HCBK (MM)

Regional bank People's United Financial Inc. (PBCT) announced its second-quarter 2011 operating earnings per share of 17 cents, outpacing the Zacks Consensus Estimate by 2 cents. Moreover, earnings compared favorably with 15 cents per share in the prior quarter and 9 cents per share in the prior-year quarter.

The modest improvement in results was attributed to lower provision for loan losses, higher net interest income and enhanced revenue, partly offset by higher non-interest expenses.

Operating income reported was $57.3 million compared with $53.8 million in the prior quarter and $31.8 million in the prior-year quarter. Including after-tax merger-related expenses and executive-level separation costs of $6.1 million, net income came in at $51.2 million or 15 cents per share in the second quarter of 2011.

Performance in Detail

In the second quarter of 2011, net interest income reported was $221.2 million, up 27.3% year over year, attributed to higher net interest margin (NIM) in spite of historically low interest rate environment and the company's asset sensitive balance sheet. Moreover, net interest income also inched up 0.4% sequentially.

Net interest margin increased 44 basis points year over year to 4.13%, due to lower cost of deposits and an increase in investment income. However, margin decreased 3 basis points sequentially, reflecting repricing pressure within the loan portfolios.

Non-interest income was $76.6 million, up 2.7% sequentially and 9.9% year over year. Increased income reflects improvement in fee-based businesses coupled with other gains on sales of acquired loans. Weakness in insurance revenue and lesser gains on sales of residential mortgages were the negatives.

Total revenue reported was $297.8 million in the quarter, up from $294.9 million in the prior quarter and $243.5 million in the prior-year quarter. However, revenue results were modestly below the Zacks Consensus Estimate of $298.0 million.

Non-interest expense inched up 2.1% year over year to $207.0 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. Further, expenses also surged up 2.1% sequentially driven by higher merger-related expenses.

Credit Metrics

People’ United witnessed a mixed credit quality during the reported quarter. The company reported $14.0 million of provision for loan losses, down from $14.6 million in the prior quarter and $17.8 million in the prior-year quarter.

However, net loan charge-offs totaled $15.5 million, up from $9.6 million in the prior quarter. Net loan charge-offs as a percentage of average loans on an annualized basis were 0.35%, up 13 basis points sequentially.

As of June 30, 2011, People's United's nonperforming loans totaled $258.8 million and the ratio of nonperforming loans to total loans was 1.69% compared with $240.5 million and 1.62%, respectively, as of March 31, 2011. This was higher than $219.7 million and 1.57%, respectively, as of June 30, 2010.

Nonperforming assets (excluding acquired non-performing loans) totaled $315.4 million as of June 30, 2011, up from $292.1 million in the prior quarter and $284.5 million in the prior-year quarter. Nonperforming assets were 2.05% of total loans, REO and repossessed assets compared with 1.96% in the previous quarter and 2.02% in the year-ago quarter.

Capital Ratios

In the second quarter of 2011, return on average assets was 0.82% and return on average tangible stockholders' equity was 6.3%, down from 0.84% and 6.4%, respectively, in the prior quarter.  As of June 30, 2011, People's United’s tangible equity ratio remained stable at 13.9%.

Dividend Update

Concurrent with the press release, the board of People's United declared a quarterly dividend of 15.75 cents per share, payable on August 15, 2011 to shareholders as of August 1, 2011. Based on the closing stock price on July 20, the dividend yield came in at 4.7%.

Competitor’s Performance

Within People’s United’s peer group, Hudson City Bancorp Inc.’s (HCBK) second-quarter 2011 operating earnings came in at 19 cents per share, outpacing the Zacks Consensus Estimate by a penny. However, this compares unfavorably with the earnings of 29 cents in the prior-year quarter. Hudson City reported an operating income of $96.0 million compared with $142.6 million in the prior-year quarter. Operating earnings were primarily affected by lower interest and dividend income, substantial decrease in non-interest income and increased non-interest expense. However, lower interest expense and reduced provision for loan losses were among the positives.

Our Take

During the quarter, People's United completed the acquisition of Massachusetts-based Danvers Bancorp Inc., though second-quarter and six month results do not include the results of Danvers. The company paid 18.5 million shares of common stock and $214.5 million in cash for the acquisition.

With People's United’s existing presence in Massachusetts, Danvers Bancorp makes it New England’s largest independent bank and the seventh largest bank, both in Massachusetts and Boston MSA.  Danvers Bancorp, a high-quality commercial institution, offers an excellent platform for growth and balances the company’s continuous footprint from Worcester, in central Massachusetts, through Boston and New Hampshire. People's United expects the transaction, which marks a platform of growth for the company, to be accretive to operating earnings with an Internal Rate of Return (IRR) greater than 15%.

People's United is trying to overcome the challenging economic environment through opportunistic acquisitions. Recent acquisitions coupled with reported positive earnings reflect its strength in capital and liquidity of the company. Though credit metrics remained volatile, loan portfolio and deposits growth acted as positives during second-quarter 2011. Moreover, we believe People's United’s earnings will improve based on synergy gains resulting from the completed acquisitions.

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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