People's United Estimates In Line - Analyst Blog

Regional bank People's United Financial Inc. (PBCT) announced fourth quarter 2010 operating earnings per share of 10 cents, in line with the Zacks Consensus Estimate. However, earnings compared favorably with 8 cents per share reported both in the prior quarter and prior-year quarter.

Operating income reported was $36.7 million compared with $27.7 million in the prior quarter and $28.0 million in the prior-year quarter. Including pre-tax merger-related expenses, core system conversion costs and one-time charges of $7.0 million, net income was $32.0 million or 9 cents per share in the fourth quarter of 2010.

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

For fiscal year 2010, operating income was $125.4 million, or 35 cents per share compared with $104.3 million or 31 cents per share in the prior year. Including pre-tax merger-related expenses, core system conversion costs and one-time charges of $58.9 million, net income was $85.7 million or 24 cents per share. Full year 2010 results were also in line with the Zacks Consensus Estimate.

People's United completed its acquisitions of Smithtown Bancorp Inc. and LSB Corporation in November. Therefore, financials include both companies' results of operations as of the respective acquisition dates. Besides, the prior-period results have not been restated so as to include Smithtown Bancorp and LSB Corp.

Performance in Detail

In the fourth quarter of 2010, net interest income reported was $189.8 million, up 8% sequentially and 29% 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 12 basis points sequentially and 66 basis points year over year to 3.85%, due to lower cost of deposits and the partial benefit from two acquisitions completed during the quarter. Non-interest income was $75.9 million, flat sequentially and up 5.9% year over year.

For fiscal year 2010, net interest income came in at $699.0 million, up 21% year over year, while non-interest income was $299.2 million, down 3.2% over the prior year.

Total revenue reported was $265.7 million in the quarter, up from $251.7 million in the prior quarter and $219.2 million in the prior-year quarter. Moreover, revenue results also outpaced the Zacks Consensus Estimate of $261.0 million. For fiscal 2010, total revenue came in at $998.2 million, up 12.7% year over year, and compared favorably with the Zacks Consensus Estimate of $992.0 million.

Non-interest expense accelerated 6.5% over the prior quarter and 20.0% year over year to $206.9 million. The increase in expenses was attributable to higher compensation and benefits expenses, professional and outside service fees, merger-related expenses and other non-interest expenses.

For fiscal 2010, non-interest expense increased 18.5% year over year to $811.2 million, aided by higher compensation and benefits expenses, occupancy and equipment expenses, professional and outside service fees, merger-related expenses and other non-interest expenses.

Credit Metrics

In the fourth quarter of 2010, People's United reported $10.9 million of provision for loan losses, down from $21.8 million in the prior quarter and $13.6 million in the prior-year quarter.

During the reported quarter, net loan charge-offs totaled $10.9 million compared with $21.8 million in the prior quarter and $13.6 million in the prior-year quarter. Net loan charge-offs as a percentage of average loans on an annualized basis were 0.28%, down 29 basis points sequentially and 10 basis points yea rover year.

As of December 31, 2010, People's United's nonperforming loans totaled $245.2 million and the ratio of nonperforming loans to total loans was 1.68% compared with $251.4 million and 1.77%, respectively, as of September 30, 2010. This was higher than $168.8 million and 1.19%, respectively, as of December 31, 2009.

Nonperforming assets totaled $303 million as of December 31, 2010, down 3% sequentially, but up 47% from the prior-year quarter. Nonperforming assets were 2.07% of total loans, REO and repossessed assets, compared with 2.18% in the previous quarter and 1.44% in the year-ago quarter.

Capital Ratios

In the fourth quarter of 2010, return on average tangible assets was 0.61% and return on average tangible stockholders' equity was 3.7%, up from 0.48% and 2.7%, respectively, in the prior quarter.  As of December 31, 2010, People's United tangible equity ratio was 14.1%.

Share Repurchase and Dividend Update

The board of directors of People's United authorized an additional repurchase of common stock.  Up to 5% or 17.5 million shares of the company's common stock can be repurchased in the open market. In April 2008, 17.3 million shares were authorized for repurchase.  As of December 31, 2010, under such authorization, 14.3 million shares have been repurchased, at a total cost of $191.2 million.

The board of People's United declared a quarterly dividend of 15.50 cents per share, payable on February 15, 2011 to shareholders as of February 1, 2011. Based on the closing stock price on January 19, the dividend yield came in at 4.4%.

Acquisition of Danvers Bancorp

Concurrent with the fourth quarter earnings release, People's United announced the acquisition of Danvers Bancorp Inc. (DNBK) of Danvers, Massachusetts, in a 55% stock and 45% cash transaction valued at approximately $493 million. Completion of the transaction awaits customary closing conditions, regulatory and Danvers Bancorp's shareholders' approval. The acquisition, which marks a platform of growth for the company, is expected to close in the second quarter of 2011.

Our Take

Overall, People's United is trying to overcome the challenging economic environment through opportunistic acquisitions and improving NIM. The announcement of recent acquisitions coupled with reported positive earnings reflects strength in capital and liquidity of the company. Further, the company's operating leverage and balance sheet remain responsive to improving credit quality, decreasing loan loss provisions and lowered its net charge-offs.

Though the historically low interest rate environment did not affect the current quarter much, we believe People's United will rebound in the near future based on synergies gained resulting from the completion of all recent acquisitions.

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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