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Regional bank People's United Financial Inc. (PBCT - Analyst Report) reported third-quarter 2013 operating earnings per share of 20 cents, missing the Zacks Consensus Estimate by a penny. However, earnings compared favorably with 19 cents per share reported in the prior-year quarter.

Improved credit quality, aided by lower provision for loan losses was a tailwind for the quarter. Further, increased loans and deposits reflected organic growth for the company. However, reduced top line and increased expenses remain concerns.

Operating income was reported at $60.8 million compared with $64.4 million in the prior-year quarter. Including certain non-recurring items, net income came in at $58.5 million or 19 cents per share in the quarter under review.

Performance in Detail

Total revenue, net of expense reported was $307.5 million in the quarter, down 2.8% year over year, due to reduced net interest income, partially offset by higher non-interest income. Moreover, results lagged the Zacks Consensus Estimate of $314.0 million.

Net interest income was $223.5 million in the reported quarter, down 4.8% year over year. Moreover, in the persistent low interest rate environment along with an asset sensitive balance sheet, operating net interest margin decreased 59 basis points year over year to 3.30%.

Further, non-interest income was $84.0 million, up 3.2% year over year. The rise was mainly attributed to higher investment management fees and elevated other non-interest income.

Non-interest expenses ascended 1.7% year over year to $212.5 million. The increase in expenses was primarily attributable to higher professional and outside service fees expenses and other non-interest costs.

Credit Metrics

Overall, People’s United’s credit quality significantly improved during the quarter under review. As of Sep 30, 2013, People's United's originated non-performing loans totaled $237.2 million, down 10.8% year over year. Moreover, the ratio of non-performing loans to total originated loans declined to 1.10% from 1.45% as of Sep 30, 2012.

Non-performing assets totaled $271.2 million, down 7.8% year over year. Moreover, non-performing assets (excluding acquired non-performing loans) were 1.26% of total related assets, down from 1.59% in the prior-year quarter.

Moreover, net loan charge-offs totaled $9.5 million, almost in line with the prior-year quarter. Net loan charge-offs, as a percentage of average loans on an annualized basis, were 0.17%, down 1 basis point year over year. Provision for loan losses was recorded at $12.1 million, down 19.9% year over year.

Capital Position

People’s United exhibited a strong capital position. Total net loans stood at $23.0 billion, up 10.0% year over year. Moreover, total deposits advanced 3.7% on a year-over-year basis to $22.2 billion.

Operating return on average assets was 0.78%, down from 0.91% in the prior-year quarter. Moreover, operating return on average tangible stockholders' equity was 9.8%, increasing from 8.6% in the prior-year quarter.

As of Sep 30, 2013, People's United’s tangible equity ratio fell to 8.5% from 11.2% in the prior-year quarter. Further, tier 1 common and total risk-based capital ratios were 11.4% and 12.6% compared with 10.8% and 12.8%, 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 Nov 15, 2013 to shareholders of record as of Nov 1, 2013. Considering the closing stock price on Oct 16, the dividend yield stood at 4.4%.

During third-quarter 2013, People’s United repurchased 2.1 million shares at an average price of $14.33 per share.  Under the existing share repurchase authorization, 8.9 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.

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).

Among other companies in the same sector, Banner Corporation (BANR - Snapshot Report) and Flagstar Bancorp Inc. (FBC - Snapshot Report) are expected to report third-quarter 2013 earnings on Oct 23 while, First Defiance Financial Corp. (FDEF - Snapshot Report) will report on Oct 28.

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