HCBK (MM)

Regional bank People's United Financial Inc. (PBCT) announced its third-quarter 2011 operating earnings per share of 19 cents, outpacing the Zacks Consensus Estimate by 2 cents. Moreover, earnings compared favorably with 17 cents per share in the prior quarter and 8 cents per share in the prior-year quarter.

The modest improvement in results was attributed to lower nonperforming assets and loans, higher net interest income and enhanced revenue, partly offset by higher non-interest expenses.

Operating income reported was $67.3 million compared with $57.3 million in the prior quarter and $27.7 million in the prior-year quarter. Including after-tax merger-related expenses and severance-related costs of $14.4 million, net income came in at $52.9 million or 15 cents per share in the third quarter of 2011.

People's United completed its acquisition of Danvers Bancorp Inc. (DNBK) on June 30, 2011, effective July 1, 2011. Therefore, Danvers' results of operations are included, though prior period results have not been restated to include Danvers.

Performance in Detail

Despite historically low interest rate environment and the company's asset sensitive balance sheet, net interest income reported was $240.0 million, up 36.5% year over year due to higher net interest margin (NIM).  Moreover, net interest income also inched up 8.5% sequentially.

Net interest margin increased 37 basis points year over year to 4.11% attributable to the expense management of the company. However, margin inched down 2 basis points sequentially.

Non-interest income was $84.7 million, up 10.6% sequentially and 24.6% year over year. Increased income reflects improvement in fee-based businesses coupled with addition of Danvers. Net losses on sales of loans were the negatives.

Total revenue reported was $324.7 million in the quarter, up from $297.8 million in the prior quarter and $243.8 million in the prior-year quarter. Moreover, revenue results were modestly above the Zacks Consensus Estimate of $323.0 million.

Non-interest expense increased 12.0% sequentially and 24.5% year over year to $231.9 million. The increase in expenses was attributable to higher compensation and benefits expenses, professional and outside service fees and augmented occupancy and equipment expenses and increased merger-related expenses.

Credit Metrics

People’ United witnessed a mixed credit quality during the reported quarter. The company reported $14.4 million of provision for loan losses, up from $14.0 million in the prior quarter and down from $21.8 million in the prior-year quarter.

However, net loan charge-offs totaled $13.4 million, down from $15.5 million in the prior quarter. Net loan charge-offs as a percentage of average loans on an annualized basis were 0.27%, up 8 basis points sequentially.

As of September 30, 2011, People's United's nonperforming loans totaled $241.6 million and the ratio of nonperforming loans to total loans was 1.60% compared with $250.4 million and 1.69%, respectively, as of June 30, 2011. This was also lower than $359.8 million and 1.77%, respectively, as of September 30, 2010.

Nonperforming assets (excluding acquired non-performing loans) totaled $305.2 million as of September 30, 2011, down from $315.4 million in the prior quarter and $312.0 million in the prior-year quarter. Nonperforming assets were 1.88% of total loans, REO and repossessed assets compared with 2.05% in the previous quarter and 2.19% in the year-ago quarter.

Capital Ratios

In the third quarter of 2011, return on average assets was 0.98% and return on average tangible stockholders' equity was 6.3%, up from 0.50% and 2.7%, respectively, in the prior-year quarter.  As of September 30, 2011, People's United’s tangible equity ratio decreased to 12.5% from 17.8% in the prior-year quarter.

Capital Deployment Update

During the quarter, with the share repurchase of 15.8 million shares of common stock at an average price of $11.81 per share, People's United completed the stock repurchase authorization announced in January 2011.  Moreover, the company approved an additional share repurchase authorization, under which up to 5% of the company's common stock outstanding, or 18 million shares, can be repurchased.

Concurrent with the press release, the board of People's United declared a quarterly dividend of 15.75 cents per share, payable on November 15, 2011 to shareholders of record as of November 1, 2011. Based on the closing stock price on October 19, the dividend yield came in at 5.2%.

Our Take

Within People’s United’s peer group, Hudson City Bancorp Inc.’s (HCBK) will report its third-quarter 2011 earnings on October 26, 2011.

With People's United’s existing presence in Massachusetts, the completion of acquisition of 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 third-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 #2 Rank, which translates into a short-term ‘Buy’ rating. However, considering the fundamentals, we are maintaining our ‘Neutral’ recommendation on the stock.

 
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