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Regional bank, People's United Financial Inc. (PBCT - Analyst Report) reported its second-quarter 2012 operating earnings per share of 20 cents, beating the Zacks Consensus Estimate by a penny. Moreover, earnings compared favorably with 18 cents per share, reported in the prior quarter.

Higher revenue aided by improved net interest income and non-interest income were the positives for the quarter. Moreover, lower non-interest expenses reflected better expense management of the company. However, elevated net loan charge-offs and reduced net interest margin were the dampeners.
    
Operating income was reported at $67.2 million compared with $60.6 million in the prior quarter. Including after-tax one-time charges of $2.4 million, net income came in at $64.8 million or 19 cents per share in the second quarter of 2012.

Performance in Detail

Total revenue reported was $311.6 million in the quarter, up 1.3% sequentially, due to higher net interest and non-interest income. However, results were below the Zacks Consensus Estimate of $314.0 million.

Net interest income reported by the company was $236 million, up 0.4% sequentially. However, in the ongoing historically low interest rate environment and with an asset sensitive balance sheet, net interest margin decreased 4 basis points sequentially to 3.97%. Reduction in interest rates and slower loan growth were the negatives for the margin.

Non-interest income was $75.7 million, up 4.6% sequentially, attributed to rise in bank service charges and higher loan prepayment fees gains on sales of acquired loans. These increases were, however, partially offset by elevated investment management fees and higher brokerage commissions.

Non-interest expense went down 1.4% sequentially to $205.7 million. The decrease in expenses was attributable to decline in compensation and benefits expenses and reflects the continual gain from cost-savings initiatives, announced in 2011.

Credit Metrics

Overall, People’s United’s credit quality reported a mixed bag during the quarter. Provision for loan losses was recorded at $10.6 million, down from $11.5 million in the prior quarter.

As of June 30, 2012, People's United's nonperforming loans totaled $236.6 million, down from $247.2 million in the last quarter. Moreover, the ratio of nonperforming loans to total loans declined to 1.52% from 1.67% as of March 31, 2012.

Nonperforming assets (excluding acquired non-performing loans) totaled $295 million as of June 30, 2012, down from $316 million in the prior quarter. Nonperforming assets were 1.67% of total loans, REO and repossessed assets, compared with 1.85% in the previous quarter.

However, net loan charge-offs totaled $13.5 million, up from $11.2 million in the prior quarter. Net loan charge-offs as a percentage of average loans on an annualized basis were 0.26%, up 4 basis points sequentially.

Capital Ratios

In the second quarter of 2012, return on average assets was 0.97% and return on average tangible stockholders' equity was 8.9%, accelerating from 0.88% and 8.0%, respectively, in the prior quarter. However, as of June 30, 2012, People's United’s tangible equity ratio plummeted to 11.5% from 11.7% in the prior quarter.

Capital Deployment Update

Concurrent with the press release, the board of People's United declared quarterly dividend of 16 cents per share. The dividend will be paid on August 15, 2012 to shareholders of record as of August 1, 2012. Considering the closing stock price on July 18, the dividend yield came in at 5.3%.

During the quarter, People’s United repurchased 4.5 million shares of common stock valued at $54 million.  Under the current share repurchase authorization, 9.0 million shares remain available for buyback.

Recent Acquisition

In the month of June 2012, People's United expanded its presence in New York by completing the acquisition of 57 branches from Citizens Financial Group Inc. In addition to buying these branches, the company took over $324 million worth of deposits and paid 1% premium to Citizens on the acquired deposits.

Management believes that the acquisition will thereby enhance 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 140 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 Viewpoint

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 deposits is expected to boost the company’s financial results. In addition, capital deployment activity will definitely boost investors’ confidence. Yet, the recent regulatory issues remain the major area of concern.

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

One of People’s United’s peers, Hudson City Bancorp Inc. (HCBK - Analyst Report) will report its second-quarter 2012 earnings on July 25, 2012.

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