People's United Q1 Earnings Lag, Div Up - Analyst Blog

Regional bank People's United Financial Inc. (PBCT) reported first-quarter 2014 operating earnings per share of 19 cents, missing the Zacks Consensus Estimate by a penny. However, earnings compared favorably with 18 cents per share reported in the prior-year quarter.

People's United's results failed to meet investors' expectations as its share price declined more than 1% in the after-hour trading session on Wednesday. However, the performance of the stock in today's trading session will give a better idea about investors' sentiments on the company's results.

Our proven model predicted that People's United may not post an earnings beat as it did not have the right combination of two key ingredients – positive Earnings ESP and a Zacks Rank of #3 (Hold) or higher. It had a Zacks Rank #3 (Hold), but the Earnings ESP was 0.00%.

Improved credit quality, aided by lower provision for loan losses was a tailwind for the quarter. Further, increased loans and deposits as well as higher revenues reflected organic growth of the company. However, increased expenses depict undisciplined expense management.

Operating income was reported at $56.5 million compared with $57.9 million in the prior-year quarter. Including certain non-recurring items, net income came in at $53.1 million or 18 cents per share in the quarter under review.

Performance in Detail

Total revenue, net of expense (fully taxable equivalent) reported was $311.7 million in the quarter, up 1.1% year over year, due to higher net interest income, partially offset by reduced non-interest income. However, results lagged the Zacks Consensus Estimate of $313.0 million.

Net interest income (fully taxable equivalent) was $231.8 million in the reported quarter, up 3.8% on a year-over-year basis. However, in the persistent low interest rate environment along with an asset sensitive balance sheet, operating net interest margin decreased 21 basis points year over year to 3.17%.

Further, non-interest income was $79.9 million, down 5.9% year over year. The fall was mainly attributed to lower gains on sales of residential mortgage loans and reduced other non-interest income.

Adjusted non-interest expenses ascended 3.7% on a year-over-year basis to $211.5 million. The increase in expenses was primarily attributable to higher compensation and benefits costs.

Credit Metrics

Overall, People's United's credit quality significantly improved during the quarter under review. As of Mar 31, 2014, People's United's originated non-performing loans totaled $194.3 million, down 22.7% year over year. Moreover, the ratio of non-performing loans to total originated loans declined to 0.84% from 1.25% as of Mar 31, 2013.

Non-performing assets totaled $231.5 million, down 18.8% year over year. Moreover, non-performing assets (excluding acquired non-performing loans) were 1.00% of total related assets, down from 1.42% in the prior-year quarter.

Moreover, net loan charge-offs totaled $5.5 million, down 43.9% from the prior-year quarter. Net loan charge-offs, as a percentage of average loans on an annualized basis, were 0.12%, down 12 basis points year over year. Provision for loan losses was recorded at $8.0 million, down 18.4% year over year.

Capital Position

People's United exhibited a strong capital position. Total net loans stood at $24.4 billion, up 10.9% year over year. Moreover, total deposits rose 8.7% on a year-over-year basis to $23.7 billion.

Operating return on average assets was 0.69%, down from 0.77% in the prior-year quarter. Moreover, operating return on average tangible stockholders' equity was 9.3%, increasing from 8.1% in the prior-year quarter.

As of Mar 31, 2014, People's United's tangible equity ratio fell to 8.0% from 9.6% in the prior-year quarter. Further, total risk-based capital ratio was 11.2% compared with 13.7% in the prior-year quarter.

Dividend Update

Concurrent with the press release, the board of People's United declared an increased quarterly dividend of 16.50 cents per share, up from 16.25 cents. The new dividend will be paid on May 15, 2014 to shareholders of record as of May 1. Considering the closing stock price on Apr 16, the dividend yield stood at 4.4%.

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 improve the company's financial results. In addition, the company's capital deployment activity will definitely boost investors' confidence.

Yet, the recent regulatory issues, increase in expenses and a low interest rate environment remain major areas of concern. People's United currently carries a Zacks Rank #3 (Hold).

Performance of other companies in the Same Sector

Washington Federal Inc.'s (WAFD) second-quarter fiscal 2014 earnings (ended Mar 31) of 38 cents per share was in line with the Zacks Consensus Estimate. Moreover, the reported figure was up 11.8% from 34 cents in the prior-year quarter.

Higher revenues, a benefit from provision and improving credit quality were positives for the quarter. However, a rise in operating expenses dragged the results. Further, profitability ratios remained strong during the quarter.

Among other companies, Banner Corporation (BANR) and First Defiance Financial Corp. (FDEF) are expected to report on Apr 21.