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Regional bank People's United Financial Inc. (PBCT - Analyst Report) reported its first-quarter 2012 operating earnings per share of 18 cents, missing the Zacks Consensus Estimate by a penny. However, earnings compared favorably with the 17 cents per share reported in the prior quarter.

Lower revenue due to reduced net interest income and non-interest income were the negatives for the quarter. However, lower non-interest expenses reflecting better expense management and improved credit quality acted as tailwinds for the quarter.

The Operating income was reported at $60.6 million compared with $58.7 million in the prior quarter. Including after-tax one-time charges of $2.0 million, net income came in at $58.6 million or 17 cents per share in the first quarter of 2012.

Performance in Detail

Total revenue reported was $307.5 million in the quarter, below the Zacks Consensus Estimate of $314.0 million. Moreover, revenue was down 2% sequentially, due to lower net interest income.

In the ongoing historically low interest rate environment and with an asset sensitive balance sheet, net interest income reported by the company was $235.1 million, down 2.9% sequentially.

Net interest margin decreased 6 basis points sequentially to 4.01%. Loan yields, along with one calendar day less in the reported quarter, decreased the net interest margin, though partially offset by lower funding costs.

Non-interest income was $72.4 million, down 1% sequentially, attributed to decline in bank service charges driven by the changes brought by the Dodd-Frank Act and lower other income. These declines were partially offset by higher insurance revenue and net gains on sales of residential mortgage loans.

Non-interest expense went down 9.4% sequentially to $208.6 million. The decrease in expenses was attributable to the absence of merger-related expenses, reflecting the continual gain from cost-savings initiatives, announced in 2011.

Credit Metrics

Overall, People’s United witnessed an improvement in credit quality during the quarter. The company reported $11.5 million of provision for loan losses, down from $20.7 million in the prior quarter.

Moreover, net loan charge-offs totaled $11.2 million, down from $14.8 million in the prior quarter. Net loan charge-offs as a percentage of average loans on an annualized basis were 0.22%, down 7 basis points sequentially.

As of March 31, 2012, People's United's nonperforming loans totaled $247.2 million, down from $249.0 million in the last quarter. Moreover, the ratio of nonperforming loans to total loans declined to 1.67% from 1.75% as of December 31, 2011.

Nonperforming assets (excluding acquired non-performing loans) totaled $316 million as of March 31, 2012, down from $337 million in the prior quarter. Nonperforming assets were 1.85% of total loans, REO and repossessed assets, compared with 2.00% in the previous quarter.

Capital Ratios

In the first quarter of 2012, return on average assets was 0.88% and return on average tangible stockholders' equity was 8.0%, up from 0.86% and 7.4%, respectively, in the prior quarter.  However, as of March 31, 2012, People's United’s tangible equity ratio plummeted to 11.7% from 12.0% in the prior quarter.

Capital Deployment Update

Concurrent with the press release, the board of People's United declared an increased quarterly dividend of 16 cents per share, up from 15.75 cents, payable on May 15, 2012 to shareholders of record as of May 1, 2012. Considering the closing stock price on April 18, the dividend yield came in at 5%.

During the quarter, People’s United repurchased 4.5 million shares of common stock valued at $56 million.  Under the current share repurchase authorization, 13.5 million shares remain available for buyback.

Acquisition During the Quarter

In February 2012, People's United came up with plans to expand in the New York State. The bank is increasing its footprint in New York with the acquisition of 56 branches from Citizens Financial Group Inc. The deal is valued at $3.25 million.

Besides buying these branches, the company will take over $325 million worth of deposits related to these. The company would be paying 1% premium to Citizens on the acquired deposits. The agreement is expected to be completed in the second quarter of 2012, subject to certain customary closing conditions, which also include regulatory approvals.

Management considers that the acquisition would increase the bank’s ability to provide in-store banking services to the customers in Long Island and Westchester County. Moreover, People’s United is the exclusive provider of banking services, working for 139 Stop & Shop stores across Long Island, southern New York State and Connecticut.

Moreover, the addition of new branches provides the bank with further scope for core deposit funding. Therefore, increase in deposits in the acquired branches will supply additional funding for strong loan growth.

Our Take

Overall, People's United is trying to overcome the slow economic recovery through opportunistic acquisitions and cost reduction initiatives. The acquisitions and positive earnings reflect its strong capital and liquidity position.

Going forward, growth in loans and deposits are expected to boost the company’s financial results. In addition, increase in dividend and share repurchase activity will definitely boost investors’ confidence. Yet, the recent regulatory issues remain the major area of concern.

People's United currently retains its Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. Considering the fundamentals, we also maintain our ‘Neutral’ recommendation on the stock.

Within People’s United’s peer group, Hudson City Bancorp Inc. (HCBK - Analyst Report) will report its first-quarter 2012 earnings on April 25, 2012.

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