Regional bank People’s United Financial Inc. (PBCT) announced third quarter 2010 operating earnings per share of 8 cents, which was below the Zacks Consensus Estimate of 10 cents. Earnings also compared unfavorably with 9 cents per share reported in the prior quarter, but were in line with the prior-year quarter. 

Operating income reported was $27.7 million compared with $31.8 million in the prior quarter and $26.8 million in the prior-year quarter. Including pre-tax merger-related expenses, core system conversion costs and one-time charges of $5.3 million, net income was $24.1 million or 7 cents per share in the third quarter of 2010. 

The modest sequential decrease in results was attributed to higher provision for loan losses, partly offset by improvement in the net interest margin (NIM), as well as lower non-interest expenses. 

People’s United completed its acquisitions of Financial Federal Corporation in February and Butler Bank in April. Therefore, financials include both companies’ results of operations as of the respective acquisition dates, and the prior period results have not been restated to include Financial Federal and Butler Bank. 

Quarter in Detail

Net interest income reported was $175.8 million, up 1.2% sequentially and 21% 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 5 basis points sequentially and 54 basis points year over year to 3.73%, due to higher investment income and lower cost of deposits. 

Non-interest income was $75.9 million, down 1.2% sequentially and 5.4% year over year. Total revenue reported was $252 million, up from $251 million in the prior quarter and $226 million in the prior-year quarter. Revenue results were in line with the Zacks Consensus Estimate. 

Non-interest expense decreased 7.4% over the prior quarter and increased 17.6% year over year to $194.2 million. The sequential decline in expenses was attributed to lower occupancy and equipment expenses, professional and outside service fees, merger-related expenses and other non-interest expenses. These decreases were partially offset by higher compensation and benefits expenses and merchant services expenses. 

Credit Metrics

In the third quarter of 2010, People’s United reported $21.8 million of provision for loan losses, up from $17.8 million in the prior quarter and $21.5 million in the prior-year quarter. 

During the reported quarter, net loan charge-offs totaled $21.8 million compared with $17.8 million in the prior quarter and $16.0 million in the prior-year quarter. Net loan charge-offs as a percentage of average loans on an annualized basis were 0.57%, up 11 basis points sequentially and 13 basis points year over year. 

As of September 30, 2010, People’s United’s nonperforming loans totaled $251.4 million and the ratio of nonperforming loans to total loans was 1.77%, compared with $219.7 million and 1.56%, respectively, as of June 30, 2010, reflecting credit losses. This was also higher than $175.7 million and 1.23%, respectively, as of September 30, 2009. 

Nonperforming assets totaled $312 million as of September 30, 2010, up 9.7% sequentially and 62% from the prior-year quarter. Nonperforming assets were 2.18% of total loans, REO and repossessed assets, compared with 2.01% in the previous quarter and 1.35% in the year-ago quarter. 

Capital Ratios

In the third quarter of 2010, return on average tangible assets was 0.48% and return on average tangible stockholders’ equity was 2.7%, up from 0.32% and 1.7% respectively, in the prior quarter.  As of September 30, 2010, People’s United tangible equity ratio was 17.8%. 

Dividend Update

The board of People’s United declared a quarterly dividend of 15.50 cents per share, payable on November 15, 2010 to shareholders as of November 1, 2010. Based on the closing stock price on October 20, the dividend yield came in at 4.7%. 

Performance by Peers

The closest competitor of People’s United, Bank of America Corporation (BAC) reported impressive results with positive net income and slowdown in provision for credit losses for the corresponding quarter. 

In the third quarter of 2010, People’s United successfully completed its core system conversion and commenced the process of rebranding branches throughout New England to People’s United Bank.  The company announced the acquisitions of Smithtown Bancorp Inc. and LSB Corporation, both of which are expected to close in November, pending regulatory and shareholder approvals. 

Our Take

Overall, People’s United is trying to overcome the challenging economic environment through opportunistic acquisitions and stable NIM. The announcement of recent acquisitions coupled with reported positive earnings reflects strength in capital and liquidity of the company. However, the company’s operating leverage and balance sheet remain sensitive to weak credit quality, increasing loan loss provisions and higher net charge-offs against decreasing non-interest income. 

Though the historically low interest rate environment did not affect the current quarter, we believe, it is expected to have a negative impact on People’s United in the upcoming quarters before it rebounds on the back of the slowly recovering economy. 

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

 
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