DBRS Comments on People’s United Financial, Inc.’s 1Q13 Earnings – Senior at A (low)

DBRS, Inc. (DBRS) has today commented on the 1Q13 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 $52.5 million for the quarter, down from $61.2 million in 4Q12, and from $57.3 million a year ago. On an operating basis, excluding merger-related expenses and other non-core items, the Company reported earnings of $57.9 million in 1Q13, down from $63.2 million sequentially.

Highlights of the quarter include strong loan growth, modest deposit growth, and solid expense control. Nonetheless, adjusted revenue declines outpaced expense declines sequentially resulting in modest negative operating leverage.

Net interest income declined $5.8 million to $219.3 million during the quarter primarily driven by lower interest income on acquired loans. Despite higher average earning asset balances in 1Q13, the operating net interest margin contracted a significant 25 basis points during the quarter to 3.38%, which was in line with Company guidance. Lower asset yields, the negative impact of two less days in the quarter, lower net interest income on acquired loans, and a full quarter of interest expense associated with the December 2012 senior note issuance all contributed to the margin decline. Management believes the Company’s net interest margin has finally stabilized, which should help net interest income grow in coming quarters given the Company’s demonstrated ability to generate loan growth.

Positively, the Company delivered strong loan growth of $424 million (8% annualized growth) sequentially primarily driven by Commercial Banking, and to a lesser extent, Retail, despite the continued contraction of the acquired loan portfolio, which declined by $155 million. Commercial real estate drove the majority of the growth. Moreover, pipelines remain strong and the acquired loan portfolio run off is becoming less pronounced.

Non-interest income declined $1.4 million following a strong 4Q12 to $82.9 million with only insurance and brokerage commissions increasing during the quarter.

Expenses were well controlled despite the first quarter having seasonally higher expenses. Specifically, operating expenses of $204.0 million were down modestly in the quarter even with payroll related costs increasing by $2.7 million. DBRS notes that People’s recently closed five branches, four of which were related to the Citizens branch acquisition, to help control costs. Overall, the Company’s efficiency ratio was 64.1% and management remains focused on achieving its goal of having a 55% efficiency ratio by the end of 2014.

Asset quality remains very sound. Indeed, for the originated loan portfolio, non-performing assets were 1.42% of originated loans, REO and repossessed assets at March 31, 2013, an improvement from 1.48% at year-end. Meanwhile, net charge-offs (NCOs) increased during the quarter to 0.24% of average annualized loans from 0.19% in 4Q12. However, excluding $3.3 million of acquired loan charge-offs, NCOs would have been relatively stable at 0.18% of average loans. The provision for loan losses was relatively stable at $12.4 million. With loan growth and charge-offs exceeding the provision, the originated allowance for loan losses declined to a still sufficient 0.88% of originated loans.

People’s remains aggressive in returning capital to shareholders, but capital still remains strong. Indeed, the Company’s tangible common equity ratio was 9.6% at March 31, 2013. DBRS notes that the Company raised its annual dividend to $0.65 per share, or $0.1625 quarterly. In addition to its high dividend payout, People’s repurchased 11.1 million shares during the quarter at a total cost of $144 million leaving 22.3 million shares available to repurchase under the current share repurchase authorization. DBRS expects the Company to continue to aggressively return capital to shareholders while capital metrics remain above those of similarly rated peers.

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

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