People’s United Financial Inc.’s (PBCT) first quarter 2010 operating earnings per share of 8 cents was flat with the Zacks Consensus Estimate as well as last quarter’s figure. Earnings was a cent higher from 7 cents in the prior-year quarter due to improvement in the net interest margin (NIM), lower interest expenses, modest loan growth and lower net loan charge-offs for the second consecutive quarter. However, continued market pressure drove non-interest expenses higher and non-interest income lower for the quarter.
 
Results included $23.4 million in system conversion and merger-related expenses.  After taxes, these expenses reduced the net income of $29.2 million by $15.6 million or 4 cent per share in the reported quarter. Net margin increased to 3.47% from 3.19% in the prior quarter and 3.25% in the prior-year quarter.
 
Non-interest expense increased 16.3% over the prior quarter and 17.1% year over year to $200.3 million. Total interest expense declined 15.0% from the prior quarter and 35.1% year over year to $34 million. Total interest income increased 3.1% from prior quarter but declined marginally by 0.8% year over year to $193.6 million. While commercial and real estate experienced stability, residential mortgage and consumer loan interests continued to remain weak. However, non-interest income declined 1.5% from the prior quarter and 2.2% year over year to $70.6 million.
 
Credit Metrics
 
During the reported quarter, net loan charge-offs totaled $9.5 million, increasing dramatically by 48.4% year-over-year although declining 30.1% from prior quarter.  Net loan charge-offs as a percentage of average loans on an annualized basis were 0.26% compared to 0.38% in fourth quarter of 2009.
 
At Mar 31, 2010, People’s United’s non-performing loans totaled $192.3 million and the ratio of non-performing loans to total loans was 1.36%, compared with $168.8 million and 1.19%, respectively, at Dec 31, 2009, reflecting credit losses. This was significantly higher compared to non-performing loans of $126.1 million and the respective ratio of 0.86% as on Mar 31, 2009.
 
Non-performing assets totaled $247.5 million at Mar 31, 2010, up $41.9 million from Dec 31, 2009.  Non-performing assets were 1.74% of total loans, REO and repossessed assets at Mar 31, 2010 as compared to 1.44% at Dec 31, 2009, primarily reflecting a decline in the market value of fixed-income assets due to an increase in interest rates.
 
At Mar 31, 2010, the allowance for loan losses, as a percentage of total loans, was 1.22% while as a percentage of non-performing loans was 90%, compared with1.21% and 102%, respectively, at Dec 31, 2009.
 
Profitability Metrics
 
In the first quarter of 2010, People’s United notched a return on average tangible assets of 0.28% and return on average tangible stockholders’ equity of 1.5%, compared with 0.51% and 2.8%, respectively, for the fourth quarter of 2009. At Dec 31, 2009, the tangible equity ratio stood at 18.6% while the tangible book value per share decreased to $10.18 from $10.68 at the end of the fourth quarter of 2009.
 
Dividend Update
 
The board of People’s United Financial declared a quarterly dividend of 15.50 cents per share, payable on May 15, 2010, to shareholders as on May1, 2010. This came in after the 18th consecutive annual dividend increase of 1 cent per share, thereby increasing the annual dividend rate to 62 cents per share from the prior 61 cents per share. Based on the closing stock price on Apr 14, 2010, the dividend yield on People’s United common stock came in at 3.8%.
 
Business Update
 
People’s United completed its acquisition of Financial Federal Corporation on Feb 19, 2010. Although Financial Federal’s results of operations are included as of the acquisition date, the prior period results have not been restated to include the effect of the acquisition. The company has also successfully completed the first phase of core systems conversion and is now focusing on the final phase, which is slated for July 2010.
 
Overall, People’s United is desperately trying to overcome the challenging economic environment through opportunistic acquisitions, stable net interest margin, modest loan growth and lower net loan charge-offs. However, the company’s operating leverage and balance sheet remains sensitive to weak credit quality, increasing loan loss provisions and non-interest expenses against decreasing non-interest income. We believe the historically low interest rate environment is expected to have a negative impact on People’s United for some more time before it rebounds with the slowly recovering economy.
 
On Thursday, the shares of People’s United closed at $16.65, up 0.8%, on the Nasdaq Stock Exchange.
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