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| PBCT > SEC Filings for PBCT > Form 10-K on 1-Mar-2013 | All Recent SEC Filings |
1-Mar-2013
Annual Report
Forward-Looking Statements
Periodic and other filings made by People's United Financial with the SEC pursuant to 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 acquisitions; 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
FDIC Insurance Coverage / Assessments
The FDIC insures deposits at FDIC insured financial institutions up to certain limits (up to $250,000 per depositor through December 31, 2013), charging premiums to maintain the DIF at specified levels. Such premiums vary based on the risk profile of the insured institution.
In 2009, in response to adverse economic conditions that resulted in an increased number of bank failures and, consequently, greater use of DIF resources, the FDIC authorized higher premium assessments pursuant to a restoration plan designed to increase the DIF reserve ratio to required levels. Also in 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. 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 December 31, 2012 was $1 million.
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.
One of the financial ratios used in the scorecard-based assessment system for financial institutions with more than $10 billion in assets is the ratio of "higher-risk" assets to Tier 1 capital and reserves. In October 2012, the FDIC adopted a final rule that revises the definitions of higher-risk commercial and industrial loans, securities and consumer loans and clarifies when an asset must be classified as higher risk. This rule is generally effective on April 1, 2013.
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
The DFA, which was signed into law on July 21, 2010, imposes significant changes in the financial regulatory landscape and will continue to impact all financial institutions and their holding companies, including People's United Bank and 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 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 FRB-NY to convert to a bank holding company.
The DFA created a new federal consumer protection agency, 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 also has 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 banks and limits the preemption of state laws as they affect subsidiaries and agents of federally-chartered banks.
The DFA limits the amount of interchange fee that an issuer of debit cards may charge or receive to an amount that is "reasonable and proportional" to the cost of the transaction. 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).
All federal prohibitions on the ability of financial institutions to pay interest on demand deposit accounts were repealed as part of the DFA. As of December 31, 2012, People's United Bank's non-interest-bearing deposits totaled $5.1 billion, or 23% 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.
In January 2013, the CFPB issued a series of final rules to implement provisions in the DFA related to mortgage origination and mortgage servicing. These rules, which are scheduled to go into effect in January 2014, may increase the cost of originating and servicing residential mortgage loans.
It is anticipated that the DFA 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.
General
People's United Financial is a savings and loan holding company incorporated under the state laws of Delaware and the holding company for People's United Bank. The principal business of People's United Financial is to provide, through People's United Bank and its subsidiaries, commercial banking, retail and business banking, and wealth management services to individual, corporate and municipal customers.
People's United Bank is a federally-chartered stock savings bank headquartered in Bridgeport, Connecticut with $30.1 billion in total assets as of December 31, 2012. People's United Bank was organized in 1842 as a mutual savings bank, converted to stock form in 1988, and in 2006 converted from a Connecticut-chartered stock savings bank to a federally-chartered stock savings bank. Its deposit accounts are insured up to applicable limits by the FDIC under the DIF. Until July 2011, People's United Bank was subject to regulation, examination, supervision and reporting requirements by the OTS as its chartering agency, and by the FDIC as the deposit insurer. On July 21, 2011, primary supervisory responsibility for People's United Bank was transferred from the OTS to the OCC.
People's United Financial's results of operations are largely dependent upon
revenues generated through net interest income and fee-based revenues and, to a
much lesser extent, other forms of non-interest income such as gains on asset
sales. Sources for these revenues are diversified across People's United
Financial's three primary operating segments that represent its core businesses:
Commercial Banking; Retail and Business Banking; and Wealth Management. People's
United Financial's results of operations are also significantly affected by the
provision for loan losses and the level of non-interest expense. In addition,
People's United Financial's results of operations may also be affected by
general and local economic conditions, changes in market interest rates,
government policies and actions of regulatory authorities.
Acquisitions
On June 22, 2012, People's United Bank acquired 57 branches from Citizens 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.
After the close of business on June 30, 2011, People's United Financial acquired Danvers based in Danvers, Massachusetts. The transaction was effective July 1, 2011. See Note 2 to the Consolidated Financial Statements.
On November 30, 2010, People's United Financial completed its acquisitions of Smithtown based in Hauppauge, New York and LSB based in North Andover, Massachusetts. On April 16, 2010, People's United Bank entered into a definitive purchase and assumption agreement with the FDIC pursuant to which People's United Bank assumed all of the deposits, certain assets and the banking operations of Butler Bank, located in Lowell, Massachusetts. On February 19, 2010, People's United Financial completed its acquisition of Financial Federal, a financial services company providing collateralized lending, financing and leasing services nationwide to small and medium sized businesses. See Note 2 to the Consolidated Financial Statements. On January 1, 2008, People's United Financial completed its acquisition of Chittenden, a multi-bank holding company headquartered in Burlington, Vermont. People's United Financial's results of operations include the results of the acquired entities beginning with their respective closing dates.
Critical Accounting Policies
In preparing the Consolidated Financial Statements, People's United Financial is required to make significant estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results could differ from People's United Financial's current estimates, as a result of changing conditions and future events. The current economic environment has increased the degree of uncertainty inherent in these significant estimates.
Several accounting estimates are particularly critical and are susceptible to significant near-term change, including the allowance for loan losses and asset impairment judgments, such as the recoverability of goodwill and other intangible assets, and other-than-temporary declines in the value of securities.
The judgments used by People's United Financial in applying these critical accounting policies may be affected by a further and prolonged deterioration in the economic environment, which may result in changes to future financial results. For example, subsequent evaluations of the loan portfolio, in light of the factors then prevailing, may result in significant changes in the allowance for loan losses in future periods, and the inability to collect outstanding principal may result in increased loan losses. People's United Financial's significant accounting policies and critical estimates are summarized in Note 1 to the Consolidated Financial Statements.
Allowance 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 troubled debt restructurings ("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, is 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.
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 that 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, these factors are evaluated 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 ("LTV") 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. These risk classifications are reviewed periodically to ensure that they continue to be appropriate in light of changes within the portfolio and/or economic indicators as well as other industry developments.
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.
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 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.
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