DBRS: People’s United 2Q14 Operating Earnings Higher, Reflecting Positive Operating Leverage

Summary:
• 2Q14 operating net income of $59.9 million was up sequentially from $56.5 million in 1Q14 reflecting positive operating leverage.
• Loan growth remains strong, but is pressuring the Company’s funding profile.
• DBRS rates People’s United Financial, Inc. Issuer & Senior Debt at A (low) with a Stable trend.

DBRS, Inc. (DBRS) views People’s United Financial, Inc.’s (People’s or the Company) 2Q14 results as improved quarter-over-quarter (QoQ) reflecting positive operating leverage and strong loan growth of 13.4% (annualized). Nonetheless, the Company’s strong loan growth continues to outpace deposit gathering putting pressure on its funding profile. DBRS notes that excluding non-core brokered deposits, total deposits declined in the seasonally lower second quarter. Improving the funding profile remains a primary challenge for People’s, especially since loan pipelines remain strong.

The Company announced a joint venture with Vantiv, Inc. called People’s United Merchant Services, which will offer customers a comprehensive suite of payment solutions. People’s contributed its entire portfolio of merchant contracts to the venture that previously had no book value, resulting in a one-time $21 million pre-tax gain. People’s should benefit from a stronger sales effort to existing and potential clients, as well as from Vantiv, Inc.’s expertise, technology and security.

Operating (core) revenues increased approximately 1% QoQ to $304.2 million with growth in both net interest income and non-interest income. Specifically, net interest income on a fully taxable equivalent basis, increased $1 million despite continued net interest margin compression benefiting from loan growth and the extra calendar day. Commercial and industrial loan growth was particularly strong with broad-based, granular growth. Adjusted core non-interest income increased 3% primarily benefiting from higher bank service charges. Meanwhile, operating expenses were well controlled declining by 2% even with continued investments in the franchise, as well as higher compliance costs. Given positive operating leverage, the Company’s efficiency ratio improved to 61.8% from 63.9% in 1Q14.

Credit quality remains strong and continues to support the rating. Indeed, both net charge-offs and non-performing loans were at their lowest levels in six years. Meanwhile, capital remains sound even with continued balance sheet growth.

DBRS rates People’s United Financial, Inc. Issuer & Senior Debt at A (low) with a Stable trend.

Note:
All figures are in U.S. Dollars unless otherwise noted.