DBRS Comments on People’s United Financial, Inc.’s 3Q13 Earnings – Senior at A (low)

DBRS, Inc. (DBRS) has today commented on the 3Q13 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 $58.5 million for the quarter, down from $62.1 million in 2Q13 and from $62.2 million a year ago. On an operating basis, excluding merger-related expenses and other non-core items, the Company reported earnings of $60.8 million in 3Q13, down from $62.4 million sequentially.

People’s delivered solid loan (6.3% annualized sequential growth and the Company’s 12th consecutive quarter of higher loan balances) and deposit (3.8%) growth and very modest revenue growth. DBRS notes that absent the $260 million decline in mortgage warehouse lending, loan growth would have been more robust at 11% annualized. Moreover, the commercial pipelines remain strong. Nonetheless, expense growth and a higher loan loss provision reflecting loan growth, not asset quality deterioration, resulted in lower sequential earnings.

Net interest income increased modestly by $2.6 million to $223.5 million sequentially, despite modest net interest margin compression and lower interest income from acquired loans reflecting loan growth. During the quarter, the net interest margin compressed three bps to 3.30%, as the extra calendar day in the quarter was more than offset by new loan volumes coming on the balance sheet at lower yields. The runoff of the higher yielding acquired loan portfolio remains a headwind, but People’s has been able to partially offset this headwind by bringing down the cost of acquired deposits. DBRS notes that with loans already exceeding deposits, the Company may not be able to be as aggressive in bringing deposit costs down, especially if loan growth remains strong.

Non-interest income declined by $2.1 million to $84.0 million. Excluding a 2Q13 non-recurring $5.8 million gain related to the sale of acquired loans, non-interest income would have increased QoQ reflecting primarily seasonally stronger insurance revenues and higher bank service charges. DBRS notes that People’s has not been reliant on mortgage banking revenues to bolster revenues and saw a decline of only $0.3 million in net gains on sales of residential mortgage loans.

Non-interest expense increased $6.7 million to $212.5 million driven primarily by a non-core $2.8 million write-down of banking house assets and higher compensation and benefits. The Company noted that it closed 7 branches during the quarter, which will provide over $2 million in cost savings per year. Given the higher expense growth relative to revenues, the efficiency ratio increased to 63.6% from 62.7% in 2Q13, but the Company anticipates improvement in the coming quarters. People’s has set an efficiency goal of 55% by 4Q14, which is looking harder to achieve given the still challenging operating environment.

Asset quality remains strong with key metrics improving sequentially. Specifically, for the originated loan portfolio, non-performing assets were 1.26% of originated loans, REO and repossessed assets; an improvement from 1.33% in 2Q13. Meanwhile, net charge-offs declined to an annualized very low 0.17% of average total loans from 0.19% sequentially. The provision for loan losses was $12.1 million, which exceeded NCOs by $2.5 million. DBRS notes that the provision was higher due to loan growth, not asset quality deterioration.

Overall, capital remains strong with a tangible common equity to tangible assets ratio of 8.5%. Under Basel III, People’s estimated its tier 1 common ratio at a healthy 11.4%. DBRS notes that the operating dividend payout ratio remains high at 83%. During the quarter, People’s slowed down the pace of its share repurchase plan. Indeed, the Company repurchased 2.1 million shares at a cost of $30 million compared to $153 million in 2Q13.

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

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