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PBCT > SEC Filings for PBCT > Form 10-Q on 12-Nov-2013All Recent SEC Filings

Show all filings for PEOPLE'S UNITED FINANCIAL, INC.



Quarterly Report

Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations

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 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 Federal Deposit Insurance Corporation (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 Deposit Insurance Fund (the "DIF") at specified levels. Such premiums vary based on the risk profile of the insured institution.

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, which became effective April 1, 2013, that revised the definitions of higher-risk commercial and industrial loans, securities and consumer loans, and clarified when an asset must be classified as higher-risk.

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.

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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, 2012, 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, 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 Board of Governors of the Federal Reserve System (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 intended to submit an application to the Federal Reserve Bank of New York (the "FRB-NY") to convert to a bank holding company. However, as a result of continued uncertainty with respect to the regulatory environment and the length of time that has passed since its initial application was first submitted, on August 1, 2013, People's United Bank provided notice to the OCC's Director of District Licensing of its intention to withdraw its application for conversion to a national bank. People's United Bank's decision to withdraw its application at this time does not represent a change in its business strategy. Rather, in light of the factors cited above, management is in the process of re-evaluating all available options to determine which organizational structure best fits People's United Bank's stated operating objectives.

The DFA created 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 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).

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On July 31, 2013, the U.S. District Court for the District of Columbia issued an Order vacating portions of the FRB's Debit Card Interchange Fee and Routing regulations related to the calculation of interchange transaction fees and network non-exclusivity. The Order would require the FRB to revise its Debit Card Interchange Fee regulations, which serve to limit the fees that issuers can charge for debit card interchange transactions, as well as its regulations relating to routing of debit card interchange transactions. The FRB has appealed the District Court's ruling to the U.S. Court of Appeals for the District of Columbia Circuit, which has agreed to an expedited schedule for briefing and consideration of the appeal. The Order vacating the FRB's debit card regulations has been stayed pending resolution of the appeal. The financial impact of the Court's ruling on the Company cannot be determined at this time.

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 September 30, 2013, 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.

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Selected Consolidated Financial Information

                                                                     Three Months Ended                             Nine Months Ended
                                                        Sept. 30,         June 30,          Sept. 30,          Sept. 30,          Sept. 30,
(dollars in millions, except per share data)              2013              2013              2012               2013               2012
Earnings Data:
Net interest income (fully taxable equivalent)         $     223.5        $   220.9        $     234.8        $     663.7        $     703.6
Provision for loan losses                                     12.1              9.2               15.1               33.7               37.2
Non-interest income                                           84.0             86.1               81.4              253.0              229.5
Non-interest expense                                         212.5            205.8              208.9              630.3              623.2
Operating non-interest expense (1)                           209.2            205.4              205.7              618.6              618.8
Income before income tax expense                              82.9             92.0               92.2              252.7              272.7
Net income                                                    58.5             62.1               62.2              173.1              184.1
Operating earnings (1)                                        60.8             62.4               64.4              181.1              190.7

Selected Statistical Data:
Net interest margin (2)                                       3.30 %           3.33 %             3.89 %             3.33 %             3.94 %
Operating net interest margin (1), (2)                        3.30             3.33               3.82               3.33               3.89
Return on average assets (2)                                  0.75             0.81               0.88               0.75               0.88
Operating return on average assets (1), (2)                   0.78             0.81               0.91               0.79               0.91
Return on average tangible assets (2)                         0.80             0.87               0.95               0.81               0.96
Return on average stockholders' equity (2)                     5.1              5.2                4.8                4.8                4.7
Return on average tangible stockholders' equity
(2)                                                            9.4              9.3                8.3                8.6                8.1
Operating return on average tangible stockholders'
equity (1), (2)                                                9.8              9.3                8.6                9.0                8.4
Efficiency ratio (1)                                          63.6             62.7               61.4               63.5               62.1

Common Share Data:
Basic and diluted earnings per share                   $      0.19        $    0.20        $      0.18        $      0.55        $      0.54
Operating earnings per share (1)                              0.20             0.20               0.19               0.58               0.57
Dividends paid per share                                    0.1625           0.1625             0.1600             0.4850             0.4775
Dividend payout ratio                                         86.0 %           83.6 %             87.3 %             89.5 %             89.3 %
Operating dividend payout ratio (1)                           82.7             83.2               84.3               85.6               86.2
Book value per share (end of period)                   $     15.07        $   15.11        $     15.20        $     15.07        $     15.20
Tangible book value per share (end of period) (1)             8.14             8.20               8.77               8.14               8.77
Stock price:
High                                                         15.67            15.00              12.55              15.67              13.79
Low                                                          14.07            12.62              11.20              12.22              11.20
Close (end of period)                                        14.38            14.90              12.14              14.38              12.14

(1) See Non-GAAP Financial Measures and Reconciliation to GAAP.

(2) Annualized.

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                                                           As of and for the Three Months Ended
                                         Sept. 30,       June 30,        March 31,       Dec. 31,        Sept. 30,
(dollars in millions)                      2013            2013            2013            2012            2012
Financial Condition Data:
Total assets                            $    31,511      $  31,345      $    30,598      $  30,324      $    28,576
Loans                                        23,227         22,866           22,161         21,737           21,040
Securities                                    4,379          4,618            4,716          4,669            3,787
Short-term investments                          148            120              127            131               64
Allowance for loan losses                       188            186              187            188              186
Goodwill and other
acquisition-related intangible assets         2,134          2,140            2,147          2,154            2,160
Deposits                                     22,190         21,982           21,792         21,751           21,363
Borrowings                                    3,621          3,626            2,849          2,386            1,524
Notes and debentures                            639            639              659            659              160
Stockholders' equity                          4,638          4,678            4,886          5,039            5,107
Total risk-weighted assets (1)               23,730         23,498           22,918         22,764           21,682
Non-performing assets (2)                       271            281              285            290              294
Net loan charge-offs                            9.6           10.8             13.1           10.0              9.4

Average Balances:
Loans                                   $    22,916      $  22,369      $    21,727      $  21,211      $    20,758
Securities                                    4,529          4,557            4,548          3,867            3,608
Short-term investments                          179            153              146            128              108
Total earning assets                         27,624         27,079           26,421         25,206           24,474
Total assets                                 31,216         30,799           30,178         28,991           28,234
Deposits                                     22,066         21,835           21,558         21,557           21,372
Total funding liabilities                    26,168         25,548           24,726         23,487           22,709
Stockholders' equity                          4,622          4,825            5,005          5,107            5,161

Net loan charge-offs to average total
loans (annualized)                             0.17 %         0.19 %           0.24 %         0.19 %           0.18 %
Non-performing assets to originated
loans, real estate owned and
repossessed assets (2)                         1.26           1.33             1.42           1.48             1.59
Originated allowance for loan losses
Originated loans (2)                           0.82           0.85             0.88           0.91             0.95
Originated non-performing loans (2)            74.8           71.8             70.6           70.3             66.0
Average stockholders' equity to
average total assets                           14.8           15.7             16.6           17.6             18.3
Stockholders' equity to total assets           14.7           14.9             16.0           16.6             17.9
Tangible stockholders' equity to
tangible assets (3)                             8.5            8.7              9.6           10.2             11.2
Total risk-based capital (1)                   12.6           12.8             13.7           14.7             15.6

(1) Consolidated. See Regulatory Capital Requirements.

(2) Excludes acquired loans.

(3) See Non-GAAP Financial Measures and Reconciliation to GAAP.

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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 intangible assets, 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 acquired 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:
(i) merger-related expenses, including acquisition integration and other costs;
(ii) charges related to executive-level management separation costs;
(iii) severance-related costs; and (iv) writedowns of banking house assets, are generally also excluded when calculating the efficiency ratio. Operating earnings per share is derived by determining the per share impact of the respective adjustments to arrive at operating earnings and adding (subtracting) such amounts to (from) GAAP earnings per share. Operating return on average assets is calculated by dividing operating earnings (annualized) by average total 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. Excluded from operating net interest margin is cost recovery income on acquired loans. Operating net interest margin is calculated by dividing operating net interest income (annualized) by average total earning assets.

The tangible equity ratio is the ratio of (i) tangible stockholders' equity (total stockholders' equity less goodwill and other acquisition-related intangible assets) (the numerator) to (ii) tangible assets (total assets less goodwill and other acquisition-related intangible assets) (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                         Nine Months Ended
                                           Sept. 30,        June 30,        Sept. 30,        Sept. 30,         Sept. 30,
(dollars in millions)                        2013             2013            2012              2013             2012
Total non-interest expense                $     212.5      $    205.8      $     208.9      $      630.3      $     623.2

Adjustments to arrive at operating
non-interest expense:
Writedowns of banking house assets               (2.8 )            -                -               (9.0 )             -
Severance-related costs                          (0.5 )          (0.4 )           (0.9 )            (2.4 )           (4.4 )
Acquisition integration and other costs            -               -              (2.3 )            (0.3 )           (5.4 )

Total                                            (3.3 )          (0.4 )           (3.2 )           (11.7 )           (9.8 )

Operating non-interest expense                  209.2           205.4            205.7             618.6            613.4

Amortization of other
acquisition-related intangible assets            (6.5 )          (6.6 )           (6.7 )           (19.6 )          (20.1 )
Other (1)                                        (4.0 )          (3.4 )           (2.7 )            (8.9 )           (7.2 )

Total                                     $     198.7      $    195.4      $     196.3      $      590.1      $     586.1

Net interest income (FTE basis)           $     227.8      $    225.2      $     237.8      $      676.3      $     711.8
Total non-interest income                        84.0            86.1             81.4             253.0            229.5

Total revenues                                  311.8           311.3            319.2             929.3            941.3
BOLI FTE adjustment                               0.6             0.4              0.7               1.4              2.2
Other (2)                                          -             (0.2 )             -               (0.9 )             -

Total                                     $     312.4      $    311.5      $     319.9      $      929.8      $     943.5

Efficiency ratio                                 63.6 %          62.7 %           61.4 %            63.5 %           62.1 %

(1) Items classified as "other" and deducted from non-interest expense for purposes of calculating the efficiency ratio 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 for purposes of calculating the efficiency ratio include, as applicable, asset write-offs and gains associated with the sale of branch locations.

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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                           Nine Months Ended
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