter, down from $62.2 million in 3Q12, but up from $41.4 million a year ago. On an operating basis, excluding merger-related expenses and other non-core items, the Company reported earnings of $63.2 million in 4Q12, down from $64.4 million sequentially.

Highlights of the quarter include robust loan and deposit growth, improving asset quality, stronger fee income, and well controlled expenses. Nonetheless, People’s experienced significant net interest margin pressure with the operating margin compressing 19 basis points to 3.63%. The Company outlined six goals for 2013 that include loan growth of at least high single digits, increasing deposits at a mid-single digit rate, maintaining net interest income in the $900 million to $940 million range (implies a margin in the 3.30% to 3.40% range), holding operating expenses flat at $815 million to $825 million range all while maintaining strong asset quality and solid capital metrics.

Net interest income (FTE) declined by 3.9% during the quarter to $228.6 million, as margin pressure more than offset average earning asset growth. The operating net interest margin compressed a significant 19 basis points to 3.63% reflecting lower yields from newly originated loans, lower accretion and a slightly larger securities portfolio. Excluding accretion, the margin would have been 3.48%. With the senior debt issuance coming on during the quarter and lower yielding securities added at the end of 4Q12, margin pressure is likely to continue in 1Q13. Moreover, while the strong loan growth helps overall net interest income, the loans yields on new originations are lower, which will also contribute to margin pressure in 2013.

Positively, loan growth remains robust. Indeed, loans grew an annualized 13.3% during the quarter driven primarily by C&I and CRE loans, which accounted for a combined 82% of the $1.1 billion of loans originated in 4Q12. C&I growth was particularly strong within the Company’s equipment finance businesses and within mortgage warehouse lending.

During the quarter, residential mortgage originations totaled $491 million, of which $228 million was sold. 86% of the $263 million of mortgages retained were hybrid, adjustable rate mortgages. Underwriting standards remain strong with 4Q12 originations having an average FICO score of 760 with an average LTV of 65%. Positively, the pipeline is modestly stronger, and the Company expects strong mortgage banking activity to last at least through the early part of 2013.

Deposit growth remains strong growing an annualized 7.3% during the quarter with both retail and commercial balances contributing. Moreover, the mix continues to improve, which has allowed to the Company to reduce deposit costs, especially in acquired markets. Positively, management noted that the acquired New York branches have seen deposit balances grow a very robust 28% (annualized) in 2012.

Non-interest income increased $2.9 million to $84.3 million even with seasonally weaker insurance revenues and lower bank service charges that were impacted by Sandy when the Company elected to waive certain fees. The increase was driven by larger gain on loan sales and higher loan prepayment fees.

Operating expenses remain well controlled. Indeed, operating expenses declined by $1.2 million to $204.5 million during the quarter reflecting lower REO expenses and lower incentive costs. Despite lower expenses, the Company’s efficiency ratio was 63.1%, up from 61.4% in 3Q12.

Asset quality metrics improved during the quarter. Non-performing assets as a percentage of originated loans, REO and repossessed assets decreased to a strong 1.48% compared to 1.59% in 3Q12 with declines across all commercial banking segments more than offsetting increases in retail segments that were primarily driven by the new OCC guidelines regarding the treatment of real estate loans to consumers who filed for bankruptcy. Meanwhile, net charge-offs remain very manageable at 0.19% of average loans. DBRS notes that non-performing loans in the acquired portfolio have declined by half to $181.6 million since the end of 2010. Overall, the Company’s $15.1 million provision represented just 13% of adjusted income before provisions and taxes, which is indicative of a healthy balance sheet.

Even with balance sheet growth and a high dividend payout ratio, capital remains strong. Specifically, the Company’s tangible stockholder’s equity to total assets ratio declined to 10.2% from 11.2% during the quarter. In 4Q12, the Company repurchased $56 million of common stock and announced a new authorization plan to repurchase another 10% of its outstanding shares. The repurchases will be financed by the recent $500 million senior notes issuance, as well as current cash on the balance sheet.

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

[Amended on May the 23rd, 2014 to remove unnecessary disclosures.]