Forward-Looking Statements
Periodic and other filings made by People's United Financial, Inc. ("People's
United Financial" or the "Company") with the Securities and Exchange Commission
pursuant to the Securities Exchange Act of 1934 (the "Exchange Act") may from
time to time contain information and statements that are forward-looking in
nature. Such filings include the Annual Report on Form 10-K, Quarterly Reports
on Form 10-Q and Current Reports on Form 8-K, and may include other forms such
as proxy statements. Other written or oral statements made by People's United
Financial or its representatives from time to time may also contain
forward-looking statements.
In general, forward-looking statements usually use words such as "expect,"
"anticipate," "believe," "should," and similar expressions, and include all
statements about People's United Financial's operating results or financial
position for future periods. Forward-looking statements represent management's
beliefs, based upon information available at the time the statements are made,
with regard to the matters addressed; they are not guarantees of future
performance.
All forward-looking statements are subject to risks and uncertainties that could
cause People's United Financial's actual results or financial condition to
differ materially from those expressed in or implied by such statements. Factors
of particular importance to People's United Financial include, but are not
limited to: (1) changes in general, international, national or regional economic
conditions; (2) changes in interest rates; (3) changes in loan default and
charge-off rates; (4) changes in deposit levels; (5) changes in levels of income
and expense in non-interest income and expense related activities;
(6) residential mortgage and secondary market activity; (7) changes in
accounting and regulatory guidance applicable to banks; (8) price levels and
conditions in the public securities markets generally; (9) competition and its
effect on pricing, spending, third-party relationships and revenues; (10) the
successful integration of acquired companies; and (11) changes in regulation
resulting from or relating to financial reform legislation.
All forward-looking statements can be affected by inaccurate assumptions or by
known or unknown risks and uncertainties. Consequently, no forward-looking
statement can be guaranteed. People's United Financial does not undertake any
obligation to update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise.
Recent Market Developments
In response to the unprecedented challenges affecting the banking system, the
federal government began implementing several programs in late 2008 designed to
address a variety of issues facing the financial sector. The most noteworthy of
these initiatives was the Emergency Economic Stabilization Act of 2008 (the
"EESA"). The EESA led to the Troubled Asset Relief Program (the "TARP") and the
TARP Capital Purchase Program, neither of which had a direct impact on People's
United Financial as the Company did not participate in these programs. People's
United Financial did, however, experience a number of changes with respect to
deposit insurance coverage and related assessments.
FDIC Insurance Coverage / Assessments
The Federal Deposit Insurance Corporation (the "FDIC") insures deposits at FDIC
insured financial institutions up to certain limits, charging premiums to
maintain the Deposit Insurance Fund (the "DIF") at specified levels. Such
premiums may vary based on the risk profile of the insured institution and,
until 2009, ranged from 0.05% of deposits for an institution in the highest
sub-category of the highest category to 0.43% of deposits for an institution in
the lowest category.
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Adverse economic conditions over the past several years has resulted in an
increased number of bank failures and, consequently, greater use of DIF
resources. In November 2009, the FDIC adopted a final rule that amended the
assessment regulations to require insured financial institutions to prepay their
estimated deposit insurance premiums for 2010, 2011 and 2012 on December 30,
2009. Under this rule, the prepayment was based on an assumed 5% annual growth
rate in each institution's insured deposits (the assessment base) and an assumed
increase of three basis points in each institution's premium assessment rate
beginning in 2011. On December 30, 2009, People's United Bank prepaid its
estimated deposit insurance premiums totaling $69 million in accordance with
FDIC regulations. The prepaid deposit insurance assessment at June 30, 2012 was
$14 million, which includes balances acquired in connection with recent business
combinations.
The EESA increased the FDIC deposit insurance limit from $100,000 to $250,000
per depositor through December 31, 2009, and subsequent amendments extended the
increased coverage through December 31, 2013.
In February 2011, the FDIC approved a final rule that: (i) changed the
assessment base from adjusted domestic deposits to a bank's average consolidated
total assets minus average tangible equity (defined as Tier 1 capital);
(ii) adopted a new large-bank pricing assessment scheme; and (iii) set a target
size for the DIF at 2% of insured deposits. The rule, which was effective
beginning with the quarterly assessment period ended June 30, 2011, also
(i) implemented a lower assessment rate schedule when the DIF reaches 1.15
percent and, in lieu of dividends, provides for a lower rate schedule when the
reserve ratio reaches 2 percent and 2.5 percent and (ii) created a
scorecard-based assessment system for financial institutions with more than $10
billion in assets, including People's United Bank.
The actual amount of future assessments will be dependent on several factors,
including: (i) People's United Bank's average total assets and average tangible
equity; (ii) People's United Bank's risk profile; and (iii) whether additional
special assessments are imposed in future periods and the manner in which such
assessments are determined.
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
As previously disclosed in the risk factors included in People's United
Financial's Annual Report on Form 10-K for the year ended December 31, 2011, our
business is subject to risk as a result of changes in Federal and State
regulation. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the
"DFA"), which was signed into law on July 21, 2010, implements significant
changes in the financial regulatory landscape and will impact all financial
institutions and their holding companies, including People's United Bank and
People's United Financial.
Among the DFA's significant regulatory changes, it creates a new federal
consumer protection agency, the Consumer Financial Protection Bureau (the
"CFPB"), which is empowered to promulgate new consumer protection regulations
and revise existing regulations in many areas of consumer protection. The CFPB
has exclusive authority to issue regulations, orders and guidance to administer
and implement the objectives of federal consumer protection laws. The CFPB will
also have exclusive supervision over our consumer compliance examinations.
Moreover, the DFA permits states to adopt stricter consumer protection laws and
authorizes state attorneys general to enforce consumer protection rules issued
by the CFPB. The DFA restricts the authority of the federal banking regulators
to preempt state consumer protection laws applicable to the Bank and limits the
preemption of state laws as they affect subsidiaries and agents of
federally-chartered banks.
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The DFA provides that the amount of interchange fee that an issuer of debit
cards may charge or receive must be "reasonable and proportional" to the cost of
the transaction. The DFA directs the Board of Governors of the Federal Reserve
System (the "FRB") to issue regulations to implement this requirement, and
further provides that in determining whether a charge is "reasonable and
proportional" the issuer may generally consider only costs that are specific to
the individual transaction. Separately, the FRB is authorized to issue
regulations that would allow an issuer to adjust interchange fees to reflect the
costs associated with fraud mitigation related to debit card transactions,
provided that the issuer must comply with fraud-related standards to be
established by the FRB. The DFA further provides that a debit card issuer may
not restrict the number of payment card networks on which a debit card
transaction may be processed to a single network or limit the ability of a
merchant to direct the routing of debit card payments for processing. The
interchange fee provisions became effective in the fourth quarter of 2011 (see
Non-Interest Income). It is anticipated that establishment of the CFPB and these
other changes will significantly increase the Company's regulatory compliance
burden and costs and may restrict the financial products and services People's
United Financial offers to its customers.
All federal prohibitions on the ability of financial institutions to pay
interest on demand deposit accounts were repealed as part of the DFA. As a
result, beginning on July 21, 2011, financial institutions could begin offering
interest on demand deposits. As of June 30, 2012, People's United Bank's
non-interest-bearing deposits totaled $4.8 billion, or 22% of total deposits.
The Company's interest expense may increase and its net interest margin may
decrease if we begin to offer higher rates of interest than we currently offer
on demand deposits.
The DFA also imposes stringent capital requirements on bank holding companies
by, among other things, imposing leverage ratios on holding companies and
prohibiting new trust preferred issuances from counting as Tier 1 capital. The
DFA also increases regulation of derivatives and hedging transactions, which
could limit the ability of People's United Financial to enter into, or increase
the costs associated with, interest rate and other hedging transactions.
The actions noted above, together with additional actions announced by the U.S.
Treasury and other regulatory agencies, continue to develop. It is not clear at
this time what impact such actions will have on the capital markets and the
financial services industry. The extreme levels of market volatility and limited
credit availability currently being experienced could continue to adversely
affect the U.S. banking industry and the broader U.S. and global economies for
the foreseeable future, which will have an effect on all financial institutions,
including People's United Financial.
The DFA transferred all supervisory functions, including ongoing supervision,
examination and regulation, for savings and loan holding companies and their
non-depository subsidiaries to the FRB, effective July 21, 2011, and on the same
day, the Office of the Comptroller of the Currency (the "OCC") assumed
responsibility for the supervision, examination and regulation of all
federally-chartered savings banks. In October 2011, People's United Bank filed
an application with the OCC to convert to a national bank charter. In connection
with this conversion, People's United Financial intends to submit an application
to the Federal Reserve Bank of New York to convert to a bank holding company.
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Selected Consolidated Financial Data
Three Months Ended Six Months Ended
June 30, March 31, June 30, June 30, June 30,
(dollars in millions, except per share data)
2012 2012 2011 2012 2011
Earnings Data:
Net interest income (fully taxable equivalent) $ 238.7 $ 237.6 $ 222.5 $ 476.3 $ 444.0
Provision for loan losses 10.6 11.5 14.0 22.1 28.6
Non-interest income 75.7 72.4 76.6 148.1 151.2
Non-interest expense (1) 205.7
208.6 207.0 414.3 409.8
Income before income tax expense
95.4 87.4 76.8 182.8 154.3
Net income 64.8 58.6 51.2 123.4 102.9
Operating earnings (2) 67.2 60.6 57.3 127.8 111.1
Selected Statistical Data:
Net interest margin (3) 3.97 %
4.01 % 4.13 % 3.99 % 4.15 %
Operating net interest margin (2), (3)
3.89 4.01 4.09 3.95 3.95
Return on average assets (3) 0.93 0.85 0.82 0.89 0.83
Operating return on average assets (2), (3) 0.97 0.88 0.92 0.93 0.90
Return on average tangible assets (3) 1.01 0.93 0.89 0.97 0.90
Return on average stockholders' equity (3) 5.0 4.5 4.0 4.7 4.0
Return on average tangible stockholders' equity (3) 8.6 7.7 6.3 8.1 6.4
Operating return on average tangible stockholders' equity
(2), (3) 8.9 8.0 7.1 8.4 6.9
Efficiency ratio (2) 61.5 63.2 64.9 62.3 65.1
Common Share Data:
Basic and diluted earnings per share $ 0.19
$ 0.17 $ 0.15$ 0.36$ 0.30
Operating earnings per share (2)
0.20 0.18 0.17 0.38 0.32
Dividends paid per share 0.1600 0.1575 0.1575 0.3175 0.3125
Dividend payout ratio 85.0 %
93.8 % 106.4 % 89.2 % 105.6 %
Operating dividend payout ratio (2)
82.0 90.6 95.1 86.1 97.8
Book value per share (end of period) $ 15.12
$ 15.03$ 15.01$ 15.12$ 15.01
Tangible book value per share (end of period) (2)
8.76 8.74 9.38 8.76 9.38
Stock price:
High 13.50 13.79 13.81 13.79 14.49
Low 11.25
12.20 12.55 11.25 12.17
Close (end of period)
11.61 13.23 13.44 11.61 13.44
(1) Includes a total of $3.6 million, $3.0 million and $9.2 million of
merger-related expenses and one-time charges for the three months ended
June 30, 2012, March 31, 2012 and June 30, 2011, respectively, and $6.6
million and $12.3 million for the six months ended June 30, 2012 and June 30,
2011, respectively.
(2) See Non-GAAP Financial Measures and Reconciliation to GAAP.
(3) Annualized.
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As of and for the Three Months Ended
June 30, March 31, Dec. 31, Sept. 30, June 30,
(dollars in millions) 2012 2012 2011 2011 2011
Financial Condition Data:
Total assets $ 28,144 $ 27,808 $ 27,568 $ 27,213 $ 25,323
Loans 20,606 20,490 20,400 20,148 17,687
Securities 3,702 2,895 2,931 2,540 3,226
Short-term investments (1) 73 767 411 779 822
Allowance for loan losses 180 183 183 177 176
Goodwill and other acquisition-related
intangibles 2,166 2,169 2,174 2,151 1,947
Deposits 21,458 21,268 20,816 20,487 18,278
Borrowings 960 811 857 881 1,331
Subordinated notes and debentures 160 160 160 159 159
Stockholders' equity 5,147 5,181 5,225 5,291 5,194
Non-performing assets (2) 295 316 337 305 315
Net loan charge-offs 13.5 11.2 14.8 13.4 15.5
Average Balances:
Loans $ 20,488 $ 20,407 $ 20,217 $ 19,856 $ 17,654
Securities 2,964 2,751 2,411 2,976 3,264
Short-term investments (1) 562 536 854 756 629
Loans held for sale 26 39 60 26 17
Total earning assets 24,040 23,733 23,542 23,614 21,564
Total assets 27,753 27,463 27,285 27,355 24,853
Deposits 21,190 20,843 20,597 20,259 18,225
Total funding liabilities 22,184 21,862 21,653 21,499 19,353
Stockholders' equity 5,188 5,217 5,302 5,515 5,177
Ratios:
Net loan charge-offs to average loans
(annualized) 0.26 % 0.22 % 0.29 % 0.27 % 0.35 %
Non-performing assets to originated loans,
real estate owned and repossessed assets
(2) 1.67 1.85 2.00 1.88 2.05
Originated allowance for loan losses to:
Originated loans (2) 1.00 1.03 1.04 1.09 1.15
Originated non-performing loans (2) 65.6 61.5 59.7 68.5 68.0
Average stockholders' equity to average
total assets 18.7 19.0 19.4 20.2 20.8
Stockholders' equity to total assets 18.3 18.6 19.0 19.4 20.5
Tangible stockholders' equity to tangible
assets (3) 11.5 11.7 12.0 12.5 13.9
Total risk-based capital (4) 15.6 16.0 16.2 16.7 19.1
(1) Includes securities purchased under agreements to resell.
(2) Excludes acquired loans. See Asset Quality.
(3) See Non-GAAP Financial Measures and Reconciliation to GAAP.
(4) Consolidated. See Regulatory Capital Requirements.
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Non-GAAP Financial Measures and Reconciliation to GAAP
In addition to evaluating People's United Financial's results of operations in
accordance with U.S. generally accepted accounting principles ("GAAP"),
management routinely supplements their evaluation with an analysis of certain
non-GAAP financial measures, such as the efficiency and tangible equity ratios,
tangible book value per share and operating earnings metrics. Management
believes these non-GAAP financial measures provide information useful to
investors in understanding People's United Financial's underlying operating
performance and trends, and facilitates comparisons with the performance of
other banks and thrifts. Further, the efficiency ratio and operating earnings
metrics are used by management in its assessment of financial performance,
including non-interest expense control, while the tangible equity ratio and
tangible book value per share are used to analyze the relative strength of
People's United Financial's capital position.
The efficiency ratio, which represents an approximate measure of the cost
required by People's United Financial to generate a dollar of revenue, is the
ratio of (i) total non-interest expense (excluding goodwill impairment charges,
amortization of other acquisition-related intangibles, losses on real estate
assets and non-recurring expenses) (the numerator) to (ii) net interest income
on a fully taxable equivalent ("FTE") basis plus total non-interest income
(including the FTE adjustment on bank-owned life insurance ("BOLI") income, and
excluding gains and losses on sales of assets other than residential mortgage
loans, and non-recurring income) (the denominator). People's United Financial
generally considers an item of income or expense to be non-recurring if it is
not similar to an item of income or expense of a type incurred within the last
two years and is not similar to an item of income or expense of a type
reasonably expected to be incurred within the following two years.
Operating earnings exclude from net income those items that management considers
to be of such a non-recurring or infrequent nature that, by excluding such items
(net of income taxes), People's United Financial's results can be measured and
assessed on a more consistent basis from period to period. Items excluded from
operating earnings, which include, but are not limited to, merger-related
expenses, charges related to executive-level management separation costs,
severance-related costs and write downs of banking house assets, are generally
also excluded when calculating the efficiency ratio. Operating earnings per
share is calculated by dividing operating earnings by the weighted average
number of dilutive common shares outstanding for the respective period.
Operating return on average assets is calculated by dividing operating earnings
(annualized) by average assets. Operating return on average tangible
stockholders' equity is calculated by dividing operating earnings (annualized)
by average tangible stockholders' equity. The operating dividend payout ratio is
calculated by dividing dividends paid by operating earnings for the respective
period.
Operating net interest margin excludes from the net interest margin those items
that management considers to be of such a discrete nature that, by excluding
such items, People's United Financial's net interest margin can be measured and
assessed on a more consistent basis from period to period. Items excluded from
operating net interest margin include cost recovery income on acquired loans and
changes in the accretable yield on acquired loans stemming from periodic cash
flow reassessments. Operating net interest margin is calculated by dividing
operating net interest income (annualized) by average earning assets.
The tangible equity ratio is the ratio of (i) tangible stockholders' equity
(total stockholders' equity less goodwill and other acquisition-related
intangibles) (the numerator) to (ii) tangible assets (total assets less goodwill
and other acquisition-related intangibles) (the denominator). Tangible book
value per share is calculated by dividing tangible stockholders' equity by
common shares (total common shares issued, less common shares classified as
treasury shares and unallocated Employee Stock Ownership Plan ("ESOP") common
shares).
In light of diversity in presentation among financial institutions, the
methodologies used by People's United Financial for determining the non-GAAP
financial measures discussed above may differ from those used by other financial
institutions.
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The following table summarizes People's United Financial's efficiency ratio
derived from amounts reported in the Consolidated Statements of Income:
Three Months Ended Six Months Ended
June 30, March 31, June 30, June 30, June 30,
(dollars in millions) 2012 2012 2011 2012 2011
Total non-interest expense $ 205.7 $ 208.6 $ 207.0 $ 414.3 $ 409.8
Adjustments:
Amortization of other
acquisition-related intangibles (6.8 ) (6.6 ) (6.0 ) (13.4 ) (11.9 )
Severance-related costs (1.1 ) (2.4 ) - (3.5 ) -
Merger-related expenses - - (6.4 ) - (9.5 )
Executive-level separation costs - - (2.8 ) - (2.8 )
Other (1) (4.6 ) (3.0 ) (1.9 ) (7.6 ) (4.0 )
Total $ 193.2 $ 196.6 $ 189.9 $ 389.8 $ 381.6
Net interest income (FTE basis) $ 238.7$ 237.6 $
222.5 $ 476.3 $ 444.0
Total non-interest income 75.7 72.4 76.6 148.1 151.2
Total revenues 314.4 310.0 299.1 624.4 595.2
Adjustments:
BOLI FTE adjustment 0.6 0.9 0.8 1.5 1.4
Net gains on sales of acquired loans (0.7 ) - (7.2 ) (0.7 ) (12.7 )
Net security gains - - (0.1 ) - (0.2 )
Other (2) - - - - 2.2
Total $ 314.3 $ 310.9 $ 292.6 $ 625.2 $ 585.9
Efficiency ratio 61.5 % 63.2 % 64.9 % 62.3 % 65.1 %
(1) Items classified as "other" and deducted from non-interest expense include,
as applicable, certain franchise taxes, real estate owned expenses, contract
termination costs and non-recurring expenses.
(2) Items classified as "other" and added to (deducted from) total revenues
include, as applicable, asset write-offs, gains associated with the sale of
branch locations and mortgage servicing rights, and interest on an income tax
refund.
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The following table summarizes People's United Financial's operating earnings,
operating earnings per share and operating return on average assets:
Three Months Ended Six Months Ended
June 30, March 31, June 30, June 30, June 30,
(dollars in millions, except per share data)
2012 2012 2011 2012 2011
Net income, as reported $ 64.8 $
58.6 $ 51.2$ 123.4$ 102.9
Adjustments to arrive at operating earnings:
Severance-related costs 1.1 2.4 - 3.5 -
Other non-operating expenses 2.5 0.6 - 3.1 -
Merger-related expenses - - 6.4 - 9.5
Executive-level separation costs - - 2.8 - 2.8
Total pre-tax adjustments 3.6 3.0 9.2 6.6 12.3
Tax effect (1.2 ) (1.0 ) (3.1 ) (2.2 ) (4.1 )
Total adjustments, net of tax 2.4 2.0 6.1 4.4 8.2
Operating earnings $ 67.2 $ 60.6 $ 57.3 $ 127.8 $ 111.1
Earnings per share, as reported $ 0.19 $
0.17 $ 0.15$ 0.36$ 0.30
Adjustment to arrive at operating earnings per share:
Severance-related costs - 0.01 - 0.01 -
Other non-operating expenses 0.01 - - 0.01 -
Merger-related expenses - - 0.02 - 0.02
Executive-level separation costs - - - - -
Total adjustments per share 0.01 0.01 0.02 0.02 0.02
Operating earnings per share $ 0.20 $ 0.18 $ 0.17 $ 0.38 $ 0.32
Average total assets $ 27,753 $ 27,463 $ 24,853 $ 27,608 $ 24,738
Operating return on average assets (annualized) 0.97 % 0.88 % 0.92 % 0.93 % 0.90 %
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The following table summarizes People's United Financial's operating net
interest margin:
Three Months Ended Six Months Ended
June 30, March 31, June 30, June 30, June 30,
(dollars in millions, except per share data) 2012 2012 2011 2012 2011
Net interest income (FTE basis) $ 238.7 $
237.6 $ 222.5 $ 476.3$ 444.0
Adjustments to arrive at operating net interest
income:
Cost recovery income (4.7 ) - - (4.7 ) -
Changes in accretable yield - - (2.2 ) - (11.2 )
Total adjustments (4.7 ) - (2.2 ) (4.7 ) (11.2 )
Operating net interest income $ 234.0 $
237.6 $ 220.3 $ 471.6$ 432.8
Net interest margin, as reported (annualized) 3.97 % 4.01 % 4.13 % 3.99 % 4.15 %
Adjustments to arrive at operating net interest
margin (annualized):
Cost recovery income (0.08 ) - - (0.04 ) -
Changes in accretable yield - - (0.04 ) - (0.20 )
Total adjustments (0.08 ) - (0.04 ) (0.04 ) (0.20 )
Operating net interest margin (annualized) 3.89 % 4.01 % 4.09 % 3.95 % 3.95 %
Total earning assets $ 24,040 $ 23,733 $ 21,564 $ 23,886 $ 21,420
The following tables summarize People's United Financial's operating return on average tangible stockholders' equity and operating dividend
payout ratio:
Three Months Ended Six Months Ended
June 30, March 31, June 30, June 30, June 30,
(dollars in millions) 2012 2012 2011 2012 2011
Operating earnings $ 67.2 $ 60.6 $ 57.3 $ 127.8 $ 111.1
Average stockholders' equity $ 5,188 $
5,217 $ 5,177 $ 5,203$ 5,181
Less: average goodwill and average other
acquisition-related intangibles
2,166 2,171 1,950 2,169 1,953
Average tangible stockholders' equity $ 3,022 $
3,046 $ 3,227 $ 3,034$ 3,228
Operating return on average tangible
stockholders' equity (annualized) 8.9 % 8.0 % 7.1 % 8.4 % 6.9 %
Three Months Ended Six Months Ended
June 30, March 31, June 30, June 30, June 30,(dollars in millions) 2012 2012 2011 2012 2011
Dividends paid $ 55.1 $ 54.9 $ 54.5 $ 110.0 $ 108.7
Operating earnings $ 67.2 $ 60.6 $ 57.3 $ 127.8 $ 111.1
Operating dividend payout ratio 82.0 % 90.6 % 95.1 % 86.1 % 97.8 %
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The following tables summarize People's United Financial's tangible equity ratio
and tangible book value per share derived from amounts reported in the
Consolidated Statements of Condition:
June 30, March 31, Dec. 31, Sept. 30, June 30,
(in millions, except per share data) 2012 2012 2011 2011 2011
Total stockholder' equity $ 5,147 $ 5,181 $ 5,225$ 5,291$ 5,194
Less: goodwill and other acquisition-related
intangibles
2,166 2,169 2,174 2,151 1,947
Tangible stockholders' equity $ 2,981 $ 3,012 $ 3,051 $ 3,140 $ 3,247
Total assets $ 28,154 $ 27,808 $ 27,568 $ 27,213 $ 25,323
Less: goodwill and other acquisition-related
intangibles 2,166 2,169 2,174 2,151 1,947
Tangible assets $ 25,988 $ 25,639 $ 25,394 $ 25,062 $ 23,376
Tangible equity ratio 11.5 % 11.7 % 12.0 % 12.5 % 13.9 %
June 30, March 31, Dec. 31, Sept. 30, June 30,
(in millions, except per share data) 2012 2012 2011 2011 2011
Tangible stockholders' equity $ 2,981 $ 3,012 $ 3,051 $ 3,140 $ 3,247
Common shares issued 395.87 395.84 395.42 395.46 377.02
Less: Common shares classified as treasury
shares 47.00 42.49 38.03 38.07 22.01
Unallocated ESOP common shares 8.54 8.62 8.71 8.80 8.89
Common shares 340.33 344.73 348.68 348.59 346.12
Tangible book value per share $ 8.76 $ 8.74 $ 8.75 $ 9.01 $ 9.38
Acquisition of Branches Completed in 2012
On June 22, 2012, People's United Bank acquired 57 branches from RBS Citizens,
N.A. and assumed approximately
$324 million in deposits associated with these branches. Fifty-three of the
branches are situated in Stop & Shop supermarkets and four are traditional
branches. All of the branches are located in the state of New York, with 30 on
Long Island, eight in Westchester County and six in the boroughs of New York
City. People's United Bank paid a 1% premium on the assumed deposits of
approximately $3.24 million. See Note 2 to the Consolidated Financial Statements
for a further discussion.
In the second quarter of 2012, People's United Bank sold one of its branches
located in Massachusetts. Included in the sale was approximately $11.6 million
in deposits and $0.7 million of other assets.
Acquisition Completed in 2011
After the close of business on June 30, 2011, People's United Financial acquired
Danvers Bancorp, Inc. ("Danvers") based in Danvers, Massachusetts. The
transaction was effective July 1, 2011. Total consideration paid in the Danvers
acquisition of approximately $462 million consisted of approximately $214
million in cash and 18.5 million shares of People's United Financial common
stock with a fair value of approximately $248 million. Cash consideration was
paid at the rate of $23.00 per share of Danvers common stock and stock
consideration was paid at the rate of 1.624 shares of People's United Financial
common stock per share of Danvers common stock. See Note 2 to the Consolidated
Financial Statements for a further discussion.
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Financial Overview
As previously discussed, People's United Financial completed its acquisition of
Danvers on June 30, 2011, effective
July 1, 2011. Accordingly, People's United Financial's results of operations
include the results of Danvers beginning with the effective date, and prior
period results have not been restated to include Danvers.
People's United Financial reported net income of $64.8 million, or $0.19 per
diluted share, for the three months ended
June 30, 2012, compared to $51.2 million, or $0.15 per diluted share, for the
year-ago period. Operating earnings were $67.2 million, or 0.20 per share, and
$57.3 million, or $0.17 per share, for the respective periods. Compared to the
year-ago period, second quarter 2012 earnings reflect continued organic loan and
deposit growth, an increase in net interest income, lower provision for loan
loss expense, improvements in certain fee-related businesses and tighter expense
control.
For the six months ended June 30, 2012, net income totaled $123.4 million, or
$0.36 per diluted share, compared to
$102.9 million, or $0.30 per diluted share, for the year-ago period. Operating
earnings were $127.8 million, or $0.38 per share and $111.1 million, or $0.32
per share, for the respective periods.
People's United Financial's operating return on average assets was 0.97% for the
three months ended June 30, 2012 compared to 0.92% for the year-ago period.
Operating return on average tangible stockholders' equity was 8.9% for the three
months ended June 30, 2012 compared to 7.1% for the year-ago period.
FTE net interest income increased $16.2 million from the year-ago quarter,
primarily reflecting the benefit from the Danvers acquisition, cost recovery
income on acquired loans (representing cash receipts in excess of carrying
amount), as well as a reduction in the cost of deposits. The operating net
interest margin decreased 20 basis points from the second quarter of 2011 to
3.89%, primarily reflecting the overall reduction in interest rates.
Compared to the first quarter of 2012, FTE net interest income increased $1.1
million while the operating net interest margin declined by 12 basis points,
primarily reflecting lower yields on loans.
Average earning assets increased $2.5 billion compared to the second quarter of
2011, reflecting a $2.8 billion increase in average loans partially offset by a
$300 million decrease in average securities. Average funding liabilities
increased $2.8 billion in the second quarter of 2012 compared to the year-ago
quarter, primarily reflecting a $3.0 billion increase in average total deposits
partially offset by a $127 million decrease in average total borrowings.
Compared to the year-ago quarter, total non-interest income decreased $0.9
million and total non-interest expense decreased $1.3 million (see Non-Interest
Income and Non-Interest Expense). The efficiency ratio was 61.5% for the second
quarter of 2012 compared to 64.9% for the year-ago period.
The provision for loan losses in the second quarter of 2012 totaled $10.6
million compared to $14.0 million in the year-ago quarter. The provision for
loan losses in the second quarter of 2012 reflected (i) net loan charge-offs of
$13.5 million, of which
$7.5 million carried previously-established specific reserves, and (ii) a $4.6
million increase in the allowance for loan losses due to growth in both the
commercial and residential mortgage loan portfolios (see Asset Quality). The
provision for loan losses in the second quarter of 2011 reflected net loan
charge-offs of $15.5 million and a $1.5 million decrease in the allowance for
loan losses. Net loan charge-offs as a percentage of average total loans on an
annualized basis were 0.26% in the second quarter of 2012 compared to 0.35% in
the year-ago quarter.
The allowance for loan losses on originated loans was $175.5 million at both
June 30, 2012 and December 31, 2011. The allowance for loan losses on acquired
loans was $4.8 million at June 30, 2012, a $2.6 million decrease from
December 31, 2011. Non-performing assets totaled $294.5 million at June 30,
2012, a $42.2 million decrease from December 31, 2011. At June 30, 2012, the
originated allowance for loan losses as a percentage of originated loans was
1.00% and as a percentage of originated non-performing loans was 65.6% (see
Asset Quality).
People's United Financial's total stockholders' equity was $5.1 billion at
June 30, 2012 compared to $5.2 billion at December 31, 2011 and as a percentage
of total assets, stockholders' equity was 18.3% and 19.0%, respectively.
Tangible stockholders' equity as a percentage of tangible assets was 11.5% at
June 30, 2012 compared to 12.0% at December 31, 2011.
People's United Bank's and People's United Financial's (consolidated) total
risk-based capital ratios were 14.0% and 15.6%, respectively, at June 30, 2012
compared to 14.0% and 16.2%, respectively, at December 31, 2011 (see Regulatory
Capital Requirements).
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Segment Results
Public companies are required to report (i) certain financial and descriptive
information about "reportable operating segments," as defined, and (ii) certain
enterprise-wide financial information about products and services, geographic
areas and major customers. Operating segment information is reported using a
"management approach" that is based on the way management organizes the segments
for purposes of making operating decisions and assessing performance.
People's United Financial's operations are divided into three primary operating
segments that represent its core businesses: Commercial Banking; Retail and
Business Banking; and Wealth Management. In addition, the Treasury area manages
People's United Financial's securities portfolio, short-term investments and
securities purchased under agreements to resell, wholesale borrowings and the
funding center.
The Company's operating segments have been aggregated into two reportable
segments: Commercial Banking; and Retail and Business Banking. These reportable
segments have been identified and organized based on the nature of the
underlying products and services applicable to each segment, the type of
customers to whom those products and services are offered and the distribution
channel through which those products and services are made available. With
respect to Wealth Management, this presentation results in the Company's
insurance business and certain trust activities being allocated to the
Commercial Banking segment, while the Company's brokerage business and certain
other trust activities are allocated to the Retail and Business Banking segment.
Segment results for 2011, which previously included Wealth Management as a
separate reportable segment, have been revised to reflect the aforementioned two
reportable segment approach.
People's United Financial uses an internal profitability reporting system to
generate information by operating segment, which is based on a series of
management estimates and allocations regarding funds transfer pricing ("FTP"),
the provision for loan losses, non-interest expense and income taxes. These
estimates and allocations, some of which can be subjective in nature, are
continually being reviewed and refined. Any changes in estimates and allocations
that may affect the reported results of any segment will not affect the
consolidated financial position or results of operations of People's United
Financial as a whole.
FTP is used in the calculation of each operating segment's net interest income,
and measures the value of funds used in and provided by an operating segment.
The difference between the interest income on earning assets and the interest
expense on funding liabilities, and the corresponding FTP charge for interest
income or credit for interest expense, results in net spread income (see
Treasury).
Beginning in the third quarter of 2011, the Company modified its FTP methodology
relating to certain deposit products, which resulted in the allocation of a
larger credit to net interest income within Commercial Banking and Retail and
Business Banking, with the offset allocated to Treasury. Prior period segment
results continue to reflect the previous FTP methodology.
A five-year rolling average net charge-off rate is used as the basis for the
provision for loan losses for the respective operating segment in order to
present a level of portfolio credit cost that is representative of the Company's
historical experience, without presenting the potential volatility from
year-to-year changes in credit conditions. While this method of allocation
allows management to more effectively assess the longer-term profitability of a
segment, it may result in a measure of segment provision for loan losses that
does not reflect actual incurred losses for the periods presented.
People's United Financial allocates a majority of non-interest expenses to each
operating segment using a full-absorption costing process (i.e. all expenses are
fully-allocated to the segments). Direct and indirect costs are analyzed and
pooled by process and assigned to the appropriate operating segment and
corporate overhead costs are allocated to the operating segments. Income tax
expense is allocated to each operating segment using a constant rate, based on
an estimate of the consolidated effective income tax rate for the year. Total
average assets and total average liabilities are presented for each reportable
segment due to management's reliance, in part, on such average balances for
purposes of assessing segment performance.
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The average assets of each reportable segment include allocated goodwill and
intangible assets, both of which are reviewed for impairment at least annually.
Goodwill is tested for impairment at the reporting unit level (i.e. the
operating segment or one level below, as applicable) and involves a two-step
test. The first step ("Step 1") is used to identify potential impairment, and
involves comparing each reporting unit's estimated fair value to its carrying
amount, including goodwill. If the estimated fair value of a reporting unit
exceeds its carrying amount, goodwill is not deemed to be impaired. Should the
carrying amount of the reporting unit exceed its estimated fair value, an
indicator of potential impairment is deemed to exist and a second step is
performed to measure the amount of such impairment, if any. None of the
Company's identified reporting units are at risk of failing the Step 1 goodwill
impairment test at this time.
In September 2011, the Financial Accounting Standards Board amended its
standards to provide an option to first assess qualitative factors to determine
whether the existence of events or circumstances leads to a determination that
it is more likely than not that the fair value of a reporting unit is less than
its carrying amount. If, after assessing the totality of such events or
circumstances, an entity determines it is not more likely than not that the fair
value of a reporting unit is less than its carrying amount, then the entity is
not required to perform the two-step impairment test.
Segment Performance Summary
Three months ended Retail and Total
June 30, 2012 Commercial Business Reportable Total
(in millions) Banking Banking
Segments Treasury Other Consolidated
Net interest income (loss)
$ 116.7 $ 128.2 $
244.9 $ (17.7 ) $ 8.8 $ 236.0
Provision for loan losses
10.5 3.5 14.0 - (3.4 ) 10.6
Total non-interest income 29.0 44.5 73.5 2.4 (0.2 ) 75.7
Total non-interest expense 59.2 135.5 194.7 (0.3 ) 11.3 205.7
Income (loss) before income tax
expense (benefit) 76.0 33.7 109.7 (15.0 ) 0.7 95.4
Income tax expense (benefit) 24.4 10.8 35.2 (4.8 ) 0.2 30.6
Net income (loss) $ 51.6 $ 22.9 $ 74.5 $ (10.2 ) $ 0.5 $ 64.8
Total average assets $ 14,875.3 $ 8,258.9 $
23,134.2 $ 4,004.4$ 614.5$ 27,753.1
Total average liabilities
2,955.1 18,633.5 21,588.6 599.2 377.3 22,565.1
Six months ended Retail and Total
June 30, 2012 Commercial Business Reportable Total
(in millions) Banking Banking
Segments Treasury Other Consolidated
Net interest income (loss)
$ 233.6 $ 260.1 $
493.7 $ (35.6 ) $ 13.0 $ 471.1
Provision for loan losses
21.0 7.0 28.0 - (5.9 ) 22.1
Total non-interest income 54.7 88.5 143.2 5.0 (0.1 ) 148.1
Total non-interest expense 117.7 271.9 389.6 0.3 24.4 414.3
Income (loss) before income tax
expense (benefit) 149.6 69.7 219.3 (30.9 ) (5.6 ) 182.8
Income tax expense (benefit) 48.7 22.6 71.3 (10.1 ) (1.8 ) 59.4
Net income (loss) $ 100.9 $ 47.1 $ 148.0 $ (20.8 ) $ (3.8 ) $ 123.4
Total average assets $ 14,867.2 $ 8,258.4 $
23,125.6 $ 3,868.6$ 613.6$ 27,607.8
Total average liabilities
2,891.2 18,582.7 21,473.9 596.3 335.1 22,405.3
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Commercial Banking consists principally of commercial real estate lending,
commercial and industrial lending, and commercial deposit gathering activities.
This segment also includes the equipment financing operations of People's
Capital and Leasing Corp. and People's United Equipment Finance Corp., as well
as cash management, correspondent banking and municipal banking. In addition,
Commercial Banking consists of institutional trust services, corporate trust,
insurance services provided through People's United Insurance Agency, Inc. and
private banking.
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
(in millions) 2012 2011 2012 2011
Net interest income $ 116.7 $ 102.3 $ 233.6 $ 204.9
Provision for loan losses 10.5 9.1 21.0 17.9
Total non-interest income 29.0 29.8 54.7 60.6
Total non-interest expense 59.2 58.2 117.7 116.5
Income before income tax expense 76.0 64.8 149.6 131.1
Income tax expense 24.4 21.6 48.7 43.7
Net income $ 51.6 $ 43.2 $ 100.9 $ 87.4
Total average assets $ 14,875.3 $ 12,917.7 $ 14,867.2 $ 12,870.5
Total average liabilities 2,955.1 2,335.1 2,891.2 2,394.9
Commercial Banking net income increased $8.4 million in the second quarter of
2012 compared to the second quarter of 2011. The improvement in net income
reflects the benefits from the Danvers acquisition, effective July 1, 2011, as
well as continued organic loan growth. The $14.4 million increase in net
interest income reflects an increase in average earning assets, improved spreads
on commercial loans due to loan mix and the change in FTP methodology discussed
previously, partially offset by narrowing spreads on certain commercial
deposits.
Included in non-interest income in the second quarter of 2012 and 2011 are net
gains on sales of acquired loans totaling $0.7 million and $7.2 million,
respectively. Excluding the gains on sales of acquired loans, non-interest
income in the second quarter of 2012 increased $5.7 million from the year-ago
quarter, reflecting increases in commercial banking fees and operating lease
income resulting from a higher level of equipment leased to customers.
Non-interest expense reflects a higher level of allocated expenses in the second
quarter of 2012 partially offset by a decrease in direct expenses.
Average assets increased $2.0 billion and average liabilities increased
$620 million in the second quarter of 2012 compared to the second quarter of
2011, reflecting loans acquired and deposits assumed in the Danvers acquisition
and organic loan and deposit growth.
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Retail and Business Banking includes, as its principal business lines, business
lending, consumer and business deposit gathering activities, consumer lending
(including residential mortgage and home equity lending), and merchant services.
In addition, Retail and Business Banking consists of brokerage, financial
advisory services, investment management services and life insurance provided by
People's Securities, Inc. and non-institutional trust services.
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
(in millions) 2012 2011 2012 2011
Net interest income $ 128.2 $ 107.5 $ 260.1 $ 212.8
Provision for loan losses 3.5 2.6 7.0 5.1
Total non-interest income 44.5 47.2 88.5 91.7
Total non-interest expense 135.5 135.2
271.9 266.6
Income before income tax expense 33.7 16.9 69.7 32.8
Income tax expense 10.8 5.6 22.6 10.9
Net income $ 22.9 $ 11.3 $ 47.1 $ 21.9
Total average assets $ 8,258.9 $ 7,077.3 $ 8,258.4 $ 6,960.1
Total average liabilities 18,633.5 16,428.2 18,582.7 16,202.7
Retail and Business Banking net income increased $11.6 million in the second
quarter of 2012 compared to the second quarter of 2011. The $20.7 million
increase in net interest income primarily reflects the benefits from the Danvers
acquisition, organic deposit growth and the change in FTP methodology discussed
previously, partially offset by narrower spreads on certain deposit products
resulting from the continued negative impact of a reduced interest rate
environment.
The decrease in non-interest income primarily reflects lower retail bank service
charges (reflecting the impact of certain provisions of the DFA relating to
interchange fees that became effective October 1, 2011), partially offset by an
increase in gains on sales of residential mortgages. The slight increase in
non-interest expense reflects an increase in allocated expenses partially offset
by a decrease in direct expenses.
Average assets increased $1.2 billion and average liabilities increased $2.2
billion in the second quarter of 2012 compared to the second quarter of 2011,
reflecting loans acquired and deposits assumed in the Danvers acquisition and
organic loan and deposit growth.
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Treasury encompasses the securities portfolio, short-term investments and
securities purchased under agreements to resell, wholesale borrowings, and the
funding center, which includes the impact of derivative financial instruments
used for risk management purposes.
The income or loss for the funding center represents the interest rate risk
component of People's United Financial's net interest income as calculated by
its FTP model in deriving each segment's net interest income. Under this
process, a money desk (the funding center) buys funds from liability-generating
business lines (such as consumer deposits) and sells funds to asset-generating
business lines (such as commercial lending). The price at which funds are bought
and sold on any given day is set by People's United Financial's Treasury group
and is based on the wholesale cost to People's United Financial of assets and
liabilities with similar maturities. Liability-generating businesses sell
newly-originated liabilities to the money desk and recognize a funding credit,
while asset-generating businesses buy funding for newly-originated assets from
the money desk and recognize a funding charge. Once funding for an asset is
purchased from or a liability is sold to the money desk, the price that is set
by the Treasury group will remain with that asset or liability until it matures
or reprices, which effectively transfers responsibility for managing interest
rate risk to the Treasury group.
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
(in millions) 2012 2011 2012 2011
Net interest income (loss) $ (17.7 ) $ 4.5 $ (35.6 ) $ 10.0
Provision for loan losses - - - -
Total non-interest income 2.4 1.0 5.0 1.8
Total non-interest expense (0.3 ) - 0.3 1.6
Income (loss) before income tax expense (15.0 ) 5.5 (30.9 ) 10.2
Income tax expense (benefit) (4.8 ) 1.9 (10.1 ) 3.5
Net income (loss) $ (10.2 ) $ 3.6 $ (20.8 ) $ 6.7
Total average assets $ 4,004.4 $ 4,067.0 $ 3,868.6 $ 4,062.0
Total average liabilities 599.2 717.2 596.3 672.2
Treasury's net loss in the second quarter of 2012 reflects an increase in net
interest loss due to the change in FTP methodology discussed previously.
Non-interest income in the second quarter of 2012 compared to the year-ago
period reflects an increase in net revenues relating to derivative transactions
entered into with commercial customers. The decrease in average assets in the
second quarter of 2012 primarily reflects deceases in average securities and
average short-term investments.
Other includes the residual financial impact from the allocation of revenues and
expenses (including the provision for loan losses) and certain revenues and
expenses not attributable to a particular segment; reversal of the FTE
adjustment since net interest income for each segment is presented on an FTE
basis; and the FTP impact from excess capital. This category also includes
certain non-recurring items, including merger-related expenses and one-time
charges totaling $3.6 million and $6.6 million for the three and six months
ended June 30, 2012, respectively, and $9.2 million and $12.3 million for the
three and six months ended June 30, 2011, respectively (included in total
non-interest-expense). Included in "Other" are assets such as cash, premises and
equipment, and other assets, including pension assets.
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
(in millions) 2012 2011 2012 2011
Net interest income $ 8.8 $ 6.9 $ 13.0 $ 13.8
Provision for loan losses (3.4 ) 2.3 (5.9 ) 5.6
Total non-interest income (0.2 ) (1.4 ) (0.1 ) (2.9 )
Total non-interest expense 11.3 13.6 24.4 25.1
Income before income tax expense 0.7 (10.4 ) (5.6 ) (19.8 )
Income tax expense 0.2 (3.5 ) (1.8 ) (6.7 )
Net income $ 0.5 $ (6.9 ) $ (3.8 ) $ (13.1 )
Total average assets $ 614.5 $ 790.8 $ 613.5 $ 845.7
Total average liabilities 377.3 195.0 335.1 287.2
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Net Interest Income
Net interest income and net interest margin are affected by many factors,
including changes in average balances; interest rate fluctuations and the slope
of the yield curve; sales of loans and securities; residential mortgage loan and
mortgage-backed security prepayment rates; product pricing; competitive forces;
the relative mix, repricing characteristics and maturity of earning assets and
interest-bearing liabilities; non-interest-bearing sources of funds; hedging
activities; and asset quality.
Since December 2008, the Federal Reserve Board has not changed its targeted
range for the federal funds rate of 0 to 0.25 percent. The operating net
interest margin was 3.89% in the second quarter of 2012 compared to 4.01% in the
first quarter of 2012 and 4.09% in the second quarter of 2011. The decline in
the operating net interest margin from the first quarter of 2012 reflects lower
loan yields due to repricing within the originated loan portfolio and deposit
growth exceeding loan growth, which was partially offset by lower funding costs.
The net interest margin continues to be impacted by the historically low
interest rate environment where loan repricings are outpacing the Company's
ability to lower deposit costs as well as the continued investment of a portion
of the Company's excess capital in relatively low-yielding short-term
investments.
Second Quarter 2012 Compared to Second Quarter 2011
FTE net interest income increased $16.2 million compared to the second quarter
of 2011, reflecting an $11.4 million increase in total interest and dividend
income and a $4.8 million decrease in total interest expense, and the net
interest margin decreased 16 basis points to 3.97%. Included in the second
quarter of 2012 is $4.7 million of cost recovery income on acquired loans
(representing cash receipts in excess of carrying amount). Included in the
year-ago period is $2.2 million of interest related to changes in the accretable
yield on acquired loans stemming from periodic cash flow reassessments.
Excluding these items, FTE operating net interest income increased $13.7 million
and the operating net interest margin declined 20 basis points to 3.89% in the
second quarter of 2012.
Average earning assets totaled $24.0 billion in the second quarter of 2012, a
$2.5 billion increase from the second quarter of 2011, reflecting a $2.8 billion
increase in average loans, partially offset by decreases of $300 million in
average securities and $67 million in average short-term investments. Average
loans, average securities, and average short-term investments comprised 85%, 12%
and 3%, respectively, of average earning assets in the second quarter of 2012
compared to 82%, 15% and 3%, respectively, in the 2011 period. In the current
quarter, the yield earned on the total loan portfolio was 4.80% and the yield
earned on securities and short-term investments was 2.21%, compared to 5.21% and
2.48%, respectively, in the year-ago quarter. Excluding adjustable-rate
residential mortgage loans, which are mostly of the hybrid variety,
approximately 47% of the loan portfolio had floating interest rates at June 30,
2012 compared to approximately 48% at December 31, 2011.
The total average commercial banking loan portfolio increased $1.8 billion
compared to the year-ago quarter, reflecting loans acquired in the Danvers
acquisition as well as organic growth. Average residential mortgage loans
increased $0.9 billion compared to the year-ago quarter, reflecting organic
growth as well as loans acquired in the Danvers acquisition. Average consumer
loans increased $39 million compared to the year-ago quarter, reflecting a $96
million increase in average home equity loans partially offset by a decline of
$58 million in average indirect auto loans.
Average funding liabilities totaled $22.2 billion in the second quarter of 2012,
a $2.8 billion increase from the year-ago period, reflecting a $3.0 billion
increase in average total deposits partially offset by a $127 million decrease
in average total borrowings. The increase in average total deposits reflects
deposits assumed in the Danvers acquisition and organic deposit growth. Average
savings and money market deposits, average non-interest-bearing deposits and
average time deposits increased $2.2 billion, $747 million and $60 million,
respectively. Average deposits comprised 96% and 94% of average funding
liabilities in the second quarter of 2012 and the year-ago period, respectively.
The 17 basis point decrease to 0.48% from 0.65% in the rate paid on average
funding liabilities primarily reflects the decrease in market interest rates and
the shift in deposit mix as well as continued repricing of higher-yielding
deposits assumed in acquisitions. The rate paid on average deposits decreased 13
basis points from the second quarter of 2011, reflecting decreases of 6 basis
points in time deposits and 18 basis points in savings and money market
deposits. Average savings and money market deposits and average time deposits
comprised 54% and 24%, respectively, of average total deposits in the second
quarter of 2012 compared to 51% and 28%, respectively, in the comparable 2011
period.
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Second Quarter 2012 Compared to First Quarter 2012
FTE net interest income increased $1.1 million compared to the first quarter of
2012, reflecting a $0.9 million increase in total interest and dividend income
and a $0.2 million decrease in total interest expense, and the net interest
margin decreased 4 basis points to 3.97%. Included in the second quarter of 2012
is $4.7 million of cost recovery income on acquired loans . Excluding this item,
FTE operating net interest income decreased $3.6 million and the operating net
interest margin declined 12 basis points to 3.89% in the second quarter of 2012
from 4.01% in the first quarter of 2012.
The decline in the operating net interest margin compared to the first quarter
of 2012 primarily reflects the effects of lower loan yields and higher levels of
securities (which reduced the net interest margin by eight and five basis
points, respectively) and the run-off of fair value amortization on acquired
deposits in the second quarter (which adversely affected the net interest margin
by four basis points), partially offset by lower funding costs (a five basis
point benefit in the net interest margin).
Average earning assets increased $307 million, reflecting increases of $214
million in average securities, $81 million in average loans and $26 million in
average short-term investments. The increase in average securities reflects, in
part, purchases early in the second quarter in anticipation of the receipt of
the proceeds from the branch acquisition (including approximately $324 million
in deposits) late in the quarter. Average funding liabilities increased
$322 million, reflecting a $346 million increase in average deposits partially
offset by a $25 million decrease in average borrowings.
The following tables present average balance sheets, interest income, interest
expense and the corresponding average yields earned and rates paid for the three
months ended June 30, 2012, March 31, 2012 and June 30, 2011, and the six months
ended June 30, 2012 and 2011. The average balances are principally daily
averages and, for loans, include both performing and non-performing balances.
Interest income on loans includes the effect of deferred loan fees and costs
accounted for as yield adjustments, but does not include interest on loans for
which People's United Financial has ceased to accrue interest. Premium
amortization and discount accretion (including amounts attributable to purchase
accounting adjustments) are also included in the respective interest income and
interest expense amounts. The impact of People's United Financial's use of
derivative instruments in managing interest rate risk is also reflected in the
table, classified according to the instrument hedged and the related risk
management objective.
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Average Balance Sheet, Interest and Yield/Rate Analysis (1)
June 30, 2012 March 31, 2012 June 30, 2011
Three months ended Average Yield/ Average Yield/ Average Yield/
(dollars in millions) Balance Interest Rate Balance Interest Rate Balance Interest Rate
Assets:
Short-term investments $ 561.6 $ 0.4 0.25 % $ 535.9 $ 0.3 0.24 % $ 628.8 $ 0.4 0.26 %
Securities (2) 2,964.4 19.1 2.58 2,750.7 18.7 2.72 3,264.4 23.7 2.91
Loans held for sale 25.9 0.4 6.63 39.1 0.5 4.96 16.6 0.3 6.63
Loans:
Commercial (3) 7,493.5 93.4 4.99 7,373.6 96.5 5.24 6,099.7 86.8 5.69
Commercial real estate (4) 7,011.9 96.4 5.50 7,118.7 91.7 5.15 6,558.1 92.6 5.65
Residential mortgage 3,806.6 35.8 3.76 3,713.1 36.2 3.89 2,859.3 29.7 4.16
Consumer 2,176.0 20.0 3.68 2,201.5 20.7 3.77 2,136.8 20.6 3.87
Total loans 20,488.0 245.6 4.80 20,406.9 245.1 4.81 17,653.9 229.7 5.21
Total earning assets 24,039.9 $ 265.5 4.42 % 23,732.6 $ 264.6 4.46 % 21,563.7 $ 254.1 4.71 %
Other assets 3,713.2 3,729.9 3,289.1
Total assets $ 27,753.1 $ 27,462.5 $ 24,852.8
Liabilities and stockholders' equity:
Deposits:
Non-interest-bearing $ 4,596.5 $ - - % $ 4,406.8 $ - - % $ 3,849.6 $ - - %
Savings, interest-bearing checking and
money market 11,511.4 10.1 0.35 11,186.5 11.0 0.39 9,353.7 12.4 0.53
Time 5,081.8 13.5 1.06 5,250.0 12.1 0.92 5,021.9 14.0 1.12
Total deposits 21,189.7 23.6 0.45 20,843.3 23.1 0.44 18,225.2 26.4 0.58
Borrowings:
Retail repurchase agreements 465.9 0.3 0.27 494.6 0.4 0.30 432.3 0.5 0.44
FHLB advances 330.8 1.2 1.48 331.9 1.2 1.48 478.7 1.8 1.56
Federal funds purchased and other
borrowings 37.3 0.1 0.76 32.2 0.1 0.84 50.0 0.1 0.58
Total borrowings 834.0 1.6 0.77 858.7 1.7 0.78 961.0 2.4 1.00
Subordinated notes and debentures 160.0 1.6 4.05 159.7 2.2 5.47 166.4 2.8 6.78
Total funding liabilities 22,183.7 $ 26.8 0.48 % 21,861.7 $ 27.0 0.49 % 19,352.6 $ 31.6 0.65 %
Other liabilities 381.4 383.8 322.9
Total liabilities 22,565.1 22,245.5 19,675.5
Stockholders' equity 5,188.0 5,217.0 5,177.3
Total liabilities and stockholders'
equity $ 27,753.1 $ 27,462.5 $ 24,852.8
Net interest income/spread (5) $ 238.7 3.94 % $ 237.6 3.97 % $ 222.5 4.06 %
Net interest margin 3.97 % 4.01 % 4.13 %
Operating net interest margin (6) 3.89 % 4.01 % 4.09 %
(1) Average yields earned and rates paid are annualized.
(2) Average balances and yields for securities available for sale are based on
amortized cost.
(3) Includes commercial and industrial loans and equipment financing loans.
(4) Interest income for the three months ended June 30, 2012 includes $4.7
million of cost recovery income; yield of 5.23% without cost recovery income.
(5) The fully taxable equivalent adjustment was $2.7 million, $2.5 million and
$1.3 million for the three months ended June 30, 2012, March 31, 2012 and
June 30, 2011, respectively.
(6) See Non-GAAP Financial Measures and Reconciliation to GAAP.
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Average Balance Sheet, Interest and Yield/Rate Analysis (1)
June 30, 2012 June 30, 2011
Average Yield/ Average Yield/
Six months ended (dollars in millions) Balance Interest Rate Balance Interest Rate
Assets:
Short-term investments
$ 548.3 $
0.7 0.25 % $ 680.3 $ 1.0 0.29 %
Securities purchased under agreements to resell
- - - 55.0 0.1 0.17
Securities (2) 2,857.5 37.8 2.65 3,177.0 44.9 2.83
Loans held for sale 32.5 0.9 5.63 34.4 1.0 6.00
Loans:
Commercial (3) 7,433.5 189.9 5.11 5,740.0 166.5 5.80
Commercial real estate (4) 7,065.3 188.1 5.32 6,804.8 194.1 5.71
Residential mortgage 3,759.9 72.0 3.83 2,784.0 59.0 4.24
Consumer 2,188.7 40.7 3.72 2,144.0 41.5 3.87
Total loans 20,447.4 490.7 4.80 17,472.8 461.1 5.28
Total earning assets 23,885.7 $ 530.1 4.44 % 21,419.5 $ 508.1 4.74 %
Other assets 3,722.1 3,318.8
Total assets $ 27,607.8 $ 24,738.3
Liabilities and stockholders' equity:
Deposits:
Non-interest-bearing $ 4,501.6 $ - - % $ 3,823.7 $ - - %
Savings, interest-bearing checking and money market 11,349.0
21.1 0.37 9,185.4 24.5 0.53
Time 5,165.9 25.6 0.99 5,076.4 28.5 1.12
Total deposits 21,016.5 46.7 0.45 18,085.5 53.0 0.59
Borrowings:
Retail repurchase agreements 480.3 0.7 0.28 448.5 1.0 0.43
FHLB advances 331.4 2.4 1.48 489.1 3.7 1.53
Federal funds purchased and other borrowings 34.8 0.2 0.80 41.3 0.2 0.67
Total borrowings 846.5 3.3 0.77 978.9 4.9 0.99
Subordinated notes and debentures 159.9 3.8 4.76 173.0 6.2 7.21
Total funding liabilities 22,022.9 $ 53.8 0.49 % 19,237.4 $ 64.1 0.67 %
Other liabilities 382.4 319.6
Total liabilities 22,405.3 19,557.0
Stockholders' equity 5,202.5 5,181.3
Total liabilities and stockholders' equity $ 27,607.8 $ 24,738.3
Net interest income/spread (5) $ 476.3 3.95 % $ 444.0 4.07 %
Net interest margin 3.99 % 4.15 %
Operating net interest margin (6) 3.95 % 4.04 %
(1) Average yields earned and rates paid are annualized.
(2) Average balances and yields for securities available for sale are based on
amortized cost.
(3) Includes commercial and industrial loans and equipment financing loans.
(4) Interest income for the six months ended June 30, 2012 includes $4.7 million
of cost recovery income; yield of 5.19% without cost recovery income.
(5) The fully taxable equivalent adjustment was $5.2 million and $2.5 million for
the six months ended June 30, 2012 and June 30, 2011, respectively.
(6) See Non-GAAP Financial Measures and Reconciliation to GAAP.
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Volume and Rate Analysis
The following table shows the extent to which changes in interest rates and
changes in the volume of average earning assets and average interest-bearing
liabilities have affected People's United Financial's net interest income. For
each category of earning assets and interest-bearing liabilities, information is
provided relating to: changes in volume (changes in average balances multiplied
by the prior year's average interest rates); changes in rates (changes in
average interest rates multiplied by the prior year's average balances); and the
total change. Changes attributable to both volume and rate have been allocated
proportionately.
Three Months
Ended June 30, 2012 Compared To
June 30, 2011 March 31, 2012
Increase (Decrease) Increase (Decrease)
(in millions) Volume Rate Total Volume Rate Total
Interest and dividend income:
Short-term investments $ - $ (0.1 ) $ (0.1 ) $ - $ - $ -
Securities (2.1 ) (2.5 ) (4.6 ) 1.4 (1.0 ) 0.4
Loans held for sale 0.2 - 0.2 (0.2 ) 0.1 (0.1 )
Loans:
Commercial 18.2 (11.6 ) 6.6 1.6 (4.7 ) (3.1 )
Commercial real estate 6.3 (2.4 ) 3.9 (1.4 ) 6.1 4.7
Residential mortgage 9.1 (3.0 ) 6.1 0.9 (1.2 ) (0.3 )
Consumer 0.4 (1.1 ) (0.7 ) (0.2 ) (0.5 ) (0.7 )
Total loans 34.0 (18.1 ) 15.9 0.9 (0.3 ) 0.6
Total change in interest and dividend
income 32.1 (20.7 ) 11.4 2.1 (1.2 ) 0.9
Interest expense:
Deposits:
Savings, interest-bearing checking and
money market 2.5 (4.8 ) (2.3 ) 0.3 (1.2 ) (0.9 )
Time 0.2 (0.7 ) (0.5 ) (0.4 ) 1.8 1.4
Total deposits 2.7 (5.5 ) (2.8 ) (0.1 ) 0.6 0.5
Borrowings:
Retail repurchase agreements - (0.2 ) (0.2 ) - (0.1 ) (0.1 )
FHLB advances (0.6 ) - (0.6 ) - - -
Federal funds purchased and other
borrowings - - - - - -
Total borrowings (0.6 ) (0.2 ) (0.8 ) - (0.1 ) (0.1 )
Subordinated notes and debentures (0.1 ) (1.1 ) (1.2 ) - (0.6 ) (0.6 )
Total change in interest expense 2.0 (6.8 )
(4.8 ) (0.1 ) (0.1 ) (0.2 )
Change in net interest income $ 30.1 $ (13.9 ) $ 16.2 $ 2.2 $ (1.1 ) $ 1.1
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Volume and Rate Analysis
Six Months Ended June 30, 2012
Compared To June 30, 2011
Increase (Decrease)
(in millions) Volume Rate Total
Interest and dividend income:
Short-term investments $ (0.2 ) $ (0.1 ) $ (0.3 )
Securities purchased under agreements to resell - (0.1 ) (0.1 )
Securities (4.3 ) (2.8 ) (7.1 )
Loans held for sale (0.1 ) - (0.1 )
Loans:
Commercial 7.3 (13.4 ) (6.1 )
Commercial real estate 45.0 (21.4 ) 23.6
Residential mortgage 19.1 (6.2 ) 12.9
Consumer 0.9 (1.7 ) (0.8 )
Total loans 72.3 (42.7 ) 29.6
Total change in interest and dividend income 67.7 (45.7 ) 22.0
Interest expense:
Deposits:
Savings, interest-bearing checking and money market 5.0 (8.4 ) (3.4 )
Time 0.5 (3.4 ) (2.9 )
Total deposits 5.5 (11.8 ) (6.3 )
Borrowings:
Retail repurchase agreements 0.1 (0.4 ) (0.3 )
FHLB advances (1.2 ) (0.1 ) (1.3 )
Federal funds purchased and other borrowings - - -
Total borrowings (1.1 ) (0.5 ) (1.6 )
Subordinated notes and debentures (0.4 )
(2.0 ) (2.4 )
Total change in interest expense 4.0 (14.3 ) (10.3 )
Change in net interest income $ 63.7 $ (31.4 ) $ 32.3
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Non-Interest Income
Three Months Ended Six Months Ended
June 30, March 31, June 30, June 30, June 30,
(in millions) 2012 2012 2011 2012 2011
Bank service charges $ 32.5 $ 30.3 $ 32.9 $ 62.8 $ 63.9
Investment management fees 8.7 8.6 8.3 17.3 16.5
Insurance revenue 7.2 8.4 6.6 15.6 14.5
Brokerage commissions 3.4 3.1 3.3 6.5 6.5
Net gains on sales of residential
mortgage loans 2.8 3.6 1.1 6.4 4.2
Net gains on sales of acquired loans 0.7 - 7.2 0.7 12.7
Net security gains - - 0.1 - 0.2
Other non-interest income:
Operating lease income 7.7 6.7 6.2 14.4 12.3
Commercial banking fees 6.7 4.8 4.4 11.5 9.5
Merchant services income, net 1.3 1.1 1.1 2.4 2.1
Bank-owned life insurance 1.2 1.8 1.4 3.0 2.6
Other 3.5 4.0 4.0 7.5 6.2
Total other non-interest income 20.4 18.4 17.1 38.8 32.7
Total non-interest income $ 75.7 $ 72.4 $ 76.6 $ 148.1 $ 151.2
Total non-interest income decreased $0.9 million compared to the second quarter
of 2011 and increased $3.3 million compared to the first quarter of 2012.
Included in the second quarter of 2012 and 2011 are net gains on sales of
acquired loans of $0.7 million and $7.2 million, respectively (see below). The
increase in non-interest income compared to the first quarter of 2012 reflects
continued progress in fee-based business partially offset by weakness in
insurance revenue and lower gains on sales of residential mortgage loans.
The improvement in bank service charges from the first quarter of 2012 primarily
reflects increases in cash management fees and seasonally higher interchange and
other fees. Bank service charges continue to be impacted as a result of certain
provisions of the DFA (see Recent Market Developments). The decrease in
insurance revenue reflects the seasonal nature of insurance renewals.
The decrease in net gains on sales of residential mortgage loans from the first
quarter of 2012 reflects the lower level of residential mortgage loan sales (a
13% decrease in volume in the second quarter of 2012 from the first quarter) due
to the higher level of refinancing activity in the first quarter of 2012. Net
gains on sales of residential mortgage loans in 2012 continue to reflect
improved "pricing" on residential mortgage loans sold.
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Net gains on sales of acquired loans in the second quarter of 2012 and 2011
reflect sales of acquired loans with contractual balances of approximately $2
million and $56 million, respectively (carrying amounts of approximately $2
million and $41 million, respectively).
BOLI income totaled $1.2 million ($1.8 million on a taxable-equivalent basis) in
the second quarter of 2012, compared to $1.4 million ($2.2 million on a
taxable-equivalent basis) in the year-ago quarter and $1.8 million ($2.7 million
on a taxable-equivalent basis) in the first quarter of 2012. BOLI income in the
first quarter of 2012 included death benefits received totaling $0.3 million.
The increase in operating lease income reflects higher levels of equipment
leased to PCLC customers while the increase in commercial banking fees primarily
reflects higher prepayment fees.
Assets under administration and those under full discretionary management,
neither of which are reported as assets of People's United Financial, totaled
$12.7 billion and $4.4 billion, respectively, at June 30, 2012 compared to $12.5
billion and $4.3 billion, respectively, at December 31, 2011.
In June 2005, a group of U.S. merchants filed a class action lawsuit against
VISA and MasterCard claiming that the way VISA and MasterCard set interchange
rates was a violation of anti-trust laws. In July 2012, the parties announced a
settlement to the lawsuit in which VISA and MasterCard proposed to pay $7.25
billion to the merchants ($6.05 billion in cash and $1.2 billion from an eight
month reduction in credit card interchange). The settlement, which is contingent
on approval by a judge and acceptance by the merchants in the lawsuit, is not
expected to have a significant impact on the Company's financial results.
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Non-Interest Expense
Three Months Ended Six Months Ended
June 30, March 31, June 30, June 30, June 30,
(dollars in millions) 2012 2012 2011 2012 2011
Compensation and benefits $ 104.5 $ 110.3 $ 102.5 $ 214.8 $ 207.9
Occupancy and equipment 34.1 33.4 30.9 67.5 64.0
Professional and outside service fees 17.5 15.3 17.4 32.8 33.3
Other non-interest expense:
Regulatory 7.6 7.8 7.3 15.4 14.8
Amortization of other
acquisition-related intangibles 6.8 6.6 6.0 13.4 11.9
Amortization of leased equipment 6.4 5.6 5.1 12.0 10.2
Stationery, printing, postage and
telephone 5.4 5.7 5.2 11.1 10.4
Advertising and promotion 5.1 4.4 4.5 9.5 7.8
Other 18.3 19.5 21.7 37.8 40.0
Total other non-interest expense 49.6 49.6 49.8 99.2 95.1
Total 205.7 208.6 200.6 414.3 400.3
Merger-related expenses - - 6.4 - 9.5
Total non-interest expense $ 205.7 $ 208.6 $ 207.0 $ 414.3 $ 409.8
Efficiency ratio 61.5 % 63.2 % 64.9 % 62.3 % 65.1 %
Excluding the effect of merger-related expenses, total non-interest expense in
the second quarter of 2012 increased $5.1 million compared to the second quarter
of 2011 and decreased $2.9 million compared to the first quarter of 2012.
Merger-related expenses consist of: (i) fees for investment advisory, legal,
accounting and valuation services; (ii) debt prepayment costs;
(iii) compensatory charges; and (iv) regulatory filings. Total non-interest
expense in the third quarter of 2012 will reflect the impact of a full quarter
of expenses relating to the purchase of 57 branches late in the second quarter
(approximately a $7.1 million increase from the second quarter).
The lower efficiency ratio in the second quarter of 2012 compared to the second
quarter of 2011 reflects a 7% increase in operating revenues partially offset by
a 2% increase in operating expenses. As compared to the first quarter of 2012,
the decrease in the efficiency ratio reflects a 1% increase in operating
revenues and a 2% decrease in operating expenses (see Non-GAAP Financial
Measures and Reconciliation to GAAP).
Compensation and benefits increased $2.0 million compared to the year-ago
quarter and decreased $5.8 million compared to the first quarter of 2012. The
year-over-year increase reflects additional compensation and benefit costs
resulting from the Danvers acquisition (effective July 1, 2011), normal merit
increases and higher benefit-related costs. The decrease from the first quarter
of 2012 primarily reflects lower payroll tax expense as a result of more
employees having reached the maximum payroll tax limit and lower benefit-related
costs.
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In July 2011, People's United Bank amended its defined benefit pension plan (the
"Plan") to "freeze", effective December 31, 2011, the accrual of pension
benefits for Plan participants. As such, Plan participants will not earn any
additional benefits after that date. Instead, effective January 1, 2012,
People's United Bank began making a contribution on behalf of these participants
to a qualified defined contribution plan in an annual amount equal to 3% of the
employee's eligible compensation. Also in July 2011, other cost-saving
initiatives were announced, including the elimination of selected positions
primarily within corporate functions, non-core lending businesses and the former
Bank of Smithtown. The annual cost savings expected to be realized as a result
of these initiatives is approximately $20 million beginning in 2012.
The increase in occupancy and equipment compared to the second quarter of 2011
primarily reflects the incremental costs associated with the continued
geographic expansion of the Company's franchise. The increase in amortization
expense of leased equipment relates to the higher level of equipment leased to
PCLC customers.
Scheduled amortization expense attributable to other acquisition-related
intangible assets for the full-year of 2012 and each of the next five years is
as follows: $26.8 million in 2012; $26.2 million in 2013; $24.8 million in 2014;
$23.8 million in 2015; $22.7 million in 2016; and $21.6 million in 2017.
Income Taxes
People's United Financial's effective income tax rate was 32.5% for the six
months ended June 30, 2012, which approximates the expected income tax rate for
the remainder of 2012, compared to 32.7% for the full-year of 2011. The
difference between People's United Financial's effective income tax rate for the
six months ended June 30, 2012 and the U.S. federal statutory rate of 35% is
primarily attributable to: (i) federal income tax credits associated with the
Company's investment in affordable housing limited partnerships; (ii) tax exempt
interest earned on certain investments; (iii) tax exempt income from bank-owned
life insurance; and (iv) state income taxes.
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FINANCIAL CONDITION
General
Total assets at June 30, 2012 were $28.2 billion, a $586 million increase from
December 31, 2011, reflecting increases of $771 million in total securities and
$206 million in total loans, partially offset by decreases of $338 million in
short-term investments, $47 million in other assets and $45 million in loans
held for sale.
At June 30, 2012, liabilities totaled $23.0 billion, a $665 million increase
from December 31, 2011, reflecting increases of $642 million in total deposits
and $103 million in total borrowings, partially offset by an $81 million
decrease in other liabilities. On June 22, 2012, People's United Bank acquired
57 branches and assumed approximately $324 million in deposits associated with
these branches. See Note 2 to the Consolidated Financial Statements for a
further discussion.
The increase in total loans from December 31, 2011 to June 30, 2012 reflects
increases of $204 million in residential mortgage loans, $134 million in
commercial and industrial loans, and $92 million in equipment financing loans,
partially offset by decreases of $173 million in commercial real estate loans
and $51 million in consumer loans. Originated loans increased $791 million from
December 31, 2011 (commercial banking loans increased $561 million and retail
loans increased $230 million) and acquired loans decreased $585 million.
Non-performing assets (excluding acquired non-performing loans) totaled $294.5
million at June 30, 2012, a $42.2 million decrease from year-end 2011, primarily
reflecting decreases in non-performing commercial real estate loans of $16.2
million, repossessed assets of $8.9 million, real estate owned ("REO") of $7.1
million, non-performing equipment financing loans of $5.6 million and
non-performing residential mortgage loans of $5.2 million. The allowance for
loan losses was $180.3 million at June 30, 2012 compared to $182.9 million at
December 31, 2011. At June 30, 2012, the originated allowance for loan losses as
a percent of originated loans was 1.00% and as a percent of originated
non-performing loans was 65.6%, compared to 1.04% and 59.7%, respectively, at
December 31, 2011.
People's United Financial's total stockholders' equity was $5.1 billion at
June 30, 2012, a $78 million decrease from December 31, 2011. This decrease
primarily reflects dividends paid of $110.0 million and open market repurchases
of 9.0 million shares of common stock at a total cost of $110.1 million,
partially offset by net income of $123.4 million. As a percentage of total
assets, stockholders' equity was 18.3% at June 30, 2012 compared to 19.0% at
December 31, 2011. Tangible stockholders' equity as a percentage of tangible
assets was 11.5% at June 30, 2012 compared to 12.0% at December 31, 2011.
People's United Financial's (consolidated) tier 1 and total risk-based capital
ratios were 14.1% and 15.6%, respectively, at June 30, 2012, compared to 14.8%
and 16.2%, respectively, at December 31, 2011. People's United Bank's leverage
(core) capital ratio, and tier 1 and total risk-based capital ratios were 11.0%,
13.1% and 14.0%, respectively, at June 30, 2012, compared to 11.1%, 13.1% and
14.0%, respectively, at December 31, 2011 (see Regulatory Capital Requirements).
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Loans
People's United Financial's lending activities consist of originating loans
secured by commercial and residential properties, and extending secured and
unsecured loans to commercial and consumer customers. The following tables
summarize People's United Financial's loan portfolios.
Commercial Real Estate
June 30, December 31,
(in millions) 2012 2011
Property Type:
Office buildings $ 2,158.2 $ 2,130.1
Retail 1,747.5 1,730.2
Residential (multi-family) 1,616.1 1,796.7
Industrial/manufacturing 524.3 499.8
Hospitality and entertainment 377.1 404.9
Mixed/Special use 212.1 237.9
Land 126.7 139.3
Self storage 120.2 129.2
Health care 58.6 40.0
Other properties 58.9 64.1
Total commercial real estate $ 6,999.7 $ 7,172.2
Commercial and Industrial
June 30, December 31,
(in millions) 2012 2011
Industry:
Finance, insurance and real estate $ 1,471.2 $ 1,300.0
Service 1,005.3 1,087.6
Manufacturing 822.8 765.2
Wholesale distribution 540.8 522.6
Retail sales 529.1 527.4
Health services 416.9 448.1
Construction 197.2 209.3
Transportation/utility 136.3 112.8
Arts/entertainment/recreation 134.6 147.1
Public administration 89.7 86.0
Agriculture 22.3 24.4
Other 120.3 122.1
Total commercial and industrial $ 5,486.5 $ 5,352.6
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Equipment Financing
June 30, December 31,
(in millions) 2012 2011
Industry:
Transportation/utility $ 679.9 $ 614.7
Construction 399.0 412.2
Printing 289.5 331.7
General manufacturing 149.7 134.0
Waste 149.6 136.6
Retail sales 128.3 114.3
Packaging 99.6 92.1
Wholesale distribution 58.1 49.3
Health services 52.8 41.6
Service 52.5 47.9
Food services 29.5 32.3
Other 32.6 22.7
Total equipment financing $ 2,121.1 $ 2,029.4
Residential Mortgage
June 30, December 31,
(in millions) 2012 2011
Adjustable-rate $ 3,208.8 $ 2,947.7
Fixed-rate 623.1 680.7
Total residential mortgage $ 3,831.9 $ 3,628.4
Consumer
June 30, December 31,
(in millions) 2012 2011
Home equity lines of credit $ 1,851.8 $ 1,862.3
Home equity loans 187.1 195.4
Indirect auto 83.1 117.0
Other 44.7 42.7
Total consumer $ 2,166.7 $ 2,217.4
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Asset Quality
Recent Trends
The past several years have been marked by significant volatility in the
financial and capital markets initially brought about by the fallout associated
with the subprime mortgage market. This disruption led to significant credit and
liquidity concerns, which resulted in government intervention within the banking
sector and a substantial decline in activity within the secondary mortgage
market. All of these issues have been further exacerbated by an accelerated
softening of the real estate market, a worsening recessionary economic
environment and, in turn, weakness within the commercial sector.
While People's United Financial continues to adhere to prudent underwriting
standards, the loan portfolio is geographically diverse and, therefore, is not
immune to potential negative consequences arising as a result of general
economic weakness and, in particular, a prolonged downturn in the housing market
on a national scale. Decreases in real estate values could adversely affect the
value of property used as collateral for loans. In addition, adverse changes in
the economy could have a negative effect on the ability of borrowers to make
scheduled loan payments, which would likely have an adverse impact on earnings.
Further, an increase in loan delinquencies may serve to decrease net interest
income and adversely impact loan loss experience, resulting in an increased
provision and allowance for loan losses.
People's United Financial actively manages asset quality through its
underwriting practices and collection operations. Underwriting practices tend to
focus on optimizing the return of a given risk classification while collection
operations focus on minimizing losses once an account becomes delinquent.
People's United Financial attempts to minimize losses associated with commercial
banking loans by requiring borrowers to pledge adequate collateral and/or
provide for third-party guarantees. Loss mitigation within the residential
mortgage loan portfolio is highly dependent on the value of the underlying real
estate.
During the recent credit cycle, People's United Financial has experienced an
increase in the number of loan modification requests. Certain originated loans
whose terms have been modified are considered troubled debt restructurings
("TDRs"). Acquired loans that are modified are not considered for TDR
classification provided they are evaluated for impairment on a pool basis.
Originated loans are considered TDRs if the borrower is experiencing financial
difficulty and is afforded a concession by People's United Financial, such as,
but not limited to: (i) payment deferral; (ii) a reduction of the stated
interest rate for the remaining contractual life of the loan; (iii) an extension
of the loan's original contractual term at a stated interest rate lower than the
current market rate for a new loan with similar risk; (iv) capitalization of
interest; or (v) forgiveness of principal or interest.
Generally, TDRs are placed on non-accrual status (and reported as non-performing
loans) until the loan qualifies for return to accrual status. Loans qualify for
return to accrual status once they have demonstrated performance with the
restructured terms of the loan agreement for a minimum of six months. Loans may
continue to be reported as TDRs after they are returned to accrual status.
During the six months ended June 30, 2012, we performed 30 loan modifications
that were not classified as TDRs. In each case, we concluded that the
modification did not result in the granting of a concession based on one or more
of the following considerations: (i) the receipt of additional collateral (the
nature and amount of which was deemed to serve as adequate compensation for
other terms of the restructuring) and/or guarantees; (ii) the borrower having
access to funds at a market rate for debt with similar risk characteristics as
the restructured debt; and (iii) the restructuring resulting in a delay in
payment that is insignificant in relation to the other terms of the obligation.
See Note 4 to the Consolidated Financial Statements for additional disclosures
relating to TDRs.
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Portfolio Risk Elements - Residential Mortgage Lending
People's United Financial does not engage in subprime mortgage lending, which
has been the riskiest sector of the residential housing market. People's United
Financial has virtually no exposure to subprime loans, or to similarly high-risk
Alt-A loans and structured investment vehicles.
At June 30, 2012, the loan portfolio included $660 million of interest-only
residential mortgage loans, of which $17 million are stated income loans.
People's United Financial began originating interest-only residential mortgage
loans in March 2003. The underwriting guidelines and requirements for such loans
are generally more restrictive than those applied to other types of residential
mortgage loans. In general, People's United Financial's underwriting guidelines
for residential mortgage loans require the following: (i) properties must be
single-family and owner-occupied primary residences; (ii) lower loan-to-value
ratios (less than 60% on average); (iii) higher credit scores (greater than 700
on average); and (iv) sufficient post closing reserves. People's United
Financial has not originated interest-only residential mortgage loans that
permit negative amortization or optional payment amounts. Amortization of an
interest-only residential mortgage loan begins after the initial interest rate
changes (e.g. after 5 years for a 5/1 adjustable-rate mortgage).
Stated income loans, which People's United Financial has not offered since
mid-2007, represent a form of reduced documentation loan that requires a
potential borrower to complete a standard mortgage application with full
verification of the borrower's asset information as contained in the loan
application, but no verification of the provided income information. As with
interest-only loans, underwriting guidelines for stated income loans require
properties to be single-family and owner-occupied primary residences with lower
loan-to-value ratios and higher credit scores. In addition, stated income loans
require the receipt of an appraisal for the real estate used as collateral and a
credit report on the prospective borrower.
Updated property values are obtained from an independent third-party for
residential mortgage loans 90 days past due. At June 30, 2012, non-performing
residential mortgage loans totaling $4.4 million had current loan-to-value
ratios of more than 100%.
The Company continues to review its foreclosure policies and procedures and has
found no systemic concerns or instances of "robo-signing" (signing foreclosure
affidavits without an appropriate review) with respect to its loan servicing
activities. We believe that our established procedures for reviewing foreclosure
affidavits and validating information contained in related loan documentation
are sound and consistently applied, and that our foreclosure affidavits are
accurate. As a result, People's United Bank has not found it necessary to
interrupt or suspend foreclosure proceedings. We have also considered the effect
of representations and warranties that we made to third-party investors in
connection with whole loan sales, and believe our representations and warranties
were true and correct and do not expose People's United Bank to any material
loss.
During the first six months of 2012, the Company repurchased from government
sponsored enterprises ("GSEs") and other parties a total of six residential
mortgage loans that we had previously sold to the GSEs and other parties. The
balances of the loans at the time of the respective repurchases totaled $0.9
million and related fees and expenses incurred totaled less than $50,000. During
that same time period, the Company issued seven investor refunds under
contractual obligations as a result of early payoffs, and sales and settlement
differences on seven loans that totaled less than $25,000. Based on the limited
number of repurchase requests the Company has historically received, the
immaterial cost associated with such repurchase requests and management's view
that this past experience is consistent with our current and near-term estimate
of such exposure, the Company has established a reserve for such repurchase
requests, which totaled $0.4 million as of June 30, 2012.
The aforementioned foreclosure issues and the potential for additional legal and
regulatory action could impact future foreclosure activities, including
lengthening the time required for residential mortgage lenders, including
People's United Bank, to initiate and complete the foreclosure process. In
recent years, foreclosure timelines have increased as a result of, among other
reasons: (i) delays associated with the significant increase in the number of
foreclosure cases as a result of the economic crisis; (ii) additional consumer
protection initiatives related to the foreclosure process; and (iii) voluntary
and/or mandatory programs intended to permit or require lenders to consider loan
modifications or other alternatives to foreclosure. Further increases in the
foreclosure timeline may have an adverse effect on collateral values and our
ability to minimize losses.
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Portfolio Risk Elements - Home Equity Lending
The majority of our home equity lines of credit ("HELOCs") have an initial draw
period of 9 1/2 years followed by a 20-year repayment phase. During the initial
draw period, interest-only payments are required, after which the disbursed
balance is fully amortized over a 20-year repayment term. HELOCs carry variable
rates indexed to the Prime Rate with a lifetime interest rate ceiling and floor,
and are secured by first or second liens on the borrower's primary residence.
The rate used to qualify borrowers is the Prime Rate plus 5.00%, even though the
initial rate may be substantially lower. The maximum loan-to-value ratio is 80%
on a single-family property, 70% on a two-family property and 65% on a
condominium. Lower loan-to-value ratios are required on larger line amounts. The
minimum FICO credit score is 680. The borrower has the ability to convert the
entire balance or a portion of the balance to a fixed-rate term loan during the
draw period. There is a limit of three term loans that must be fully amortized
over a term not to exceed the original HELOC maturity date.
A smaller portion of our HELOC portfolio has an initial draw period of 10 years
with a variable-rate interest-only payment, after which there is a 5-year
amortization period. An additional small portion of our HELOC portfolio has a
5-year draw period which, at our discretion, may be renewed for an additional
5-year interest-only draw period.
The following table sets forth, as of June 30, 2012, the amount of HELOCs
scheduled to have the draw period end during the years shown:
December 31, (in millions) Credit Lines
2012 $ 66.2
2013 252.6
2014 338.8
2015 367.2
2016 372.8
2017 487.8
Later years 1,781.6
Total $ 3,667.0
Essentially all of our HELOCs (97%) are presently in their draw period. Our
default and delinquency statistics indicate a higher level of occurrence for
converted amortizing payment loans when compared to HELOCs that are still in the
draw period.
Delinquency statistics for the HELOC portfolio at June 30, 2012 are as follows:
Portfolio Delinquencies
(dollars in millions) Balance Amount Percent
HELOC status:
Still in draw period $ 1,805.4 $ 21.6 1.20 %
Amortizing payment 46.4 2.4 5.19
For the six months ended June 30, 2012, approximately 35% of our borrowers with
balances outstanding under HELOCs paid only the minimum amount due.
The majority of our home equity loan ("HEL") portfolio fully amortizes over
terms ranging from 5 to 20 years. HELs are limited to first or second liens on a
borrower's primary residence. The maximum loan-to-value ratio is 80% on a
single-family property, 70% on a two-family property and 65% on a condominium.
Lower loan-to-value ratios are required on larger line amounts.
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We are not able, at this time, to develop statistics for the entire HEL
portfolio with respect to first liens serviced by third parties that have
priority over our junior liens, as lien position data has not historically been
captured on our loan servicing systems. As of June 30, 2012, full and complete
first lien position data was not readily available for approximately 80% of the
HEL portfolio. Effective January 2011, we began tracking lien position data for
all new originations and our collections department continues to add lien
position data once a loan reaches 75 days past due in connection with our
updated assessment of combined loan-to-value ("CLTV") exposure, which takes
place for loans 90 days past due. In addition, when we are notified that the
holder of a superior lien has commenced a foreclosure action, our home equity
account is identified in the collections system for ongoing monitoring of the
legal action. As of June 30, 2012, the portion of the HEL portfolio greater than
90 days past due with a CLTV greater than 80% was $6.9 million.
When the first lien is held by a third party, we can, in some cases, obtain an
indication that a first lien is in default through information reported to
credit bureaus. However, because more than one mortgage may be reported in a
borrower's credit report and there may not be a corresponding property address
associated with reported mortgages, we are often unable to associate a specific
first lien with our junior lien. As of June 30, 2012, there were 65 loans
totaling $5.4 million for which we have received notification that the holder of
a superior lien has commenced foreclosure action. For 29 of the loans (totaling
$1.4 million), our second lien position was performing at the time such
foreclosure action was commenced. The total estimated loss related to those 29
loans was $0.8 million as of June 30, 2012. It is important to note that the
percentage of new home equity originations for which we hold the first lien has
increased steadily from approximately 40% in 2009 to approximately 55% as of
June 30, 2012.
We believe there are several factors that serve to mitigate the potential risk
associated with the limitations on available first lien data. Most importantly,
our underwriting guidelines for home equity loans, which have been, and continue
to be, consistently applied, generally require the following: (i) properties
located within our geographic footprint; (ii) lower loan-to-value ratios; and
(iii) higher credit scores. Notwithstanding the maximum loan-to-value ratios and
minimum FICO scores discussed previously, actual loan-to-value ratios at
origination were less than 60% on average and current FICO scores of our
borrowers are greater than 750 on average. In addition, as of June 30, 2012,
approximately 74% of the portfolio balance relates to originations that occurred
since 2005, which is generally recognized as the peak of the recent housing
bubble. We believe these factors are a primary reason for the portfolio's
relatively low level of non-performing loans and net loan charge-offs, both in
terms of absolute dollars and as a percentage of average loans.
Each month, all home equity and second mortgage loans greater than 180 days past
due (regardless of our lien position) are analyzed in order to determine the
amount by which the balance outstanding (including any amount subject to a first
lien) exceeds the underlying collateral value. To the extent a shortfall exists,
a charge-off is recognized. This charge-off activity is reflected in our
established allowance for loan losses for home equity and second mortgage loans
as part of the component attributable to historical portfolio loss experience,
which considers losses incurred over the most recent 12-month period. While the
limitations on available first lien data could impact the accuracy of our loan
loss estimates, we believe that our methodology results in an allowance for loan
losses that appropriately estimates the inherent probable losses within the
portfolio, including those loans originated prior to January 2011 for which
certain lien position data is not available.
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Portfolio Risk Elements - Commercial Real Estate Lending
In general, construction loans originated by People's United Financial are used
to finance improvements to commercial, industrial or residential property.
Repayment is typically derived from the sale of the property as a whole, the
sale of smaller individual units, or by a take-out from a permanent mortgage.
The term of the construction period generally does not exceed two years. Loan
commitments are based on established construction budgets which represent an
estimate of total costs to complete the proposed project, including both hard
(direct) costs (building materials, labor, etc.) and soft (indirect) costs
(legal and architectural fees, etc.). In addition, project costs may include an
appropriate level of interest reserve to carry the project through to
completion. If established, such interest reserves are determined based on:
(i) a percentage of the committed loan amount; (ii) the loan term; and (iii) the
applicable interest rate. Regardless of whether a loan contains an interest
reserve, the total project cost statement serves as the basis for underwriting
and determining which items will be funded by the loan and which items will be
funded through borrower equity.
Construction loans are funded, at the request of the borrower, not more than
once per month, based on the extent of work completed, and are monitored,
throughout the life of the project, by an independent professional construction
engineer and the Company's commercial real estate lending department. Interest
is advanced to the borrower upon request, based upon the progress of the project
toward completion. The amount of interest advanced is added to the total
outstanding principal under the loan commitment. Should the project not progress
as scheduled, the adequacy of the interest reserve necessary to carry the
project through to completion is subject to close monitoring by management.
Should the interest reserve be deemed to be inadequate, the borrower is required
to fund the deficiency. Similarly, once a loan is fully funded, the borrower is
required to fund all interest payments.
People's United Financial's construction loan portfolio totaled $654 million
(approximately 3% of total loans) at June 30, 2012. The total committed amount
at that date, including both the outstanding balance and the unadvanced portion
of such loans, totaled $874 million. In some cases, a portion of the total
committed amount includes an accompanying interest reserve. At June 30, 2012,
construction loans totaling $217 million had remaining available interest
reserves totaling $16 million. At that date, the Company had no construction
loans with interest reserves that were on non-accrual status and included in
non-performing loans.
The recent economic downturn has resulted in an increase in the number of
extension requests for commercial real estate and construction loans, some of
which have related repayment guarantees. Modifications of originated commercial
real estate loans involving maturity extensions are evaluated according to the
Company's normal underwriting standards and are classified as TDRs if the
borrower is experiencing financial difficulty and is afforded a concession by
People's United Financial similar to those discussed previously. People's United
Financial had approximately $18 million of restructured construction loans as of
June 30, 2012.
An extension may be granted to allow for the completion of the project,
marketing or sales of completed units, or to provide for permanent financing,
and is based on a re-underwriting of the loan and management's assessment of the
borrower's ability to perform according to the agreed-upon terms. Typically, at
the time of an extension, borrowers are performing in accordance with
contractual loan terms. Extension terms generally do not exceed 12 to 18 months
and typically require that the borrower provide additional economic support in
the form of partial repayment, additional collateral or guarantees. In cases
where the fair value of the collateral or the financial resources of the
borrower are deemed insufficient to repay the loan, reliance may be placed on
the support of a guarantee, if applicable. However, such guarantees are never
considered the sole source of repayment.
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People's United Financial evaluates the financial condition of guarantors based
on the most current financial information available. Most often, such
information takes the form of (i) personal financial statements of net worth,
cash flow statements and tax returns (for individual guarantors) and
(ii) financial and operating statements, tax returns and financial projections
(for legal entity guarantors). The Company's evaluation is primarily focused on
various key financial metrics, including net worth, leverage ratios and
liquidity. It is the Company's policy to update such information annually, or
more frequently as warranted, over the life of the loan.
While People's United Financial does not specifically track the frequency with
which it has pursued guarantor performance under a guarantee, the Company's
underwriting process, both at origination and upon extension, as applicable,
includes an assessment of the guarantor's reputation, creditworthiness and
willingness to perform. Historically, when the Company has found it necessary to
seek performance under a guarantee, it has been able to effectively mitigate its
losses.
In considering the impairment status of such loans, an evaluation is made of the
collateral and future cash flow of the borrower as well as the anticipated
support of any repayment guarantor. In the event that the guarantor is unwilling
or unable to perform, a legal remedy is pursued. When performance under the loan
terms is deemed to be uncertain, including performance of the guarantor, all or
a portion of the loan may be charged-off, typically based on the fair value of
the collateral securing the loan.
Allowance and Provision for Loan Losses
The allowance for loan losses is established through provisions for loan losses
charged to income. Losses on loans, including impaired loans, are charged to the
allowance for loan losses when all or a portion of a loan is deemed to be
uncollectible. Recoveries of loans previously charged off are credited to the
allowance for loan losses when realized.
People's United Financial maintains the allowance for loan losses at a level
that is deemed to be appropriate to absorb probable losses inherent in the
respective loan portfolios, based on a quarterly evaluation of a variety of
factors. These factors include, but are not limited to: (i) People's United
Financial's historical loan loss experience and recent trends in that
experience; (ii) risk ratings assigned by lending personnel to commercial real
estate loans, commercial and industrial loans, and equipment financing loans,
and the results of ongoing reviews of those ratings by People's United
Financial's independent loan review function; (iii) an evaluation of delinquent
and non-performing loans and related collateral values; (iv) the probability of
loss in view of geographic and industry concentrations and other portfolio risk
characteristics; (v) the present financial condition of borrowers; and
(vi) current economic conditions.
The Company's allowance for loan losses consists of three elements: (i) an
allowance for larger-balance, non-homogeneous loans that are evaluated on an
individual (loan-by-loan) basis; (ii) an allowance for smaller-balance
homogeneous loans that are evaluated on a collective basis; and (iii) a specific
allowance for individual loans deemed to be impaired, including originated loans
classified as TDRs.
Larger-balance, Non-homogeneous Loans. The Company establishes a loan loss
allowance for its larger-balance, non-homogeneous loans using a methodology that
incorporates (i) the probability of default for a given loan risk rating and
(ii) historical default data over a multi-year period. In accordance with the
Company's loan risk rating system, each loan, with the exception of those
included in large groups of smaller-balance homogeneous loans, is assigned a
risk rating (using a nine-grade scale) by the originating loan officer, credit
management, internal loan review or loan committee. Loans rated one represent
those loans least likely to default while loans rated nine represent a loss. The
probability of loans defaulting for each risk rating, referred to as default
factors, are estimated based on the frequency with which loans migrate from one
risk rating to another and to default status over time. Estimated loan default
factors are multiplied by loan balances within each risk-rating category and
again multiplied by an historical loss-given-default estimate for each loan type
to determine an appropriate level of allowance by loan type. The historical
loss-given-default estimates are updated annually (or more frequently, if
necessary) based on actual charge-off experience. This approach is applied to
the commercial, commercial real estate and equipment financing components of the
loan portfolio.
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In developing the allowance for loan losses for larger-balance, non-homogeneous
loans, the Company also gives consideration to certain qualitative factors,
including the macroeconomic environment and any potential imprecision inherent
in its loan loss model which may result from having limited historical loan loss
data which, in turn, may result in inaccurate probability of default and
loss-given-default factors. In consideration of these factors, the Company may
adjust the allowance for loan losses upward or downward based on current
economic conditions and portfolio trends. In determining the extent of any such
adjustment, the Company considers both economic and portfolio-specific data that
correlates with loan losses. The Company annually reviews this data to determine
that such a correlation continues to exist. Additionally, at interim dates
between annual reviews, the Company evaluates the factors in order to conclude
that they continue to be adequate based on current economic conditions.
Smaller-balance, Homogeneous Loans. Pools of smaller-balance, homogeneous loans
with similar risk and loss characteristics are also assessed for probable
losses. These loan pools include residential mortgage, home equity and other
consumer loans that are not assigned individual loan risk ratings. Rather, the
assessment of these portfolios is based upon a consideration of recent
historical loss experience, delinquency trends and portfolio-specific risk
characteristics, the combination of which determines whether a loan is
classified as "High" risk, "Moderate" risk or "Low" risk.
The allowance for loan losses for these smaller-balance, homogeneous portfolios
is developed using a "build-up" approach that includes components attributable
to: (i) historical portfolio loss experience; (ii) portfolio-specific risk
elements; and (iii) other qualitative factors.
The risk characteristics considered include (i) collateral values/loan-to-value
ratios (above and below 70%); (ii) borrower credit scores under the FICO scoring
system (above and below a score of 680); and (iii) other relevant portfolio risk
elements such as income verification at the time of underwriting (stated income
vs. non-stated income) and the property's intended use (owner-occupied,
non-owner occupied, second home, etc.). In classifying a loan as either "High",
"Moderate" or "Low" risk, the combination of each of the aforementioned risk
characteristics is considered for that loan, resulting, effectively, in a
"matrix approach" to its risk classification.
In establishing the allowance for loan losses for residential mortgage loans,
the Company principally considers historical portfolio loss experience of the
most recent 1- and 3-year periods, as management believes this provides a
reasonable basis for estimating the inherent probable losses within the
residential mortgage portfolio. In establishing the allowance for loan losses
for home equity loans, the Company principally considers historical portfolio
loss experience of the most recent 12-month period.
With respect to portfolio stratification based on the aforementioned
portfolio-specific risk characteristics, each risk category is currently
assigned an applicable reserve factor. For residential mortgage loans, the
"Moderate" (or baseline) reserve factor represents the portfolio's net
charge-off rate for the preceding fiscal year. For home equity loans, the
"Moderate" (or baseline) reserve factor represents an average of the portfolio's
monthly net charge-off rates for the preceding three months. This component of
the allowance employs a shorter look-back period as it is intended to identify
emerging portfolio trends in credit quality as determined by reference to a
loan's initial underwriting as well as subsequent changes in property values and
borrower credit scores. Accordingly, the shorter look-back period is deemed to
provide a better basis on which to analyze such trends.
Within each respective portfolio, the loan population deemed to be "High" risk
is subject to a reserve factor equal to two times that of the applicable
baseline factor, while the loan population deemed to be "Low" risk is subject to
a reserve factor equal to one-third of the applicable baseline factor. These
adjustments around the baseline factor are intended to reflect the higher or
lower probability of loss inherent in the corresponding portfolio
stratification. The reserve factor multiples for the "High" and "Low" risk
categories were determined by reference to actual historical portfolio loss
experience and are generally reflective of the range of losses incurred over
each portfolio's respective look-back period. As such, management believes that
these multiples, which are reassessed annually (or more frequently, if
necessary), provide a reasonable basis for estimating the inherent probable
losses within each risk classification category.
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In addition to the portfolio-specific quantitative measures described above, the
Company considers a variety of qualitative factors in establishing its allowance
for loan losses that, generally, are based on management's assessment of
economic, market and industry conditions. Such qualitative factors include, but
are not limited to: (i) present and forecasted economic conditions, including
unemployment rates, new jobs creation and consumer confidence levels;
(ii) changes in industry trends, including the impact of new regulations, the
origination market, the U.S. homeownership rate and potential homebuyer levels;
and (iii) trends in property values, including housing market indicators,
foreclosure activity, housing inventory and distressed sale levels, and median
sales prices/average market time.
In completing the "build-up" approach to the allowance for loan losses for
smaller-balance, homogeneous loans, the amount reflecting the Company's
consideration of these various qualitative factors is added to the amounts
attributable to historical portfolio loss experience and portfolio-specific risk
elements. In this manner, historical charge-off data (whether periods or
amounts) is not adjusted and the allowance for loan losses always includes a
component attributable to qualitative factors, the degree of which may change
from period to period as such qualitative factors indicate improving or
worsening trends. There were no significant changes in the qualitative factor
component of the related allowance for loan losses during the six months ended
June 30, 2012.
Individually Impaired Loans. The allowance for loan losses also includes
specific allowances for individually impaired loans. Generally, the Company's
impaired loans consist of (i) classified commercial loans in excess of $750,000
that have been placed on non-accrual status and (ii) originated loans classified
as TDRs. Individually impaired loans are measured based upon observable market
prices; the present value of expected future cash flows discounted at the loan's
original effective interest rate; or, in the case of collateral dependent loans,
fair value of the collateral (based on appraisals and other market information)
less cost to sell. If the recorded investment in a loan exceeds the amount
measured as described in the preceding sentence, a specific allowance for loan
losses would be established as a component of the overall allowance for loan
losses or, in the case of a collateral dependent loan, a charge-off would be
recorded for the difference between the loan's recorded investment and
management's estimate of the fair value of the collateral (less cost to sell).
It would be rare for the Company to identify a loan that meets the criteria
stated above and requires a specific allowance or a charge-off and not deem it
impaired solely as a result of the existence of a guarantee.
People's United Financial performs an analysis of its impaired loans, including
collateral dependent impaired loans, on a quarterly basis. Individually impaired
collateral dependent loans are measured based upon the appraised value of the
underlying collateral and other market information. Generally, the Company's
policy is to obtain updated appraisals for commercial collateral dependent loans
when the loan is downgraded to a risk rating of "substandard" or "doubtful", and
the most recent appraisal is more than 12 months old or a determination has been
made that the property has experienced a significant decline in value.
Appraisals are prepared by independent, licensed third-party appraisers and are
subject to review by the Company's internal commercial appraisal department or
external appraisers contracted by the commercial appraisal department. The
conclusions of the external appraisal review are reviewed by the Company's Chief
Commercial Appraiser prior to acceptance. The Company's policy with respect to
impaired residential mortgage loans is to receive updated appraisals upon the
loan being classified as non-performing (typically upon becoming 90 days past
due).
In determining the allowance for loan losses, People's United Financial gives
appropriate consideration to the age of appraisals through its regular
evaluation of other relevant qualitative and quantitative information.
Specifically, between scheduled appraisals, property values are monitored within
the commercial portfolio by reference to current originations of collateral
dependent loans and the related appraisals obtained during underwriting as well
as by reference to recent trends in commercial property sales as published by
leading industry sources. Property values are monitored within the residential
mortgage portfolio by reference to available market indicators, including real
estate price indices within the Company's primary lending areas.
In most situations where a guarantee exists, the guarantee arrangement is not a
specific factor in the assessment of the related allowance for loan losses.
However, the assessment of a guarantor's credit strength is reflected in the
Company's internal loan risk ratings which, in turn, are an important factor in
its allowance for loan loss methodology for loans within the commercial and
commercial real estate portfolios.
People's United Financial did not change its methodologies with respect to
determining the allowance for loan losses during the first six months of 2012.
While People's United Financial seeks to use the best available information to
make these determinations, future adjustments to the allowance for loan losses
may be necessary based on changes in economic conditions, results of regulatory
examinations, further information obtained regarding known problem loans, the
identification of additional problem loans and other factors.
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Acquired Loans
Acquired loans that have evidence of deterioration in credit quality since
origination and for which it is probable, at acquisition, that all contractually
required payments will not be collected are initially recorded at fair value
without recording an allowance for loan losses. Fair value of the loans is
determined using market participant assumptions in estimating the amount and
timing of both principal and interest cash flows expected to be collected, as
adjusted for an estimate of future credit losses and prepayments, and then
applying a market-based discount rate to those cash flows. Acquired loans are
generally accounted for on a pool basis, with pools formed based on the loans'
common risk characteristics, such as loan collateral type and accrual status.
Each pool is accounted for as a single asset with a single composite interest
rate and an aggregate expectation of cash flows.
Under the accounting model for acquired loans, the excess of cash flows expected
to be collected over the carrying amount of the loans, referred to as the
"accretable yield", is accreted into interest income over the life of the loans
in each pool using the effective yield method. Accordingly, acquired loans are
not subject to classification as non-accrual in the same manner as originated
loans. Rather, acquired loans are considered to be accruing loans because their
interest income relates to the accretable yield recognized at the pool level and
not to contractual interest payments at the loan level. The difference between
contractually required principal and interest payments and the cash flows
expected to be collected, referred to as the "nonaccretable difference",
includes estimates of both the impact of prepayments and future credit losses
expected to be incurred over the life of the loans in each pool. As such,
charge-offs on acquired loans are first applied to the nonaccretable difference
and then to any allowance for loan losses recognized subsequent to acquisition.
A decrease in expected cash flows in subsequent periods may indicate that the
loan pool is impaired which would require the establishment of an allowance for
loan losses by a charge to the provision for loan losses. At June 30, 2012, the
allowance for loan losses on acquired loans was $4.8 million.
Selected asset quality metrics presented below distinguish between the
'originated' portfolio and the 'acquired' portfolio. All loans acquired in
connection with acquisitions beginning in 2010 comprise the acquired loan
portfolio; all other loans of the Company comprise the originated portfolio,
including originations subsequent to the respective acquisition dates.
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Provision and Allowance for Loan Losses
Three Months Ended Six Months Ended
June 30, March 31, June 30, June 30, June 30,
(dollars in millions) 2012 2012 2011 2012 2011
Allowance for loan losses on
originated loans:
Balance at beginning of period $ 175.5 $ 175.5 $ 177.5 $ 175.5 $ 172.5
Charge-offs (12.3 ) (12.9 ) (17.4 ) (25.2 ) (27.8 )
Recoveries 1.5 1.7 1.9 3.2 2.7
Net loan charge-offs (10.8 ) (11.2 ) (15.5 ) (22.0 ) (25.1 )
Provision for loan losses 10.8 11.2 14.0 22.0 28.6
Balance at end of period $ 175.5 $ 175.5 $ 176.0 $ 175.5$ 176.0
Allowance for loan losses on acquired
loans:
Balance at beginning of period $ 7.7 $ 7.4 $ - $ 7.4 $ -
Charge-offs (2.7 ) - - (2.7 ) -
Provision for loan losses (0.2 ) 0.3 - 0.1 -
Balance at end of period $ 4.8 $ 7.7 $ - $ 4.8 $ -
Originated allowance for loan losses
as a percentage of:
Originated loans 1.00 % 1.03 % 1.15 % 1.00 % 1.15 %
Originated non-performing loans 65.6 61.5 68.0 65.6 68.0
Commercial banking originated
allowance for loan losses as a
percentage of originated commercial
banking loans 1.28 1.34 1.55 1.28 1.55
Retail originated allowance for loan
losses as a percentage of originated
retail loans 0.37 0.34 0.25 0.37 0.25
The provision for loan losses in the second quarter of 2012 totaled $10.6
million, reflecting $13.5 million in net loan charge-offs (including $7.5
million against previously-established specific reserves) and a $4.6 million
increase in the allowance for loan losses due to loan growth in both the
commercial and residential mortgage loan portfolios. The provision for loan
losses totaled $14.0 million in the second quarter of 2011, reflecting $15.5
million in net loan charge-offs and a $1.5 million decrease in the allowance for
loan losses. Management believes that the level of the allowance for loan losses
at June 30, 2012 is appropriate to cover probable losses.
Loan Charge-Offs
The Company's charge-off policies, which comply with standards established by
banking regulators, are consistently applied from period to period. Charge-offs
are recorded on a monthly basis. Partially charged-off loans continue to be
evaluated on a monthly basis and additional charge-offs or loan loss provisions
may be recorded on the remaining loan balance based on the same criteria.
For unsecured consumer loans, charge-offs are generally recorded when the loan
is deemed to be uncollectible or 120 days past due, whichever occurs first. For
consumer loans secured by real estate, including residential mortgage loans,
charge-offs are generally recorded when the loan is deemed to be uncollectible
or 180 days past due, whichever occurs first, unless it can be clearly
demonstrated that repayment will occur regardless of the delinquency status.
Factors that demonstrate an ability to repay may include: (i) a loan that is
secured by adequate collateral and is in the process of collection; (ii) a loan
supported by a valid guarantee or insurance; or (iii) a loan supported by a
valid claim against a solvent estate.
For commercial banking loans, a charge-off is recorded when the Company
determines that it will not collect all amounts contractually due based on the
fair value of the collateral less cost to sell, or the present value of expected
future cash flows.
The decision whether to charge-off all or a portion of a loan rather than to
record a specific or general loss allowance is based on an assessment of all
available information which aids in determining the loan's net realizable value.
Typically this involves consideration of both (i) the fair value of any
collateral securing the loan, including whether the estimate of fair value has
been derived from an appraisal or other market information, and (ii) other
factors affecting the likelihood of repayment, including the existence of
guarantees and insurance. If the amount by which the Company's recorded
investment in the loan exceeds its net realizable value is deemed to be a
confirmed loss, a charge-off is recorded. Otherwise, a specific or general
reserve is established, as applicable.
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Net Loan Charge-Offs
Three Months Ended Six Months Ended
June 30, March 31, June 30, June 30, June 30,
(in millions) 2012 2012 2011 2012 2011
Commercial Banking:
Commercial real estate $ 6.1 $ 5.0 $ 9.3 $ 11.1 $ 12.6
Commercial and industrial 3.1 1.6 1.7 4.7 4.0
Equipment financing 1.2 0.6 2.3 1.8 3.5
Total 10.4 7.2 13.3 17.6 20.1
Retail:
Residential mortgage 1.4 2.0 1.1 3.4 2.7
Home equity 1.4 1.7 0.8 3.1 1.6
Other consumer 0.3 0.3 0.3 0.6 0.7
Total 3.1 4.0 2.2 7.1 5.0
Total $ 13.5 $ 11.2 $ 15.5 $ 24.7 $ 25.1
Net Loan Charge-Offs as a Percentage of Average Total Loans (Annualized)
Three Months Ended Six Months Ended
June 30, March 31, June 30, June 30, June 30,
2012 2012 2011 2012 2011
Commercial Banking:
Commercial real estate 0.35 % 0.28 % 0.57 % 0.32 % 0.37 %
Commercial and industrial 0.23 0.12 0.16 0.17 0.21
Equipment financing 0.22 0.12 0.46 0.17 0.34
Retail:
Residential mortgage 0.14 0.22 0.23 0.18 0.20
Home equity 0.28 0.33 0.16 0.31 0.17
Other consumer 0.67 0.70 0.83 0.69 0.68
Total portfolio 0.26 % 0.22 % 0.35 % 0.24 % 0.29 %
The comparatively low level of net loan charge-offs in recent periods, in terms
of absolute dollars and as a percentage of average loans, may not be sustainable
in the future.
Non-Performing Assets
A loan is generally considered "non-performing" when it is placed on non-accrual
status. A loan is generally placed on non-accrual status when it becomes 90 days
past due as to interest or principal payments. Past due status is based on the
contractual payment terms of the loan. A loan may be placed on non-accrual
status before it reaches 90 days past due if such loan has been identified as
presenting uncertainty with respect to the collectibility of interest and
principal. A loan past due 90 days or more may remain on accruing status if such
loan is both well secured and in the process of collection. There were no loans
past due 90 days or more and still accruing interest at June 30, 2012 or
December 31, 2011.
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All previously accrued but unpaid interest on non-accrual loans is reversed from
interest income in the period in which the accrual of interest is discontinued.
Interest payments received on non-accrual loans (including impaired loans) are
generally applied as a reduction of principal if future collections are
doubtful, although such interest payments may be recognized as income. A loan
remains on non-accrual status until the factors that indicated doubtful
collectibility no longer exist or until a loan is determined to be uncollectible
and is charged off against the allowance for loan losses.
Non-Performing Assets
June 30, March 31, Dec. 31, Sept. 30, June 30,
(dollars in millions) 2012 2012 2011 2011 2011
Originated non-performing loans:
Commercial Banking:
Commercial real estate $ 90.5 $ 97.3 $ 106.7 $ 91.0 $ 90.2
Commercial and industrial 62.2 63.0 59.2 49.2 54.1
Equipment financing 37.3 39.6 42.9 37.9 36.0
Total 190.0 199.9 208.8 178.1 180.3
Retail:
Residential mortgage 63.7 70.0 68.9 65.5 65.8
Home equity 13.7 15.3 15.8 14.2 12.3
Other consumer 0.2 0.2 0.3 0.5 0.4
Total 77.6 85.5 85.0 80.2 78.5
Total originated non-performing loans
(1) 267.6 285.4 293.8 258.3 258.8
REO 19.7 21.9 26.8 27.7 33.5
Repossessed assets 7.2 9.1 16.1 19.2 23.1
Total non-performing assets $ 294.5 $ 316.4 $ 336.7 $ 305.2 $ 315.4
Originated non-performing loans as a
percentage of originated loans 1.52 % 1.67 % 1.75 % 1.60 % 1.69 %
Non-performing assets as a percentage
of:
Originated loans, REO and repossessed
assets 1.67 1.85 2.00 1.88 2.05
Tangible stockholders' equity and
originated allowance
for loan losses 9.33 9.93 10.44 9.20 9.21
(1) Reported net of government guarantees totaling $14.8 million at June 30,
2012, $15.6 million at March 31, 2012, $12.1 million at Dec. 31, 2011, $11.3
million at Sept. 30, 2011 and $10.7 million at June 30, 2011. These
government guarantees relate, almost entirely, to guarantees provided by the
Small Business Administration as well as selected other Federal agencies and
represent the carrying value of the loans that are covered by such
guarantees, the extent of which (i.e. full or partial) varies by loan. At
June 30, 2012, the principal loan classes to which these government guarantees relate are commercial and industrial loans (approximately 90%) and
commercial real estate loans (approximately 10%).
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The preceding table excludes acquired loans that are (i) accounted for as
purchased credit impaired loans or (ii) covered by an FDIC loss-share agreement
totaling $225 million and $11 million, respectively, at June 30, 2012 and $235
million and $14 million, respectively, at December 31, 2011. Such loans meet
People's United Financial's definition of a non-performing loan but are excluded
because the risk of credit loss was considered in the Company's estimate of
acquisition-date fair value and/or credit losses are covered by an FDIC
loss-share agreement. The discounts arising from recording these loans at fair
value were due, in part, to credit quality. The acquired loans are generally
accounted for on a pool basis and the accretable yield on the pools is being
recognized as interest income over the life of the loans based on expected cash
flows at the pool level.
Total non-performing assets decreased $42.2 million from December 31, 2011 and
equaled 1.67% of originated loans, REO and repossessed assets at June 30, 2012.
The decrease in total non-performing assets from December 31, 2011 reflects
decreases in non-performing commercial real estate loans of $16.2 million,
repossessed assets of $8.9 million, REO of $7.1 million, non-performing
equipment financing loans of $5.6 million, non-performing residential mortgage
loans of $5.2 million and non-performing consumer loans of $2.2 million,
partially offset by increases in non-performing commercial and industrial loans
of $3.0 million.
All loans and REO acquired in the Butler Bank acquisition are subject to an FDIC
loss-share agreement. The loss-share agreement provides for coverage by the
FDIC, up to certain limits, on all such 'covered assets'. The FDIC is obligated
to reimburse the Company for 80% of any future losses on covered assets up to
$34.0 million. The Company will reimburse the FDIC for 80% of recoveries with
respect to losses for which the FDIC paid the Company 80% reimbursement under
the loss-sharing coverage.
In addition to the originated non-performing loans discussed above, People's
United Financial has also identified approximately $539 million in originated
potential problem loans at June 30, 2012. Originated potential problem loans
represent loans that are currently performing, but for which known information
about possible credit deterioration on the part of the related borrowers causes
management to have concerns as to the ability of such borrowers to comply with
contractual loan repayment terms and which may result in the disclosure of such
loans as non-performing at some time in the future. The originated potential
problem loans are generally loans that, although performing, have been
classified as "substandard" in accordance with People's United Financial's loan
rating system, which is consistent with guidelines established by banking
regulators.
At June 30, 2012, originated potential problem loans consisted of $262 million
of commercial and industrial loans, $165 million of commercial real estate loans
and $112 million of equipment financing loans. Such loans are closely monitored
by management and have remained in performing status for a variety of reasons
including, but not limited to, delinquency status, borrower payment history and
fair value of the underlying collateral. Management cannot predict the extent to
which economic conditions may worsen or whether other factors may adversely
impact the ability of these borrowers to make payments. Accordingly, there can
be no assurance that originated potential problem loans will not become 90 days
or more past due, be placed on non-accrual status, be restructured, or require
additional provisions for loan losses.
The levels of non-performing assets and potential problem loans are expected to
fluctuate in response to changing economic and market conditions, and the
relative sizes of the respective loan portfolios, along with management's degree
of success in resolving problem assets. Management takes a proactive approach
with respect to the identification and resolution of problem loans. However,
given the current state of the U.S. economy and, more specifically, the real
estate market, the level of non-performing assets may increase in 2012.
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Liquidity
Liquidity is defined as the ability to generate sufficient cash flows to meet
all present and future funding requirements at reasonable costs. Liquidity
management addresses People's United Financial's and People's United Bank's
ability to fund new loans and investments as opportunities arise, to meet
customer deposit withdrawals, and to repay borrowings and subordinated notes as
they mature. People's United Financial's, as well as People's United Bank's,
liquidity positions are monitored daily by management. The Asset and Liability
Management Committee ("ALCO") of People's United Bank has been authorized by the
Board of Directors of People's United Financial to set guidelines to ensure
maintenance of prudent levels of liquidity for People's United Financial as well
as for People's United Bank. ALCO reports to the Treasury and Finance Committee
of the Board of Directors of People's United Financial.
Asset liquidity is provided by: cash; short-term investments and securities
purchased under agreements to resell; proceeds from security sales, maturities
and principal repayments; and proceeds from scheduled principal collections,
prepayments and sales of loans. In addition, certain securities may be used to
collateralize borrowings under repurchase agreements. The Consolidated
Statements of Cash Flows present data on cash provided by and used in People's
United Financial's operating, investing and financing activities. At June 30,
2012, People's United Financial (parent company) liquid assets included $3
million in debt securities available for sale. People's United Bank's liquid
assets included $488 million in cash and cash equivalents, $3.6 billion in debt
securities available for sale and $12 million in trading account securities.
Securities available for sale with a fair value of $1.34 billion at June 30,
2012 were pledged as collateral for public deposits and for other purposes.
Liability liquidity is measured by People's United Financial's and People's
United Bank's ability to obtain deposits and borrowings at cost-effective rates
that are diversified with respect to markets and maturities. Deposits, which are
considered the most stable source of liability liquidity, totaled $21.5 billion
at June 30, 2012 and represented 77% of total funding (the sum of total
deposits, total borrowings, subordinated notes and debentures, and stockholders'
equity). Borrowings are used to diversify People's United Financial's funding
mix and to support asset growth. Borrowings and subordinated notes and
debentures totaled $960 million and $160 million, respectively, at June 30,
2012, representing 3.5% and 0.6%, respectively, of total funding at that date.
People's United Bank's current sources of borrowings include: federal funds
purchased, advances from the FHLB of Boston and the Federal Reserve Bank of New
York, and repurchase agreements. At June 30, 2012, People's United Bank's total
borrowing limit from the FHLB of Boston and Federal Reserve Bank of New York for
advances, and repurchase agreements, was $5.0 billion, based on the level of
qualifying collateral available for these borrowings. In addition, People's
United Bank had unsecured borrowing capacity of $0.8 billion at that date.
At June 30, 2012, People's United Bank had outstanding commitments to originate
loans totaling $1.1 billion and approved, but unused, lines of credit extended
to customers totaling $4.4 billion (including $1.9 billion of home equity lines
of credit).
The sources of liquidity discussed above are deemed by management to be
sufficient to fund outstanding loan commitments and to meet People's United
Financial's and People's United Bank's other obligations.
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Stockholders' Equity and Dividends
People's United Financial's total stockholders' equity was $5.15 billion at
June 30, 2012, a $78 million decrease from December 31, 2011. This decrease
primarily reflects dividends paid of $110.0 million and open market repurchases
of 9.0 million shares of common stock at a total cost of $110.1 million,
partially offset by net income of $123.4 million.
Stockholders' equity equaled 18.3% of total assets at June 30, 2012 compared to
19.0% at December 31, 2011. Tangible stockholders' equity equaled 11.5% of
tangible assets at June 30, 2012 compared to 12.0% at December 31, 2011.
In October 2011, People's United Financial's Board of Directors authorized the
repurchase of common stock. Under the repurchase authorization, up to 5% of the
Company's common stock outstanding, or 18.0 million shares, may be repurchased,
either directly or through agents, in the open market at prices and terms
satisfactory to management. During the six months ended June 30, 2012,
9.0 million shares of People's United Financial common stock were repurchased
under this program at a total cost of $110.1 million. Through July 31, 2012, an
additional 0.9 million shares were repurchased at a total cost of $9.7 million.
In July 2012, People's United Financial's Board of Directors declared a
quarterly dividend on its common stock of $0.16 per share. The dividend is
payable on August 15, 2012 to shareholders of record on August 1, 2012.
In June 2012, People's United Bank paid a cash dividend of $55 million to
People's United Financial.
Regulatory Capital Requirements
People's United Bank's tangible capital ratio was 11.0% at June 30, 2012,
compared to the minimum ratio of 1.5% generally required by its regulator, the
OCC.
People's United Bank is also subject to the OCC's risk-based capital
regulations, which require minimum ratios of leverage capital and total
risk-based capital of 4.0% and 8.0%, respectively. People's United Bank
satisfied these requirements at June 30, 2012 with ratios of 11.0% and 14.0%,
respectively, compared to 11.1% and 14.0%, respectively, at December 31, 2011.
People's United Bank's regulatory capital ratios exceeded the OCC's numeric
criteria for classification as a "well capitalized" institution at June 30,
2012.
The following summary compares People's United Bank's regulatory capital amounts
and ratios as of June 30, 2012 to the OCC's requirements. At June 30, 2012,
People's United Bank's adjusted total assets, as defined, were $26.0 billion and
its total risk-weighted assets, as defined, were $21.9 billion. At June 30,
2012, People's United Bank exceeded each of its regulatory capital requirements.
OCC Requirements
Classification as Minimum
As of June 30, 2012 People's United Bank Well-Capitalized Capital Adequacy
(dollars in millions) Amount Ratio Amount Ratio Amount Ratio
Tangible capital $ 2,859.0 (1) 11.0 % n/a n/a $ 390.7 1.5 %
Leverage (core) capital 2,859.0 (1) 11.0 $ 1,302.2 5.0 % 1,041.8 4.0
Risk-based capital:
Tier 1 2,859.0 (1) 13.1 1,311.1 6.0 874.0 4.0
Total 3,060.2 (2) 14.0 2,185.1 10.0 1,748.1 8.0
(1) Tier 1 capital represents People's United Bank's total equity, excluding:
(i) after-tax net unrealized gains (losses) on certain securities classified
as available for sale; (ii) after-tax net gains on derivatives qualifying as
cash flow hedges; (iii) certain assets not recognized in Tier 1 capital
(principally goodwill and other acquisition-related intangibles); and
(iv) the amount recorded in accumulated other comprehensive income (loss)
relating to pension and other postretirement benefits.
(2) Represents Tier 1 capital plus subordinated notes and debentures, up to
certain limits, and the allowance for loan losses up to 1.25% of total
risk-weighted assets.
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The following table summarizes People's United Financial's capital ratios on a
consolidated basis:
June 30, December 31,
2012 2011
Tangible equity to tangible assets 11.5 % 12.0 %
Leverage (Tier 1 capital to adjusted total
assets) 11.9
12.5
Tier 1 common equity to total risk-weighted
assets (1) 13.6
14.3
Tier 1 risk-based capital to total risk-weighted
assets 14.1
14.8
Total risk-based capital to total risk-weighted
assets 15.6 16.2
(1) Tier 1 common equity represents total stockholders' equity, excluding
goodwill and other acquisition-related intangibles.
In December 2010, the Basel Committee on Banking Supervision released its final
framework for capital requirements, which are referred to as Basel III. When
implemented by the U.S. banking agencies and fully phased-in, Basel III will
require bank holding companies and their bank subsidiaries to maintain
substantially more capital, with a greater emphasis on common equity. The
implementation of the Basel III final framework is scheduled to commence
January 1, 2013.
The Basel III final capital framework, among other things: (i) introduces as a
new capital measure "Common Equity Tier 1" ("CET1"); (ii) specifies that Tier 1
capital consists of CET1 and "Additional Tier 1 Capital" instruments meeting
specified requirements; (iii) defines CET1 narrowly by requiring that most
adjustments to regulatory capital measures be made to CET1 and not to the other
components of capital; and (iv) expands the scope of the adjustments as compared
to existing regulations.
When fully phased in on January 1, 2019, Basel III requires financial
institutions to maintain: (i) as a newly adopted international standard, a
minimum ratio of CET1 to risk-weighted assets of at least 4.5%, plus a 2.5%
"capital conservation buffer" (which is added to the 4.5% CET1 ratio as that
buffer is phased in, effectively resulting in a minimum ratio of CET1 to
risk-weighted assets of at least 7.0%); (ii) a minimum ratio of Tier 1 capital
to risk-weighted assets of at least 6.0%, plus the capital conservation buffer
(which is added to the 6.0% Tier 1 capital ratio as that buffer is phased in,
effectively resulting in a minimum Tier 1 capital ratio of 8.5% upon full
implementation); (iii) a minimum ratio of Total (that is, Tier 1 plus Tier 2)
capital to risk-weighted assets of at least 8.0%, plus the capital conservation
buffer (which is added to the 8.0% total capital ratio as that buffer is phased
in, effectively resulting in a minimum total capital ratio of 10.5% upon full
implementation); and (iv) as a newly adopted international standard, a minimum
leverage ratio of 3.0%, calculated as the ratio of Tier 1 capital balance sheet
exposures plus certain off-balance sheet exposures (computed as the average for
each quarter of the month-end ratios for the quarter).
In June 2012, the U.S. banking agencies issued proposed rules to address
implementation of the Basel III framework for U.S. financial institutions. The
proposed rules, which set forth changes in the calculation of risk-weighted
assets and introduce limitations on what is permissible for inclusion as Tier 1
capital, would become effective according to a phase-in approach over several
years beginning in 2013. In August 2012, the comment period for the proposed
rules, which was originally scheduled to end in early September 2012, was
extended to late October 2012.
The regulations ultimately applicable to U.S. financial institutions may be
substantially different from the Basel III final framework as published in
December 2010 and the proposed rules issued in June 2012. However, given the
Company's strong capital levels, no material impact is anticipated when the new
rules are finally implemented. Management will continue to monitor these and
future proposed regulations.
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Market Risk Management
Market risk is the risk of loss to earnings, capital and the fair values of
certain assets and liabilities resulting from changes in interest rates, equity
prices and foreign currency exchange rates.
Interest Rate Risk
For People's United Financial, the only relevant market risk at this time is
interest rate risk ("IRR"), which is the potential exposure to earnings or
capital that may result from changes in interest rates. People's United
Financial manages its IRR to achieve a balance between risk, earnings volatility
and capital preservation. ALCO has primary responsibility for managing People's
United Financial's IRR. To evaluate People's United Financial's IRR profile,
ALCO monitors economic conditions, interest rate trends, liquidity levels and
capital ratios. Management also reviews assumptions periodically for projected
customer and competitor behavior, in addition to the expected repricing
characteristics and cash flow projections for assets, liabilities and
off-balance-sheet financial instruments. Actual conditions may vary
significantly from People's United Financial's assumptions.
Management evaluates the impact of IRR on "Income at Risk" using an earnings
simulation model to project earnings under multiple interest rate environments
over a one-year time horizon resulting in a quantification of IRR.
The earnings projections are based on a dynamic balance sheet and estimates of
pricing levels for People's United Financial's products under multiple scenarios
intended to reflect instantaneous yield curve shocks. People's United Financial
estimates its base case Income at Risk using current interest rates. Internal
policy regarding IRR simulations currently specifies that for instantaneous
parallel shifts of the yield curve, estimated Income at Risk for the subsequent
one-year period should not decline by more than: 7% for a 100 basis point shift;
10% for a 200 basis point shift; and 15% for a 300 basis point shift.
The following table shows the estimated percentage change in People's United
Financial's Income at Risk over a one-year simulation period beginning June 30,
2012. Given the interest rate environment at that date, simulations for declines
in interest rates below 25 basis points were not deemed to be meaningful.
Rate Change Percent Change in
(basis points) Income at Risk
+300 19.9 %
+200 13.1
+100 6.0
-25 (1.3 )
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While Income at Risk simulation identifies earnings exposure over a relatively
short time horizon, "Economic Value of Equity at Risk" takes a long-term
economic perspective when quantifying IRR, thereby identifying possible margin
behavior over a longer time horizon. Base case Economic Value of Equity at Risk
is calculated by estimating the net present value of all future cash flows from
existing assets and liabilities using current interest rates. The base case
scenario assumes that future interest rates remain unchanged.
Internal policy currently limits the exposure of a decrease in Economic Value of
Equity at Risk resulting from instantaneous parallel shifts of the yield curve
in the following manner: 5% for 100 basis points shift; 10% for 200 basis points
shift; and 15% for 300 basis points shift.
The following table shows the estimated percentage change in People's United
Financial's Economic Value of Equity at Risk, assuming various shifts in
interest rates. Given the interest rate environment at June 30, 2012,
simulations for declines in interest rates below 25 basis points were not deemed
to be meaningful.
Percent Change in
Rate Change Economic Value of
(basis points) Equity at Risk
+300 (1.0 )%
+200 0.2
+100 0.5
-25 (1.1 )
People's United Financial's interest rate risk position at June 30, 2012, as set
forth in the Income at Risk and Economic Value of Equity at Risk tables above,
reflects an asset sensitive Income at Risk position and a neutral Economic Value
of Equity at Risk position at that date. Based on the Company's current interest
rate position, an immediate 100 basis points increase in interest rates
translates to an approximate $55 million increase in net interest income on an
annualized basis. Given the uncertainty of the magnitude, timing and direction
of future interest rate movements and the shape of the yield curve, actual
results may vary from those predicted by People's United Financial's models.
People's United Financial uses derivative financial instruments, including
interest rate swaps, primarily for market risk management purposes (principally
interest rate risk). Certain other derivatives are entered into in connection
with transactions with commercial customers. Derivatives are not used for
speculative purposes.
At June 30, 2012, People's United Financial used interest rate swaps on a
limited basis to manage IRR associated with the Company's $125 million
subordinated notes. People's United Financial has entered into an interest rate
swap to hedge the LIBOR-based floating interest rate payments on these
subordinated notes (such payments began in February 2012). The subordinated
notes had a fixed interest rate of 5.80% until February 2012, at which time the
interest rate converted to the three month LIBOR plus 68.5 basis points.
People's United Financial has agreed with the swap counterparty to exchange, at
specified intervals, the difference between fixed-rate (1.99%) and floating-rate
interest amounts calculated based on a notional amount of $125 million. The
floating rate interest amounts received under the interest rate swap are
calculated using the same floating rate paid on the subordinated notes. The
interest rate swap effectively converts the variable rate subordinated notes to
a fixed interest rate and consequently reduces People's United Financial's
exposure to increases in interest rates. This interest rate swap is accounted
for as a cash flow hedge.
People's United Financial has written guidelines that have been approved by its
Board of Directors and ALCO governing the use of derivative financial
instruments, including approved counterparties and credit limits. Credit risk
associated with these instruments is controlled and monitored through policies
and procedures governing collateral management and credit approval.
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By using derivatives, People's United Financial is exposed to credit risk to the
extent that counterparties to the derivative contracts do not perform as
required. Should a counterparty fail to perform under the terms of a derivative
contract, the Company's counterparty credit risk is equal to the amount reported
as a derivative asset in the Consolidated Statements of Condition, less any
posted collateral. Amounts reported as derivative assets represent derivative
contracts in a gain position, net of derivatives in a loss position with the
same counterparty (to the extent subject to master netting arrangements).
People's United Financial seeks to minimize counterparty credit risk through
credit approvals, limits, monitoring procedures, execution of master netting
arrangements and obtaining collateral, where appropriate. Counterparties to
People's United Financial's derivatives include major financial institutions
with investment grade credit ratings from the major rating agencies. As such,
management believes the risk of incurring credit losses on derivative contracts
with those counterparties is remote and losses, if any, would be immaterial.
Certain of People's United Financial's derivative contracts contain provisions
establishing collateral requirements (subject to minimum collateral posting
thresholds) based on the Company's external credit rating. If the Company's
senior unsecured debt rating were to fall below the level generally recognized
as investment grade, the counterparties to such derivative contracts could
require additional collateral on those derivative transactions in a net
liability position (after considering the effect of master netting arrangements
and posted collateral). The aggregate fair value of derivative instruments with
such credit-related contingent features that were in a net liability position at
June 30, 2012 was $6.3 million, for which People's United Financial had posted
$5.4 million of collateral in the normal course of business. If the Company's
senior unsecured debt rating had fallen below investment grade as of that date,
$0.9 million in additional collateral would have been required.
Foreign Currency Risk
Foreign exchange contracts are commitments to buy or sell foreign currency on a
future date at a contractual price. People's United Financial uses these
instruments on a limited basis to eliminate its exposure to fluctuations in
currency exchange rates on certain of its commercial loans that are denominated
in foreign currencies. Gains and losses on foreign exchange contracts
substantially offset the translation gains and losses on the related loans.
Effective in the first quarter of 2010, People's United Financial no longer
designates foreign exchange contracts as hedging instruments.
Derivative Financial Instruments
The following table summarizes certain information concerning derivative
financial instruments utilized by People's United Financial in its management of
IRR and foreign currency risk:
Interest Foreign
Rate Exchange
As of June 30, 2012 (dollars in millions) Swaps Contracts
Notional principal amounts $ 125.0 $ 6.7
Weighted average interest rates:
Pay fixed 1.99 % N/A
(Receive floating) (Libor + 0.685 %) N/A
Weighted average remaining term to
maturity (in months) 56 2
Fair value:
Recognized as a liability $ 2.4 $ 0.2
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People's United Financial has entered into interest rate swaps with certain of
its commercial customers. In order to minimize its risk, these customer
derivatives (pay floating/receive fixed) have been offset with essentially
matching interest rate swaps with People's United Financial's counterparties
(pay fixed/receive floating). Hedge accounting has not been applied for these
derivatives. Accordingly, changes in the fair value of all such interest rate
swaps are recognized in current earnings.
The following table summarizes certain information concerning these interest
rate swaps:
Interest Rate Swaps
Commercial Other
As of June 30, 2012 (dollars in millions) Customers Counterparties
Notional principal amounts $ 959.9 $
959.9
Weighted average interest rates:
Pay floating (receive fixed) 0.24% (2.47 %)
-
Pay fixed (receive floating) -
2.56% (0.29 %)
Weighted average remaining term to
maturity (in months) 86 86
Fair value:
Recognized as an asset $ 76.8 $ -
Recognized as a liability - 71.4
See Note 12 to the Consolidated Financial Statements for further information
relating to derivatives.
