A month has gone by since the last earnings report for People's United (PBCT). Shares have lost about 11.3% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is People's United due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
People's United Q2 Earnings Meet Estimates, Costs Rise
People's United reported second-quarter 2020 operating earnings of 24 cents per share, in line with the Zacks Consensus Estimate. However, the bottom line was below the year-ago quarter’s 34 cents.
Second-quarter results reflected improvement in loan and deposit balances, and revenues. Also, a strong capital position supported the company’s results. However, elevated expenses and margin contraction were headwinds. Further, a drastic increase in provision for credit losses due to the impacts of coronavirus was a major offsetting factor.
After considering certain non-recurring items, net income available to common shareholders was $86.4 million compared with $129.7 million reported in the prior-year quarter.
Revenue Growth Offsets Higher Expenses
Revenues were up 9% year over year to $495.2 million in the second quarter. The top line lagged the Zacks Consensus Estimate of $495.9 million by a slight margin.
Net interest income, on a fully taxable basis, totaled $413 million, up 16.2% year over year. The rise was mainly due to a considerable fall in interest expenses. Nevertheless, net interest margin contracted 7 basis points (bps) to 3.05%.
Non-interest income declined 15.7% year over year to $89.6 million. Lower bank service charges, customer interest rate swap and other income led to the downside.
Non-interest expenses jumped 9.2% on a year-over-year basis to $304 million. Increase in all components, except for operating lease expenses, led to the rise.
Efficiency ratio was 53.5% compared with 55.8% in the prior-year quarter. A decline in the ratio indicates improved profitability.
As of Jun 30, 2020, total loans were $45.5 billion, up 2.6% from the prior quarter. Also, total deposits grew 11.6% sequentially to $49.9 billion.
Credit Quality Deteriorates
As of Jun 30, 2020, non-performing assets were $314.6 million, up 48.2% year over year. Ratio of non-performing assets to total loans was 0.69% compared with 0.55% in the year-ago quarter.
Also, net loan charge-offs more than doubled year over year to $8.5 million. Net loan charge-offs as a percentage of average total loans were 0.08% on an annualized basis, up 3 bps year over year. Provision for loan losses was $80.8 million compared with $7.6 million in the year-ago quarter.
Capital Position and Profitability Ratios
As of Jun 30, 2020, total risk-based capital ratio decreased to 11.8% from 12% recorded a year ago. Also, the ratio of tangible equity to assets was 7.3%, down year over year from 7.7%.
Return on average tangible stockholders’ equity was 8.1%, down from the prior-year quarter’s 14.1%. Return on average assets of 0.58% declined from 1.04% as of Jun 30, 2020.
Looking forward, management expects PPP to have an approximately 3-basis point unfavorable impact on the margin in each of the next two quarters.
Run-off in the acquired United Financial’s portfolio is anticipated to be $200-$300 million for 2020.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates.
Currently, People's United has a poor Growth Score of F, however its Momentum Score is doing a lot better with an A. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise People's United has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.
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