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PBCT > SEC Filings for PBCT > Form 10-Q on 2-Nov-2012All 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 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.

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 September 30, 2012 was $8 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.

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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 September 30, 2012, People's United Bank's non-interest-bearing deposits totaled $4.7 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                           Nine Months Ended
                                                    Sept. 30,        June 30,         Sept. 30,         Sept. 30,         Sept. 30,
(dollars in millions, except per share data)          2012           2012 (1)         2011 (1)            2012            2011 (1)
Earnings Data:
Net interest income (fully taxable equivalent)     $     237.8       $   238.3       $     240.4       $     711.8       $     679.1
Provision for loan losses                                 15.1            10.6              14.4              37.2              43.0
Non-interest income (2)                                   81.4            75.7              84.7             229.5             235.9
Non-interest expense (3)                                 208.9           205.7             231.9             623.2             641.7
Income before income tax expense                          92.2            95.0              76.1             272.7             225.1
Net income                                                62.2            64.6              51.5             184.1             151.0
Operating earnings (4)                                    64.4            67.0              65.9             190.7             173.6

Selected Statistical Data:
Net interest margin (5)                                   3.89 %          3.96 %            4.07 %            3.94 %            4.09 %
Operating net interest margin (4), (5)                    3.82            3.88              4.07              3.89              4.02
Return on average assets (5)                              0.88            0.93              0.75              0.88              0.79
Operating return on average assets (4), (5)               0.91            0.97              0.96              0.91              0.90
Return on average tangible assets (5)                     0.95            1.01              0.82              0.96              0.85
Return on average stockholders' equity (5)                 4.8             5.0               3.7               4.7               3.8
Return on average tangible stockholders' equity
(5)                                                        8.3             8.5               6.1               8.1               6.2
Operating return on average tangible
stockholders' equity (4), (5)                              8.6             8.9               7.8               8.4               7.1
Efficiency ratio (4)                                      61.4            61.5              62.4              62.2              64.5

Common Share Data:
Basic and diluted earnings per share               $      0.18       $    0.19       $      0.14       $      0.54       $      0.43
Operating earnings per share (4)                          0.18            0.20              0.18              0.57              0.49
Dividends paid per share                                0.1600          0.1600            0.1575            0.4775            0.4700
Dividend payout ratio                                     87.3 %          85.4 %           111.5 %            89.3 %           110.0 %
Operating dividend payout ratio (4)                       84.3            82.2              87.1              86.2              95.7
Book value per share (end of period)               $     15.20       $   15.09       $     15.15       $     15.20       $     15.15
Tangible book value per share (end of period)
(4)                                                       8.77            8.72              8.98              8.77              8.98
Stock price:
High                                                     12.55           13.50             13.96             13.79             14.49
Low                                                      11.20           11.25             10.50             11.20             10.50
Close (end of period)                                    12.14           11.61             11.40             12.14             11.40

(1) Previously reported amounts for the three months ended June 30, 2012 and the three and nine months ended Sept. 30, 2011 have been revised to reflect a reduction in net interest income, which, after taxes, reduced net income by $0.2 million, $1.4 million and $4.8 million, respectively. Basic and diluted earnings per share were reduced by $0.01 and $0.02 for the three and nine months ended Sept. 30, 2011, respectively (no change for the three months ended June 30, 2012). Certain statistical data and other per common share data have been revised accordingly. See Note 13 to the Consolidated Financial Statements.

(2) Includes net security gains of $8.6 million and $8.8 million for the three and nine months ended Sept. 30, 2011, respectively.

(3) Includes a total of $3.2 million, $3.6 million and $21.5 million of merger-related expenses and one-time charges for the three months ended Sept. 30, 2012, June 30, 2012 and Sept. 30, 2011, respectively, and $9.8 million and $33.8 million for the nine months ended Sept. 30, 2012 and 2011, respectively.

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

(5) 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)                       2012          2012 (1)        2012 (1)        2011 (1)        2011 (1)
Financial Condition Data:
Total assets                             $    28,576      $  28,137      $    27,791      $  27,553      $    27,200
Loans                                         21,040         20,588           20,472         20,385           20,136
Securities                                     3,787          3,702            2,895          2,931            2,540
Short-term investments (2)                        64             73              767            411              779
Allowance for loan losses                        186            180              183            183              177
Goodwill and other acquisition-related
intangibles                                    2,160          2,166            2,169          2,174            2,151
Deposits                                      21,363         21,458           21,268         20,816           20,487
Borrowings                                     1,524            960              811            857              881
Subordinated notes and debentures                160            160              160            160              159
Stockholders' equity                           5,107          5,135            5,170          5,215            5,282
Non-performing assets (3)                        294            295              316            337              305
Net loan charge-offs                             9.4           13.5             11.2           14.8             13.4

Average Balances:
Loans                                    $    20,727      $  20,488      $    20,407      $  20,217      $    19,856
Securities                                     3,608          2,964            2,751          2,411            2,976
Short-term investments (2)                       108            562              536            854              756
Loans held for sale                               31             26               39             60               26
Total earning assets                          24,474         24,040           23,733         23,542           23,614
Total assets                                  28,234         27,753           27,463         27,285           27,355
Deposits                                      21,372         21,190           20,843         20,597           20,259
Total funding liabilities                     22,709         22,184           21,862         21,653           21,499
Stockholders' equity                           5,161          5,188            5,217          5,302            5,515

Net loan charge-offs to average loans
(annualized)                                    0.18 %         0.26 %           0.22 %         0.29 %           0.27 %
Non-performing assets to originated
loans, real estate owned and
repossessed assets (3)                          1.59           1.67             1.85           2.00             1.88
Originated allowance for loan losses
Originated loans (3)                            0.95           1.00             1.03           1.05             1.09
Originated non-performing loans (3)             66.0           65.6             61.5           59.7             68.5
Average stockholders' equity to
average total assets                            18.3           18.7             19.0           19.4             20.2
Stockholders' equity to total assets            17.9           18.3             18.6           18.9             19.4
Tangible stockholders' equity to
tangible assets (4)                             11.2           11.4             11.7           12.0             12.5
Total risk-based capital (5)                    15.6           15.6             16.0           16.2             16.7

(1) Previously reported amounts as of June 30, 2012, March 31, 2012, Dec. 31, 2011 and Sept. 30, 2011 have been revised to reflect a reduction in loans of $18 million, $18 million, $15 million and $12 million, respectively, and in stockholders' equity of $12 million, $11 million, $10 million and $9 million, respectively. Certain statistical data has been revised accordingly. See Note 13 to the Consolidated Financial Statements.

(2) Includes securities purchased under agreements to resell.

(3) Excludes acquired loans. See Asset Quality.

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

(5) 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 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 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                         Nine Months Ended
                                          Sept. 30,        June 30,        Sept. 30,        Sept. 30,         Sept. 30,
(dollars in millions)                       2012             2012            2011              2012             2011
Total non-interest expense               $     208.9      $    205.7      $     231.9      $      623.2      $     641.7
Amortization of other
acquisition-related intangibles                 (6.7 )          (6.8 )           (7.0 )           (20.1 )          (18.9 )
Severance-related costs                         (0.9 )          (1.1 )           (1.4 )            (4.4 )           (1.4 )
Merger-related expenses                           -               -             (20.1 )              -             (29.6 )
Executive-level separation costs                  -               -                -                 -              (2.8 )
Other (1)                                       (5.0 )          (4.6 )           (2.3 )           (12.6 )           (6.3 )

Total                                    $     196.3      $    193.2      $     201.1      $      586.1      $     582.7

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