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Regional bank People's United Financial Inc. (PBCT - Analyst Report) reported second-quarter 2013 operating earnings per share of 20 cents, edging out the Zacks Consensus Estimate by a penny. Moreover, earnings compared favorably with 18 cents per share reported in the prior quarter.

Improved credit quality, higher top line and reduced non-interest expenses were the tailwinds for the quarter. Further, increased loans and deposits reflected organic growth for the company. However, the low-interest environment remains a concern.

Operating income was reported at $62.4 million compared with $57.9 million in the prior quarter. Including after-tax severance-related costs, net income came in at $62.1 million in the quarter under review.

Performance in Detail

Total revenue, net of expense reported was $307 million in the quarter, up 1.6% sequentially, due to elevated net interest and non-interest income. However, results lagged the Zacks Consensus Estimate of $310.0 million.

Net interest income was $220.9 million in the reported quarter, up 0.7% sequentially. However, in a historically low interest rate environment along with an asset sensitive balance sheet, operating net interest margin decreased 5 basis points sequentially to 3.33%.

Further, non-interest income was $86.1 million, up 3.9% sequentially. The rise was mainly attributed to higher bank service charges and elevated investment management fees, partially offset by reduced net gains on sales of residential mortgage loans and lower insurance revenues.

Non-interest expenses descended 2.9% sequentially to $205.8 million. The decrease in expenses was primarily attributable to a fall in compensation and benefits expenses and other non-interest expenses, partially offset by higher professional and outside service fees expenses.

Credit Metrics

Overall, People’s United’s credit quality significantly improved during the quarter under review. As of Jun 30, 2013, People's United's originated non-performing loans totaled $247.3 million, down 1.6% sequentially. Moreover, the ratio of non-performing loans to total originated loans declined to 1.18% from 1.25% as of Mar 31, 2013.

Non-performing assets totaled $280.5 million, down 1.6% sequentially. Moreover, non-performing assets (excluding acquired non-performing loans) were 1.33% of total related assets, down from 1.42% in the prior quarter.

Moreover, net loan charge-offs totaled $10.8 million, down 17.6% sequentially. Net loan charge-offs, as a percentage of average loans on an annualized basis, were 0.19%, down 5 basis points sequentially. Provision for loan losses was recorded at $9.2 million, down 25.8% sequentially.

Capital Position

People’s United exhibited a strong capital position. Total net loans stood at $22.7 billion, up 3.2% sequentially. Moreover, total deposits advanced slightly on a sequential basis to $22.0 billion.

Operating return on average assets was 0.81%, up from 0.77% in the prior quarter. Moreover, operating return on average tangible stockholders' equity was 9.3%, increasing from 8.1% in the prior quarter.

As of Jun 30, 2013, People's United’s tangible equity ratio fell to 8.7% from 9.6% in the prior quarter. Further, tier 1 common and total risk-based capital ratios were 10.8% and 12.8% compared with 12.0% and 13.7%, respectively, in the prior quarter.

Capital Deployment Update

Concurrent with the press release, the board of People's United declared a quarterly dividend of 16.25 cents per share. The dividend will be paid on Aug 15, 2013 to shareholders of record as of Aug 1, 2013. Considering the closing stock price on Jul 17, the dividend yield stood at 4.2%.

During second-quarter 2013, People’s United repurchased 11.2 million shares at an average price of $13.63 per share.  Under the existing share repurchase authorization, 11.0 million shares remain available for buyback.

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. Decrease in expenses exhibits the positive impact of cost control measures.

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

Among other companies in the same sector, First Defiance Financial Corp. (FDEF - Snapshot Report) is expected to report its second-quarter 2013 earnings on Jul 22, Banner Corporation (BANR - Snapshot Report) on Jul 24 and First PacTrust Bancorp, Inc. (BANC - Snapshot Report) on Aug 2.

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