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PBCT > SEC Filings for PBCT > Form 10-K on 3-Mar-2014All Recent SEC Filings

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

Form 10-K for PEOPLE'S UNITED FINANCIAL, INC.


3-Mar-2014

Annual Report


Item 7. 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 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.


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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), charging premiums to maintain the DIF at specified levels. The FDIC has established a system for setting deposit insurance premiums based upon the risks a particular bank or savings association poses to the DIF.

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% and, in lieu of dividends, provides for a lower rate schedule when the reserve ratio reaches 2% and 2.5% 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 regulatory 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 Company's business is subject to risk as a result of changes in federal and state regulation. 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.

Among the more significant provisions of the DFA, the responsibility for all supervisory functions, including ongoing supervision, examination and regulation, for savings and loan holding companies and their non-depository subsidiaries was transferred to the FRB and the OCC assumed responsibility for the supervision, examination and regulation of all federally-chartered savings banks. 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 and 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. If the District Court's ruling is upheld, bank service charge revenue derived from interchange transaction fees could be reduced further.

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, 2013, People's United Bank's non-interest-bearing deposits totaled $5.3 billion, or 24% 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 2014, a series of final rules issued by the CFPB to implement provisions in the DFA related to mortgage origination and mortgage servicing went into effect and may increase the cost of originating and servicing residential mortgage loans.

Enactment of the DFA has resulted in significant increases in 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 $33.2 billion in total assets as of December 31, 2013. 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. People's United Bank is subject to regulation, examination, supervision and reporting requirements by the OCC, as its primary regulator, and by the FDIC as the deposit insurer. In addition, the CFPB has responsibility for supervising People's United Bank's compliance with designated consumer financial laws.

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.


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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. 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 5 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.

People's United Financial's results of operations include the results of the acquired entities beginning with their respective closing dates. Financial data for prior periods has not been restated to include Danvers, Smithtown, LSB, Butler Bank and Financial Federal and therefore, are not directly comparable to subsequent periods.

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.


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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 by average total assets. Operating return on average tangible stockholders' equity is calculated by dividing operating earnings 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 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 operating non-interest expense and efficiency ratio, as derived from amounts reported in the Consolidated Statements of Income:

Years ended December 31 (dollars in millions)       2013            2012            2011           2010          2009
Total non-interest expense                        $   839.0       $   830.6       $   871.9       $ 782.0       $ 659.8

Adjustments to arrive at operating
non-interest expense:
Writedowns of banking house assets                     (9.0 )            -             (4.8 )          -             -
Severance-related costs                                (2.8 )          (7.3 )          (5.3 )          -             -
Acquisition integration and other costs                (0.9 )          (5.4 )            -             -             -
Merger-related expenses                                  -               -            (42.9 )       (23.3 )        (2.0 )
Executive-level separation agreement                     -               -             (3.8 )       (15.3 )          -

Total                                                 (12.7 )         (12.7 )         (56.8 )       (38.6 )        (2.0 )

Operating non-interest expense                        826.3           817.9           815.1         743.4         657.8

Amortization of other acquisition-related
intangible assets                                     (26.2 )         (26.8 )         (25.8 )       (21.7 )       (20.6 )
FDIC special assessment                                  -               -               -             -           (8.4 )
Other (1)                                             (10.3 )          (7.8 )         (10.3 )        (9.4 )        (6.5 )

Total                                             $   789.8       $   783.3       $   779.0       $ 712.3       $ 622.3


Net interest income (FTE basis)                   $   905.8       $   940.4       $   921.2       $ 697.3       $ 580.2
Total non-interest income                             333.2           313.8           307.6         270.0         284.3

Total revenues                                      1,239.0         1,254.2         1,228.8         967.3         864.5
Adjustments:
BOLI FTE adjustment                                     2.1             2.8             3.1           3.6           4.5
Net security (gains) losses                              -               -             (8.8 )         1.0         (22.0 )
Other (2)                                              (0.8 )          (0.7 )           2.2            -           (1.9 )

Total                                             $ 1,240.3       $ 1,256.3       $ 1,225.3       $ 971.9       $ 845.1

Efficiency ratio                                       63.7 %          62.3 %          63.6 %        73.3 %        73.6 %

(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:

Years ended December 31 (in millions, except per share data)     2013          2012          2011          2010          2009
Net income, as reported                                        $  232.4      $  245.3      $  192.4      $   82.5      $  101.2

Adjustments to arrive at operating earnings:
Writedowns of banking house assets                                  9.0            -            4.8            -             -
Severance-related costs                                             2.8           7.3           5.3            -             -
Acquisition integration and other costs                             0.9           5.4            -             -             -
Merger-related expenses                                              -             -           42.9          23.3           2.0
Executive-level separation costs                                     -             -            3.8          15.3            -
Core system conversion costs                                         -             -             -           20.3           2.5

Total pre-tax adjustments                                          12.7          12.7          56.8          58.9           4.5
Tax effect                                                         (4.0 )        (4.1 )       (18.5 )       (19.2 )        (1.4 )

Total adjustments, net of tax                                       8.7           8.6          38.3          39.7           3.1

Operating earnings                                             $  241.1      $  253.9      $  230.7      $  122.2      $  104.3


Earnings per share, as reported                                $   0.74      $   0.72      $   0.55      $   0.23      $   0.30

Adjustment to arrive at operating earnings per share:
Writedowns of banking house assets                                 0.03            -           0.01            -             -
Severance-related costs                                              -           0.02          0.01            -             -
Acquisition integration and other costs                              -           0.01            -             -             -
Merger-related expenses                                              -             -           0.08          0.04            -
Executive-level separation costs                                     -             -           0.01          0.03            -
Core system conversion costs                                         -             -             -           0.04          0.01

Total adjustments per share                                        0.03          0.03          0.11          0.11          0.01

Operating earnings per share                                   $   0.77      $   0.75      $   0.66      $   0.34      $   0.31


Average total assets                                           $ 31,009      $ 28,113      $ 26,028      $ 22,016      $ 20,757

Operating return on average assets                                 0.78 %        0.90 %        0.89 %        0.55 %        0.50 %


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The following table summarizes People's United Financial's operating net interest income and margin:

Years ended December 31 (dollars in millions)       2013            2012           2011           2010            2009
Net interest income (FTE basis)                   $   905.8       $  940.4       $  921.2       $   697.3       $   580.2

Adjustments to arrive at operating net
interest income:
Cost recovery income                                     -            (8.8 )         (5.0 )            -               -
Changes in accretable yield                              -              -           (11.2 )            -               -

Total adjustments                                        -            (8.8 )        (16.2 )            -               -

Operating net interest income                     $   905.8       $  931.6       $  905.0       $   697.3       $   580.2


Net interest margin, as reported                       3.31 %         3.86 %         4.10 %          3.67 %          3.20 %

Adjustments to arrive at operating net
interest margin:
Cost recovery income                                     -           (0.04 )        (0.02 )            -               -
Changes in accretable yield                              -              -           (0.05 )            -               -

Total adjustments                                        -           (0.04 )        (0.07 )            -               -

Operating net interest margin                          3.31 %         3.82 %         4.03 %          3.67 %          3.20 %

Average total earning assets                      $  27,360       $ 24,366       $ 22,497       $  18,989       $  18,157

The following tables summarize People's United Financial's operating return on average tangible stockholders' equity and operating dividend payout ratio:

Years ended December 31 (dollars in millions)     2013          2012          2011          2010           2009
Operating earnings                              $  241.1      $  253.9      $  230.7      $   122.2      $   104.3
. . .
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