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Regional bank, People's United Financial Inc. (PBCT - Analyst Report) reported its fourth-quarter 2012 operating earnings per share of 19 cents, in line with the Zacks Consensus Estimate. Earnings compared favorably with 17 cents per share, reported in the prior-year quarter and were in line with the prior quarter.

Lower non-interest expenses and reduced provision for loan losses were the tailwinds for the quarter. However, lower revenues aided by fall in net interest income acted as a dampener.

Operating income was reported at $63.2 million compared with $57.1 million in the prior-year quarter and $64.4 million in the prior quarter. Including after-tax severance-related costs of $2.0 million, net income came in at $61.2 million or 18 cents per share in the fourth quarter of 2012.

For full-year 2012, operating income was 75 cents per share, up from 66 cents reported in the prior year and outpacing the Zacks Consensus Estimate by 2 cents. Including after-tax merger-related expenses and other adjustments of 3 cents per share, net income summed to 72 cents.

Performance in Detail

Total revenues, net of expense reported was $309.4 million in the quarter, down 0.6% year over year and 2.2% sequentially, due to lower net interest income, partially offset by higher non-interest income. Moreover, results lagged the Zacks Consensus Estimate of $314.0 million.

For full year, revenues were $1,242.5 million, up 1.8% from $1,221.0 million in 2011. However, this compares unfavorably with the Zacks Consensus Estimate of $1,258.0 million.

Net interest income was $225.1 million in the reported quarter, down 6.1% year over year and 4.1% sequentially. Moreover, in the ongoing historically low interest rate environment and with an asset sensitive balance sheet, operating net interest margin decreased 19 basis points sequentially to 3.63%.

Primarily, new loan volume at lower rates and lower interest income on acquired loans led to the reduction in margin. These were partly offset by lower funding costs and improved mix. Further, margin was down 40 basis points year over year.

Yet, non-interest income was $84.3 million, up 17.6% year over year and 3.6% sequentially. The upsurge was mainly attributed to a rise in investment management fees, operating lease income and higher other non-interest income along with net gains on sales of residential mortgage loans. These increases were, however, partially offset by lower insurance revenue.

Non-interest expenses descended 9.9% year over year and 0.7% sequentially to $207.4 million. The decrease in expenses was primarily attributable to fall in compensation and benefits expenses, partially offset by 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 $12.0 million, down 42% year over year and 21% sequentially.

As of Dec 31, 2012, People's United's nonperforming loans totaled $181.6 million, down 27% from $249 million in the last-year quarter and 10% from $202 million in the prior quarter. Moreover, the ratio of nonperforming loans to total loans declined to 1.30% from 1.45% as of Sep 30, 2012 and 1.75% as of Dec 31, 2011.

Nonperforming assets totaled $289.6 million as of Dec 31, 2012, down 14% year over year and 1.5% sequentially. Moreover, nonperforming assets (excluding acquired non-performing loans) were 1.48% of total related assets, down from 2.00% in the previous-year quarter and 1.59% in the prior quarter.

However, net loan charge-offs totaled $10.0 million, down 32.4% from $14.8 million in the prior-year quarter but up slightly from $9.4 million reported in the prior quarter. Net loan charge-offs as a percentage of average loans on an annualized basis were 0.19%, down 10 basis points year over year but up 1 basis point sequentially.

Capital Ratios

Operating return on average assets was 0.87% and return on average tangible stockholders' equity was 8.6%, increasing from 0.84% and 7.2%, respectively, in the prior quarter.  Moreover, as of Dec 31, 2012, People's United’s tangible equity ratio plummeted to 10.2% from 11.2% in the prior quarter and 12.0% in the prior-year quarter. Further, tier 1 common and total risk-based capital ratios were 12.7% and 14.7%, respectively.

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 Feb 15, 2013 to shareholders of record as of Feb 1, 2013. Considering the closing stock price on Jan 16, the dividend yield came in at 5.1%.

During 2012, People’s United repurchased 18.2 million shares of common stock valued at $220 million. Notably, during the fourth quarter, the company repurchased 4.7 million shares of common stock at a total cost of $56 million.  Under the new share repurchase authorization announced in November 2012, 33.4 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 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 Rank #3 (Hold).

One of People’s United’s peers, Hudson City Bancorp Inc. (HCBK - Analyst Report) will report its fourth-quarter 2012 earnings on Jan 30.

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