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Regional bank, People's United Financial Inc. (PBCT - Analyst Report) reported its third-quarter 2012 operating earnings per share of 19 cents, in line with the Zacks Consensus Estimate. Earnings compared unfavorably with 20 cents per share, reported in the prior quarter.

Higher non-interest expenses and elevated provision for loan losses were the dampeners for the quarter. However, higher revenue aided by improved non-interest income acted as a positive.

Operating income was reported at $64.4 million compared with $67.2 million in the prior quarter. Including after-tax one-time charges of $2.2 million, net income came in at $62.2 million or 18 cents per share in the third quarter of 2012.

Performance in Detail

Total revenue, net of expense reported was $316.2 million in the quarter, up 1.6% sequentially, due to higher non-interest income. Moreover, results surpassed the Zacks Consensus Estimate of $315.0 million.

Net interest income reported by the company was $234.8 million, slightly down on a sequential basis. Moreover, in the ongoing historically low interest rate environment and with an asset sensitive balance sheet, operating net interest margin decreased 6 basis points sequentially to 3.82%. Reduction in loan yields was partly offset by lower funding costs.

Non-interest income was $81.4 million, up 7.5% sequentially, mainly attributed to a rise in bank service charges and higher other non-interest income. These increases were, however, partially offset by lower brokerage commissions.

Non-interest expenses augmented 1.6% sequentially to $208.9 million. The increase in expenses was attributable to escalation in compensation and benefits expenses and elevated occupancy and equipment expenses.

Credit Metrics

Overall, People’s United’s credit quality reported a mixed bag during the quarter. Provision for loan losses was recorded at $15.1 million, up 42.5% from $10.6 million in the prior quarter.

As of September 30, 2012, People's United's nonperforming loans totaled $202.0 million, down 14.6% from $236.6 million in the last quarter. Moreover, the ratio of nonperforming loans to total loans declined to 1.45% from 1.52% as of June 30, 2012.

Nonperforming assets (excluding acquired non-performing loans) totaled $294.0 million as of September 30, 2012, approximately in line with the prior quarter. However, nonperforming assets were 1.59% of total loans, REO and repossessed assets, down from 1.67% in the previous quarter.

Moreover, net loan charge-offs totaled $9.4 million, down 30.4% from $13.5 million in the prior quarter. Net loan charge-offs as a percentage of average loans on an annualized basis were 0.18%, down 8 basis points sequentially.

Capital Ratios

Operating return on average assets was 0.91% and return on average tangible stockholders' equity was 8.6%, descending from 0.97% and 8.9%, respectively, in the prior quarter.  Moreover, as of September 30, 2012, People's United’s tangible equity ratio plummeted to 11.2% from 11.5% 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 November 15, 2012 to shareholders of record as of November 1, 2012. Considering the closing stock price on October 17, 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, 4.5 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 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 our ‘Neutral’ recommendation on the stock.

One of People’s United’s peers, Hudson City Bancorp Inc. (HCBK - Analyst Report) will report its third-quarter 2012 earnings on October 24, 2012.

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