HCBK (MM)

Regional bank  People's United Financial Inc. (PBCT) announced its first-quarter 2011 operating earnings per share of 15 cents, outpacing the Zacks Consensus Estimate of 12 cents per share. Moreover, earnings compared favorably with 10 cents per share reported in the prior quarter and 8 cents per share in the prior-year quarter.

Operating income reported was $53.8 million compared with $36.7 million in the prior quarter and $29.2 million in the prior-year quarter. Including pre-tax merger-related expenses, core system conversion costs and one-time charges of $2.1 million, net income came in at $51.7 million or 15 cents per share in the first quarter of 2011.

The modest improvement in results was attributed to lower non-performing assets, higher net interest margin (NIM) and enhanced revenue, partly offset by higher non-interest expenses and increased provision for loan losses.

Performance in Detail

In the first quarter of 2011, net interest income reported was $220.3 million, up 16% sequentially and 38% year over year, attributed to higher net interest margin in spite of historically low interest rate environment and the company's asset sensitive balance sheet.

Net margin increased 29 basis points sequentially and 67 basis points year over year to 4.16%, due to lower cost of deposits, an increase in investment income and benefit from two acquisitions completed during the prior quarter. Further, additional interest from the Financial Federal acquisition driven by better-than-expected credit experience and slower than projected pre-payment activity added to the positives.

Non-interest income was $74.6 million, up 9.5% sequentially and up 16.1% year over year. The completion of all the acquisitions in 2010 aided to the increased income.

Total revenue reported was $294.9 million in the quarter, up from $257.9 million in the prior quarter and $223.8 million in the prior-year quarter. Moreover, revenue results also outpaced the Zacks Consensus Estimate of $285.0 million.

Non-interest expense inched up 1.9% over the prior quarter and 4.6% year over year to $202.8 million. The increase in expenses was attributable to higher compensation and benefits expenses and occupancy and equipment expenses, partially offset by lower professional and outside service fees and merger-related expenses.

Credit Metrics

In the first quarter of 2011, People's United reported $14.6 million of provision for loan losses, up from $10.9 million in the prior quarter and $9.5 million in the prior-year quarter.

During the reported quarter, net loan charge-offs totaled $9.6 million compared with $10.9 million in the prior quarter and $9.5 million in the prior-year quarter. Net loan charge-offs as a percentage of average loans on an annualized basis were 0.22%, down 6 basis points sequentially and 4 basis points year over year.

As of March 31, 2011, People's United's nonperforming loans totaled $240.5 million and the ratio of nonperforming loans to total loans was 1.62% compared with $245.2 million and 1.70%, respectively, as of December 31, 2010. This was higher than $192.3 million and 1.36%, respectively, as of March 31, 2010.

Nonperforming assets (excluding acquired non-performing loans) totaled $292.1 million as of March 31, 2011, down 3.6% sequentially, but up 17.7% from the prior-year quarter. Nonperforming assets were 1.96% of total loans, REO and repossessed assets, compared with 2.09% in the previous quarter and 1.75% in the year-ago quarter.

Capital Ratios

In the first quarter of 2011, return on average assets was 0.84% and return on average tangible stockholders' equity was 6.4%, up from 0.56% and 3.7%, respectively, in the prior quarter.  As of March 31, 2011, People's United’s tangible equity ratio was 13.9%, down from 14.1% in the prior quarter and 18.7% in the prior-year quarter.

Dividend Update

The company's board of directors voted to increase the common stock dividend to an annual dividend rate of 63 cents per share.

The board of People's United declared a quarterly dividend of 15.75 cents per share, payable on May 15, 2011 to shareholders as of May 1, 2011. Based on the closing stock price on April 19, the dividend yield came in at 4.9%.

Competitor’s Performance

Within People’s United’s peer group, Hudson City Bancorp’s (HCBK) first-quarter 2011 operating earnings came in at 19 cents per share, substantially ahead of the Zacks Consensus Estimate of a massive loss. However, this compares unfavorably with the earnings of 30 cents in the prior-year quarter. The company completed the restructuring of its balance sheet during the quarter. This move has reduced after-tax earnings by $649.3 million. Considering all the non-recurring items, Hudson City reported a GAAP net loss of $555.7 million or $1.13 per share. Operating earnings were primarily affected by lower interest and dividend income, and increased non-interest expense. However, lower interest expense, reduced provision for loan losses and a substantial increase in non-interest income were among the positives.

Our Take

Overall, People's United is trying to overcome the challenging economic environment through opportunistic acquisitions and improving NIM. The completion of acquisitions coupled with reported positive earnings reflects strength in capital and liquidity of the company. Further, the company's operating leverage and balance sheet remain responsive to improving credit quality, decreasing non-performing assets and lowered its net charge-offs.

People's United currently retains its Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. Considering the fundamentals, we are maintaining our ‘Neutral’ recommendation on the stock.

 
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