DBRS Comments on People’s United Financial, Inc.’s 2Q13 Earnings – Senior at A (low)

DBRS, Inc. (DBRS) has today commented on the 2Q13 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 $62.1 million for the quarter, up from $52.5 million in 1Q13, but down from $64.6 million a year ago. On an operating basis, excluding merger-related expenses and other non-core items, the Company reported earnings of $62.4 million in 2Q13, up from $57.9 million sequentially.

Highlights of the quarter include positive operating leverage, robust loan growth, solid deposit growth, and continued improvements in asset quality. As previously signaled, the Company aggressively repurchased shares during the quarter, as it looks to deploy its excess capital. Positively, the Company noted that the branches it acquired last year in Southern New York have performed better than originally expected.

Despite the operating net interest margin declining another five basis points to 3.33%, net interest income increased $1.6 million to $220.9 million reflecting robust loan growth. The Company noted that it believes the margin has now largely stabilized, but modest pressure should persist in 2H13. As a result of the stabilizing margin, expected continued loan growth should make it easier to grow revenues.

For 2Q13, strong commercial banking loan growth, and to a lesser extent, retail loan growth, more than offset runoff in the acquired portfolios resulting in annualized loan growth of 12.7%. Commercial real estate (CRE) was the primary driver comprising 66% of the $906 million of originated loan growth in the quarter with almost all of the growth coming from New York CRE. The Company noted that most of its CRE portfolio is nicely diversified with most relationships well below $25 million. While C&I growth was less pronounced, it was broad based with growth seen in equipment finance, asset-based lending, and warehouse lending.

Noninterest income was $86.1 million, an increase of $3.2 million from 1Q13. Results included a $5.8 million net gain on the sale of acquired loans. Bank service charges and investment management fees reported increased during the quarter, but insurance revenues (seasonally weaker in 2Q & 4Q) and net gains on the sale of residential mortgages were down sequentially. While gains on residential mortgage sales were down sequentially, the residential mortgage pipeline is 5% higher than last quarter with 69% of the pipeline being jumbo in nature.

Operating expense were $205.4 million, up $1.4 million from 1Q13 levels. The modest increase in operating expenses primarily reflected the timing of certain advertising and promotion expenses. Overall, the efficiency ratio improved to 62.7% from 64.1% in 1Q13 benefitting from higher revenues. The Company remains focused on achieving a 55% efficiency ratio in 4Q14.

Deposits grew $190 million to $22.0 billion. The Company has done a good job bringing the cost of deposits down in its newer markets, while improving the overall deposit mix. Indeed, the cost of acquired deposits has declined by 17 basis points, or almost 20%, over the past year.

Asset quality remains strong and improved during the quarter. Non-performing loans (NPLs) in the acquired portfolio declined $21.7 million, or 12%, during the quarter. At $159.0 million, acquired NPLs are down by 33% over the past year. Within the originated loan portfolio, NPLs were 1.18% of loans, while NPAs were 1.33% of originated loans, REO and repossessed assets. Meanwhile, net charge-offs (NCOs) were $10.8 million, or 0.19% of average loans and leases, compared to 0.24% in 1Q13. DBRS notes that $4.3 million of NCOs were related to loans with specific reserves established in earlier periods. Overall, the provision for loan losses was $9.2 million.

The Company repurchased 11.2 million shares at a weighted average price of $13.63 leaving 11 million shares of common stock available for repurchase under existing authorization. Despite the aggressive share repurchases during the quarter, capital remains strong. Indeed, the Company’s tangible common equity to tangible assets ratio was 8.7%. While still strong, DBRS notes that capital metrics are no longer a positive outlier within the Company’s rating category.

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

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