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People's United Posts In-Line 1Q Earnings

Zacks Equity Research

Regional bank People's United Financial Inc. (PBCT) reported first-quarter 2013 operating earnings per share of 18 cents, in line with the Zacks Consensus Estimate. Earnings compared unfavorably with 19 cents per share reported in the prior quarter but were in line with the prior-year quarter.

Lower non-performing assets and loans and deposits growth were the tailwinds for the quarter. However, reduction in revenues and increased expenses were dampeners. Further, higher provision for loan losses was recorded.

Operating income was reported at $57.9 million compared with $63.2 million in the prior quarter and $59.3 million in the prior-year quarter. Including after-tax severance-related costs, writedowns of banking house assets and integration costs, net income came in at $52.5 million or 16 cents per share in the quarter under review.

Performance in Detail

Total revenue, net of expense reported were $302.2 million in the quarter, down 2.3% sequentially, due to lower net interest and non-interest income. Moreover, results lagged the Zacks Consensus Estimate of $310.0 million.

Net interest income was $219.3 million in the reported quarter, down 2.6% sequentially. Moreover, in the ongoing historically low interest rate environment and with an asset sensitive balance sheet, operating net interest margin decreased 25 basis points sequentially to 3.38%.

Primarily, new loan volume at lower rates and lower interest income on acquired loans along with the effect of two fewer calendar days in the quarter led to the reduction in margin. These were partly offset by lower funding costs and improved mix.

Further, non-interest income was $82.9 million, down 1.7% sequentially. The dip was mainly attributed to lower bank service charges and reduced net gains on sales of residential mortgage loans, partially offset by higher brokerage commissions and elevated insurance revenue.

Non-interest expenses ascended 2.2% sequentially to $212 million. The increase in expenses was primarily attributable to rise in compensation and benefits expenses, partially offset by lower professional and outside service fees expenses.

Credit Metrics

Overall, People’s United’s credit quality reported a mixed bag during the quarter. As of Mar 31, 2013, People's United's non-performing loans totaled $180.7 million, down 0.5% sequentially. Moreover, the ratio of non-performing loans to total loans declined to 1.25% from 1.30% as of Dec 31, 2012.

Non-performing assets totaled $285.1 million as of Mar 31, 2013, down 1.6% sequentially. Moreover, non-performing assets (excluding acquired non-performing loans) were 1.42% of total related assets, down from 1.48% in the prior quarter.

However, net loan charge-offs totaled $13.1 million, up 31% sequentially. Net loan charge-offs, as a percentage of average loans on an annualized basis, were 0.24%, up 5 basis points sequentially. Provision for loan losses was recorded at $12.4 million, up 3.3% sequentially.

Capital Position

People’s United exhibited strong capital position. Total net loans stood at $22 billion, up 2.3% sequentially. Moreover, total deposits advanced slightly on a sequential basis to $21.8 billion.

Operating return on average assets was 0.77%, down from 0.87% in the prior quarter. Moreover, operating return on average tangible stockholders' equity was 8.1%, decreasing from 8.6% in the prior quarter.

As of Mar 31, 2013, People's United’s tangible equity ratio plummeted to 9.6% from 10.2% in the prior quarter. Further, tier 1 common and total risk-based capital ratios were 12.0% and 13.7% compared with 12.7% and 14.7%, respectively, in the prior quarter.

Capital Deployment Update

Concurrent with the press release, the board of People's United declared an increased quarterly dividend of 16.25 cents per share, up from prior dividend of 16 cents. The dividend will be paid on May 15, 2013 to shareholders of record as of May 1, 2013. Considering the closing stock price on Apr 17, the dividend yield stood at 5.1%.

During first-quarter 2013, People’s United repurchased 11.1 million shares for $144 million.  Under the existing share repurchase authorization, 22.3 million shares remain available for buyback.

Performance of Related Companies

Washington Federal Inc.’s (WAFD) fiscal second-quarter 2013 earnings (ended Mar 31) of 34 cents per share were ahead of the Zacks Consensus Estimate by a penny. This also compares favorably with the year-ago earnings of 32 cents.

Constantly declining credit costs primarily drove the results. However, higher operating expenses and lower top line were the headwinds. Improvement in asset quality and enhanced capital ratios were the other highlights of the quarter.

Among others, First Defiance Financial Corp. (FDEF) and Banner Corporation (BANR) are scheduled to report their first-quarter 2013 earnings on Apr 22.

Our Viewpoint

Overall, People's United is trying to overcome the slow economic recovery through opportunistic acquisitions. Going forward, growth in loans and deposits is expected to boost the company’s financial results.

In addition, capital deployment activity will definitely boost investors’ confidence. Yet the recent regulatory issues, decline in top line and rising expenses remain the major areas of concern. People's United currently retains a Zacks Rank #4 (Sell).

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