10-K 1 d474272d10k.htm 10-K 10-K
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

 

ANNUAL REPORT

Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2017

 

 

People’s United Financial, Inc.

(Exact name of registrant as specified in its charter)

 

 

001-33326

(Commission File Number)

 

Delaware   20-8447891

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

850 Main Street

Bridgeport, Connecticut 06604

(Address of principal executive offices, including zip code)

(203) 338-7171

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

(Title of each class)

 

(Name of each exchange on which registered)

Common Stock, $0.01 par value per share   NASDAQ Global Select Market
Fixed-to-Floating Rate Non-Cumulative Perpetual  
Preferred Stock, Series A, $0.01 par value per share   NASDAQ Global Select Market

Securities registered pursuant to Section 12(g) of the Act: None.

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     Yes  ☒    No  ☐

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.     Yes  ☐    No  ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No  ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ☒

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer   ☐  (Do not check if a smaller reporting company)    Smaller reporting company  
     Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ☐    No  ☒

The aggregate market value of voting stock held by non-affiliates of the registrant, based upon the last reported sales price of its common stock as of the last business day of the registrant’s most recently completed second quarter on the NASDAQ Global Select Market was $6,084,618,519.

As of February 16, 2018, there were 347,111,753 shares of the registrant’s common stock outstanding.

Documents Incorporated by Reference

Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held on April 19, 2018, are incorporated by reference into Part III.


Table of Contents

PEOPLE’S UNITED FINANCIAL, INC.

2017 FORM 10-K

Table of Contents

 

          Page  

Part I

     

Item 1.

   Business      1  

Item 1A.

   Risk Factors      11  

Item 1B.

   Unresolved Staff Comments      18  

Item 2.

   Properties      18  

Item 3.

   Legal Proceedings      18  

Item 4.

   Mine Safety Disclosures      18  

Part II

     

Item 5.

   Market for Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
     18  

Item 6.

   Selected Financial Data      21  

Item 7.

   Management’s Discussion and Analysis of Financial Condition and
Results of Operations
     22  

Item 7A.

   Quantitative and Qualitative Disclosures About Market Risk      75  

Item 8.

   Financial Statements and Supplementary Data      80  

Item 9.

   Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
     80  

Item 9A.

   Controls and Procedures      80  

Item 9B.

   Other Information      80  

Part III

     

Item 10.

   Directors, Executive Officers and Corporate Governance      80  

Item 11.

   Executive Compensation      81  

Item 12.

   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters      81  

Item 13.

   Certain Relationships and Related Transactions, and Director Independence      81  

Item 14.

   Principal Accountant Fees and Services      81  

Part IV

     

Item 15.

   Exhibits and Financial Statement Schedules      82  

Item 16.

   Form 10-K Summary      86  

Signatures

        87  


Table of Contents

Part I

 

Item 1. Business

General

People’s United Financial, Inc. (“People’s United” or the “Company”) is a bank holding company and a financial holding company registered under the Bank Holding Company Act of 1956 (the “BHC Act”), as amended, and is incorporated under the state laws of Delaware. People’s United is the holding company for People’s United Bank, National Association (the “Bank”), a national banking association headquartered in Bridgeport, Connecticut.

The principal business of People’s United is to provide, through the Bank and its subsidiaries, commercial banking, retail banking and wealth management services to individual, corporate and municipal customers. Traditional banking activities are conducted primarily within New England and southeastern New York, and include extending secured and unsecured commercial and consumer loans, originating mortgage loans secured by residential and commercial properties, and accepting consumer, commercial and municipal deposits.

In addition to traditional banking activities, the Bank provides specialized financial services tailored to specific markets including: personal, institutional and employee benefit trust; cash management; and municipal banking. Through its non-banking subsidiaries, the Bank offers: brokerage, financial advisory services, investment management services and life insurance through People’s Securities, Inc. (“PSI”); equipment financing through People’s Capital and Leasing Corp. (“PCLC”), People’s United Equipment Finance Corp. (“PUEFC”) and LEAF Commercial Capital, Inc. (“LEAF”); and commercial insurance services through People’s United Insurance Agency, Inc. (“PUIA”).

This full range of financial services is delivered through a network of 403 branches located in Connecticut, southeastern New York, Massachusetts, Vermont, Maine and New Hampshire, including 85 full-service Stop & Shop supermarket branches throughout Connecticut and 62 in southeastern New York that provide customers with seven-day-a-week banking. The Bank’s distribution network includes investment and brokerage offices, commercial banking offices, online banking and investment trading, a 24-hour telephone banking service and participation in a worldwide ATM network. PCLC, PUEFC and LEAF maintain a sales presence in 17 states to support equipment financing operations throughout the United States. The Bank maintains a mortgage warehouse lending group located in Kentucky and a national credits group that has participations in commercial loans and commercial real estate loans to borrowers in various industries on a national scale.

People’s United’s operations are divided into three primary operating segments that represent its core businesses: Commercial Banking; Retail Banking; and Wealth Management. In addition, the Treasury area manages People’s United’s securities portfolio, short-term investments, brokered deposits and wholesale borrowings.

The Company’s operating segments have been aggregated into two reportable segments: Commercial Banking and Retail Banking. Commercial Banking consists principally of commercial real estate lending, commercial and industrial lending, and commercial deposit gathering activities. This segment also includes the equipment financing operations of PCLC, PUEFC and LEAF, as well as cash management, correspondent banking, municipal banking, institutional trust services, corporate trust, commercial insurance services provided through PUIA and private banking. Retail Banking includes, as its principal business lines, consumer lending (including residential mortgage and home equity lending) and consumer deposit gathering activities. This segment also includes brokerage, financial advisory services, investment management services and life insurance provided through PSI and non-institutional trust services.

Further discussion of People’s United’s business and operations appears on pages 22 through 79.

 

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Supervision and Regulation

People’s United Financial, Inc.

General

As a bank holding company and a financial holding company, People’s United is regulated under the BHC Act and is subject to supervision, examination and regulation by the Board of Governors of the Federal Reserve System (the “FRB”). Among other things, this authority permits the FRB to restrict or prohibit activities that are determined to be a serious risk to the subsidiary bank. A bank holding company should have sufficient capital and an effective capital planning process, consistent with its overall risk profile and considering the size, scope, and complexity of its operations, to ensure its safe and sound operation. In addition, the FRB evaluates a bank holding company’s capital planning and capital distribution processes, and its capital sufficiency in light of relevant regulations and supervisory guidance applicable to bank holding companies.

Activities Restrictions Applicable to Bank Holding Companies. The activities of a bank holding company, including People’s United, must be financially-related activities permissible for a bank holding company, unless the bank holding company has elected to be treated as a financial holding company. A bank holding company that has made a financial holding company election may also engage in activities permissible under section 4(k) of the BHC Act.

Federal law prohibits a bank holding company directly or indirectly, from acquiring:

 

   

control (as defined under the BHC Act) of another bank (or a holding company parent) without prior FRB approval;

 

   

through merger, consolidation or purchase of assets, another bank or a holding company thereof, or acquiring all or substantially all of the assets of such institution or holding company without prior approval by the FRB or the Office of the Comptroller of the Currency (the “OCC”); or

 

   

control of any depository institution not insured by the Federal Deposit Insurance Corporation (the “FDIC”) (except through a merger with and into the holding company’s bank subsidiary that is approved by the OCC).

The BHC Act prohibits a bank holding company (directly or indirectly, or through one or more subsidiaries) from acquiring another bank or holding company thereof without prior written approval of the FRB; acquiring or retaining, with certain exceptions, more than 5% of a non-subsidiary bank, a non-subsidiary holding company or a non-subsidiary company engaged in activities other than those permitted by the BHC Act; or acquiring or retaining control of a depository institution that is not federally insured. In evaluating applications by holding companies to acquire banks, the FRB must consider the financial and managerial resources and future prospects of the company and institution involved, the effect of the acquisition on the risk to the Deposit Insurance Fund (the “DIF”), the convenience and needs of the community, and competitive factors.

Federal Securities Law

People’s United’s common stock is registered with the Securities and Exchange Commission (the “SEC”) under the Securities Exchange Act of 1934 (the “Exchange Act”), as amended. People’s United is subject to the information, proxy solicitation, insider trading, and other requirements and restrictions of the Exchange Act.

Delaware Corporation Law

People’s United is incorporated under the laws of the State of Delaware and is, therefore, subject to regulation by the state of Delaware. The rights of People’s United’s stockholders are governed by the Delaware General Corporation Law.

 

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Regulatory Capital Requirements

Bank holding companies and national banks are subject to various regulations regarding capital requirements administered by U.S. banking agencies. The FRB (in the case of a bank holding company) and the OCC (in the case of a bank) may initiate certain actions if a bank holding company or a bank fails to meet minimum capital requirements. In addition, under its prompt corrective action regulations, the OCC is required to take certain supervisory actions (and may take additional discretionary actions) with respect to an undercapitalized bank. These actions could have a direct material effect on a bank’s financial statements. People’s United and the Bank are subject to regulatory capital requirements administered by the FRB and the OCC, respectively.

In December 2010, the Basel Committee on Banking Supervision released its final framework for capital requirements (the “Basel III framework” or “Basel III”). Final interagency rules to address implementation of the Basel III framework for U.S. financial institutions, including the Company and the Bank, became effective on January 1, 2015. When fully phased-in, these rules will: (i) set forth changes in the calculation of risk-weighted assets; (ii) introduce limitations on what is permissible for inclusion in Tier 1 capital; and (iii) require bank holding companies and their bank subsidiaries to maintain substantially more capital, with a greater emphasis on common equity.

See Management’s Discussion and Analysis—Regulatory Capital Requirements beginning on page 74 for a further discussion regarding capital requirements.

Dividends and Capital Distributions

People’s United is dependent upon dividends from the Bank to provide funds for the payment of dividends to shareholders and other general corporate purposes. People’s United’s ability to pay cash dividends is governed by federal law and regulations, including requirements to maintain adequate capital above regulatory minimums and safety and soundness practices.

The National Bank Act and OCC regulations impose limitations upon dividend payments by national banks. A national bank must file an application with the OCC if the total amount of its dividends for the applicable calendar year exceeds the national bank’s net income for that year plus its retained net income for the preceding two years. The Bank may not pay dividends to People’s United if, after paying those dividends, it would fail to meet the required minimum levels under risk-based capital guidelines or if the OCC notified the Bank that it was in need of more than normal supervision.

In addition, a national bank is required to file an application with the OCC for the redemption of subordinated debt under certain circumstances, as well as for reductions in permanent capital.

Under the Federal Deposit Insurance Act (the “FDI Act”), an insured depository institution, such as the Bank, is prohibited from making capital distributions, including the payment of dividends, if, after making such distribution, the institution would become “undercapitalized” (as such term is used in the FDI Act). Payment of dividends by the Bank also may be restricted at any time at the discretion of the appropriate regulator if it deems the payment to constitute an unsafe and unsound banking practice. See Note 13 to the Consolidated Financial Statements for a further discussion on capital distributions.

 

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Supervision and Regulation

People’s United Bank, National Association

General

The Bank is subject to regulation, examination, supervision and reporting requirements by the OCC as its primary regulator, by the FDIC as the deposit insurer and by the Consumer Financial Protection Bureau (the “CFPB”) with respect to compliance with designated consumer financial laws. Its deposit accounts are insured up to applicable limits by the FDIC under the DIF.

The Bank files reports with the OCC concerning its activities and financial condition, and must obtain regulatory approval from the OCC prior to entering into certain transactions, such as mergers with, or acquisitions of, other depository institutions. The OCC conducts periodic examinations to assess compliance with various regulatory requirements. The OCC has substantial discretion to impose enforcement action on a national bank that fails to comply with applicable regulatory requirements, particularly with respect to capital requirements imposed on national banks. In addition, the FDIC has the authority to recommend to the OCC that enforcement action be taken with respect to a particular national bank and, if action is not taken by the OCC, the FDIC has authority to take such action under certain circumstances.

This regulation and supervisory structure establishes a comprehensive framework of activities in which a national bank can engage and is intended primarily for the protection of the DIF, depositors and consumers. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such laws and regulations or interpretations thereof, whether by the OCC, the FDIC, and the CFPB or through legislation, could have a material adverse impact on the Bank and its operations.

The Bank’s brokerage subsidiary, PSI, is regulated by the SEC, the Financial Industry Regulatory Authority and state securities regulators. PUIA is subject to regulation by applicable state insurance regulators.

Activity Powers. National association banks derive their lending, investment and other activity powers primarily from the National Bank Act and the regulations of the OCC thereunder. Under these laws and regulations, national banks generally may invest in:

 

   

real estate mortgages;

 

   

consumer and commercial loans;

 

   

certain types of debt securities; and

 

   

certain other assets.

The ability of a national bank to invest in debt securities is limited to those securities that are readily marketable, investment grade and primarily non-speculative. OCC regulations also impose limits on the amount of investments in certain types of debt securities.

Safety and Soundness Standards. Each federal banking agency, including the OCC, has adopted guidelines establishing general standards relating to internal controls, information and internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, asset quality, earnings and compensation, fees and benefits. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines.

 

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In addition, the OCC adopted regulations to require a national bank that is given notice by the OCC that it is not satisfying any of such safety and soundness standards to submit a compliance plan to the OCC. If, after being so notified, a national bank fails to submit an acceptable compliance plan or fails in any material respect to implement an accepted compliance plan, the OCC may issue an order directing corrective and other actions of the types to which a significantly undercapitalized institution is subject under the “prompt corrective action” provisions of the Federal Deposit Insurance Corporation Improvement Act (“FDICIA”). If a national bank fails to comply with such an order, the OCC may seek to enforce the order in judicial proceedings and to impose civil monetary penalties.

Prompt Corrective Action. FDICIA also established a system of prompt corrective action to resolve the problems of undercapitalized institutions. Under this system, federal bank regulators, including the OCC, are required to take certain, and authorized to take other, supervisory actions against undercapitalized institutions, based upon five categories of capitalization which FDICIA created: “well-capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.”

The severity of the action authorized or required to be taken under the prompt corrective action regulations increases as a bank’s capital decreases within the three undercapitalized categories. All banks are prohibited from paying dividends or other capital distributions or paying management fees to any controlling person if, following such distribution, the bank would be undercapitalized. The OCC is required to monitor closely the condition of an undercapitalized bank and to restrict the growth of its assets. An undercapitalized bank is required to file a capital restoration plan within 45 days of the date the bank receives notice or is deemed to have notice that it is within any of the three undercapitalized categories, and the plan must be guaranteed by a parent holding company.

The aggregate liability of a parent holding company is limited to the lesser of:

 

   

an amount equal to 5% of the bank’s total assets at the time it became “undercapitalized”; and

 

   

the amount that is necessary (or would have been necessary) to bring the bank into compliance with all capital standards applicable with respect to such bank as of the time it fails to comply with a capital restoration plan.

If a bank fails to submit an acceptable plan, it is treated as if it were “significantly undercapitalized.” Banks that are significantly or critically undercapitalized are subject to a wider range of regulatory requirements and restrictions. Under OCC regulations, generally, a national bank is treated as “well-capitalized” if its Total risk-based capital ratio is 10% or greater, its Tier 1 risk-based capital ratio is 8% or greater, its Common Equity Tier 1 (“CET 1”) capital ratio is 6.5% or greater and its Tier 1 leverage ratio is 5% or greater, and it is not subject to any order or directive by the OCC to meet a specific capital level. As of December 31, 2017, the Bank’s regulatory capital ratios exceeded the OCC’s numeric criteria for classification as a “well-capitalized” institution. Basel III also revised the prompt corrective action framework by incorporating new regulatory capital minimums.

Insurance Activities. National banks are generally permitted to engage in certain insurance and annuity activities through subsidiaries. However, federal banking laws prohibit depository institutions from conditioning the extension of credit to individuals upon either the purchase of an insurance product or annuity from an entity affiliated with the depository institution or an agreement by the consumer not to purchase an insurance product or annuity from an entity that is not affiliated with the depository institution. Applicable regulations also require prior disclosure of this prohibition to potential insurance product or annuity customers.

 

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Federal banking agencies, including the OCC, also require depository institutions that offer non-deposit investment products, such as certain annuity and related insurance products, to disclose to the consumer that the products are not federally insured, are not guaranteed by the institution and are subject to investment risk including possible loss of principal. These disclosure requirements apply if the institution offers the non-deposit investment products directly or through affiliates or subsidiaries.

Deposit Insurance. The Bank is a member of, and pays its deposit insurance assessments to, the DIF.

The FDIC has established a system for setting deposit insurance premiums based upon the risks a particular bank poses to the DIF. The assessment is based on a bank’s average consolidated total assets minus average tangible equity (defined as Tier 1 capital). The size of the DIF is targeted at 2% of insured deposits. A reduced assessment rate schedule applies once the DIF reaches 1.15% of insured deposits, with additional reductions when the DIF reaches 2% and 2.5% of insured deposits, respectively. The FDIC applies a scorecard-based assessment system for financial institutions with more than $10 billion in assets (such as the Bank). One of the financial ratios used in the scorecard is the ratio of “higher risk” assets to Tier 1 capital and reserves. The classification of assets such as commercial and industrial loans, securities and consumer loans as “higher risk” is determined in accordance with applicable FDIC regulations and guidance.

In March 2016, the FDIC issued a final rule that will serve to implement a Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “DFA”) provision requiring banks with over $10 billion in assets to be responsible for recapitalizing the DIF to 1.35% of insured deposits after it reaches a 1.15% reserve ratio. The rule became effective on July 1, 2016. For banks with over $10 billion in assets, the rule imposes a 4.5 basis point surcharge to bring the DIF’s reserve ratio to 1.35% by the end of 2018. For the surcharge only, the assessment base would be reduced by $10 billion. See Management’s Discussion and Analysis—Non-Interest Expense beginning on page 43 for a further discussion regarding regulatory assessments.

In addition, all FDIC-insured institutions are required to pay assessments to the FDIC at an annual rate of approximately 0.0046% of insured deposits to fund interest payments on bonds issued by the Financing Corporation, an agency of the federal government established to recapitalize the predecessor to the Savings Association Insurance Fund. These assessments will continue until the Financing Corporation bonds mature between 2017 and 2019.

Under the FDI Act, the FDIC may terminate the insurance of an institution’s deposits upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.

Transactions with Affiliates. National banks are subject to the affiliate and insider transaction rules set forth in Sections 23A, 23B, 22(g) and 22(h) of the Federal Reserve Act, and their implementing regulations, Regulation W and Regulation O, issued by the FRB. Affiliated transaction provisions, among other things, prohibit or limit a national bank from extending credit to, or entering into certain transactions with, its affiliates and principal stockholders, directors and executive officers.

In addition, national banks are prohibited from making a loan to an affiliate that is engaged in non-bank holding company activities and purchasing or investing in securities issued by an affiliate that is not a subsidiary. The FRB and the OCC require each depository institution that is subject to the affiliate transaction restrictions of Sections 23A and 23B of the Federal Reserve Act to implement policies and procedures to ensure compliance with Regulation W.

 

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In addition to the insider transaction limitations of Sections 22(g) and 22(h) of the Federal Reserve Act, Section 402 of the Sarbanes-Oxley Act of 2002 prohibits the extension of personal loans to directors and executive officers of issuers (as defined in the Sarbanes-Oxley Act). The prohibition, however, does not apply to mortgage loans advanced by an insured depository institution, such as the Bank, that are subject to the insider lending restrictions of Section 22(h) of the Federal Reserve Act.

Privacy Standards. The Bank is subject to OCC regulations implementing statutorily-mandated privacy protection. These regulations require the Bank to disclose its privacy policy, including identifying with whom it shares “non-public personal information,” to customers at the time of establishing the customer relationship and annually thereafter. In addition, the Bank is required to provide its customers with the ability to “opt-out” of having the Bank share their non-public personal information with unaffiliated third parties before the Bank can disclose such information, subject to certain exceptions.

In addition to certain state laws governing protection of customer information, the Bank is subject to federal regulatory guidelines establishing standards for safeguarding customer information. The guidelines describe the agencies’ expectations for the creation, implementation and maintenance of an information security program, which would include administrative, technical and physical safeguards appropriate to the size and complexity of the institution and the nature and scope of its activities. The standards set forth in the guidelines are intended to ensure the security and confidentiality of customer records and information, protect against any anticipated threats or hazards to the security or integrity of such records and protect against unauthorized access to or use of such records or information that could result in substantial harm or inconvenience to any customer. Federal guidelines also impose certain customer disclosures and other actions in the event of unauthorized access to customer information.

Community Reinvestment Act. Under the Community Reinvestment Act (the “CRA”), as implemented by the OCC regulations, any national bank, including the Bank, has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community. The CRA requires the OCC, in connection with its examination of a federally-chartered savings bank, to assess the depository institution’s record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such institution.

Current CRA regulations rate an institution based on its actual performance in meeting community needs. In particular, the evaluation system focuses on three tests:

 

   

a lending test, to evaluate the institution’s record of making loans in its service areas;

 

   

an investment test, to evaluate the institution’s record of investing in community development projects, affordable housing and programs benefiting low or moderate income individuals and businesses; and

 

   

a service test, to evaluate the institution’s delivery of services through its branches, ATMs and other offices.

The CRA also requires all institutions to make public disclosure of their CRA ratings. The Bank received a “satisfactory” rating in its most recent CRA examination for the evaluation period ending June 30, 2013. The federal banking agencies adopted regulations implementing the requirements under the Gramm-Leach-Bliley Act that insured depository institutions publicly disclose certain agreements that are in fulfillment of the CRA. The Bank has no such agreements in place at this time.

 

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Loans to One Borrower. Generally, national banks may not make a loan or extend credit, including credit associated with derivatives and securities financing transactions, to a single or related group of borrowers in excess of 15% of the institution’s unimpaired capital and surplus. Additional amounts may be loaned, not in excess of 10% of unimpaired capital and surplus, if such loans or extensions of credit are secured by readily-marketable collateral. The Bank is in compliance with applicable loans to one borrower limitations.

Nontraditional Mortgage Products. The federal banking agencies have issued guidance for institutions that originate or service nontraditional or alternative mortgage products, defined to include all residential mortgage loan products that allow borrowers to defer repayment on principal or interest, such as interest-only mortgages and payment option adjustable-rate mortgages. A portion of the Bank’s adjustable-rate residential mortgage loans represent interest-only residential mortgage loans. None of these loans permit negative amortization or optional payment amounts.

Recognizing that alternative mortgage products expose institutions to increased risks as compared to traditional loans where payments amortize or reduce the principal amount, the guidance requires increased scrutiny for alternative mortgage products. Institutions that originate or service alternative mortgages should have: (i) strong risk management practices that include maintenance of capital levels and allowance for loan losses commensurate with the risk; (ii) prudent lending policies and underwriting standards that address a borrower’s repayment capacity; and (iii) programs and practices designed to ensure that consumers receive clear and balanced information to assist in making informed decisions about mortgage products. The guidance also recommends heightened controls and safeguards when an institution combines an alternative mortgage product with features that compound risk, such as a simultaneous second-lien or the use of reduced documentation to evaluate a loan application. The Bank complies with the guidance on non-traditional mortgage products as it is interpreted and applied by the OCC.

Liquidity. The Bank maintains sufficient liquidity to ensure its safe and sound operation, in accordance with applicable OCC regulations.

Assessments. The OCC charges assessments to recover the cost of examining national banks and their affiliates. These assessments are based on three components: (i) the size of the institution on which the basic assessment is based; (ii) the institution’s supervisory condition, which results in an additional assessment based on a percentage of the basic assessment for any savings institution with a composite rating of 3, 4 or 5 in its most recent safety and soundness examination; and (iii) the complexity of the institution’s operations, which results in an additional assessment based on a percentage of the basic assessment for any savings institution that managed over $1 billion in trust assets, serviced for others loans aggregating more than $1 billion, or had certain off-balance-sheet assets aggregating more than $1 billion.

Branching. Under OCC branching regulations, the Bank is generally authorized to open branches nationwide. The Bank is required to submit an application to the OCC and publish a public notice prior to establishing a new branch or relocating an existing branch. OCC authority preempts any state law purporting to regulate branching by national banks.

Anti-Money Laundering and Customer Identification. The Bank is subject to OCC and Financial Crimes Enforcement Network regulations implementing the Bank Secrecy Act, as amended by the USA PATRIOT Act. The USA PATRIOT Act gives the federal government powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing and broadened anti-money laundering requirements. By way of amendments to the Bank Secrecy Act, Title III of the USA PATRIOT Act takes measures intended to encourage information sharing among banks, regulatory agencies and law enforcement bodies. Further, certain provisions of Title III impose affirmative reporting obligations on a broad range of financial institutions, including national banks like the Bank.

 

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Federal Home Loan Bank System. The Bank is a member of the Federal Home Loan Bank (the “FHLB”) system, which consists of twelve regional FHLBs, each subject to supervision and regulation by the Federal Housing Finance Agency. The FHLB system provides a central credit facility primarily for member institutions as well as other entities involved in home mortgage lending. It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLBs. It makes loans or advances to members in accordance with policies and procedures, including collateral requirements, established by the respective boards of directors of the FHLBs. These policies and procedures are subject to the regulation and oversight of the Federal Housing Finance Agency, which has also established standards of community or investment service that members must meet to maintain access to long-term advances.

The Bank, as a member of the FHLB of Boston, is currently required to purchase and hold shares of capital stock in the FHLB of Boston in an amount equal to 0.35% of the Bank’s Membership Stock Investment Base plus an Activity Based Stock Investment Requirement. The Activity Based Stock Investment Requirement is equal to 3.0% of the principal balance of FHLB advances with an original maturity of one day and 4.0% of the principal balance of FHLB advances with an original maturity of two days or longer. The Bank is in compliance with these requirements. As a result of prior acquisitions, the Bank also holds shares of capital stock in the FHLB of New York. The Bank, as a member of the Federal Reserve Bank system, is currently required to purchase and hold shares of capital stock in the Federal Reserve Bank of New York (the “FRB-NY”) in an amount equal to 6% of its capital and surplus.

Reserve Requirements. FRB reserve regulations require banks to maintain reserves against their transaction accounts (primarily negotiable order of withdrawal and demand deposit accounts). Institutions must maintain a reserve of 3% against aggregate transaction account balances between $16.0 million and $122.3 million (subject to adjustment by the FRB) plus a reserve of 10% (subject to adjustment by the FRB within specific limits) against that portion of total transaction account balances in excess of $122.3 million. The first $16.0 million of otherwise reservable balances is exempt from the reserve requirements. The Bank is in compliance with the foregoing requirements. The required reserves must be maintained in the form of vault cash, or an interest-bearing account at a Federal Reserve Bank, or a pass-through account as defined by the FRB.

Market Area and Competition

People’s United’s primary market areas are New England and southeastern New York, with Connecticut, New York, Massachusetts and Vermont having the largest concentration of its loans, deposits and branches. At December 31, 2017, 24%, 23%, 17% and 6% of the Company’s loans by outstanding principal amount were to customers located within Connecticut, New York, Massachusetts and Vermont, respectively. Loans to customers located in the New England states as a group represented 54% of total loans at December 31, 2017. However, substantially the entire equipment financing portfolio (95% at December 31, 2017) was to customers located outside of New England. At December 31, 2017, 29% of the equipment financing portfolio was to customers located in Texas, California and New York, and no other state exposure was greater than 6%.

As of June 30, 2017, People’s United had: (i) the largest market share of deposits in Fairfield County, Connecticut; (ii) the third largest market share of deposits in the state of Connecticut; and (iii) the largest market share of deposits in the state of Vermont. People’s United competes for deposits, loans and financial services with commercial banks, savings institutions, commercial and consumer finance companies, mortgage banking companies, insurance companies, credit unions and a variety of other institutional lenders and securities firms.

 

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As People’s United’s predominant market, Connecticut is one of the most attractive banking markets in the U.S. With a total population of approximately 3.6 million and a median household income of $76,633, Connecticut ranks seventh in the U.S., well above the U.S. median household income of $61,045, according to U.S. Census data and SNL Financial. The median household income in New York, which has the Company’s second highest number of branches, was $66,418, according to U.S. Census data and SNL Financial. The median household income in Massachusetts and Vermont, which have the Company’s third and fourth highest number of branches, was $77,248 and $61,542, respectively, according to U.S. Census data and SNL Financial.

The principal basis of competition for deposits is the interest rate paid for those deposits and related fees, the convenience of access to services through traditional and non-traditional delivery alternatives, and the quality of services to customers. The principal basis of competition for loans is through the interest rates and loan fees charged and the development of relationships based on the efficiency, convenience and quality of services provided to borrowers. Further competition has been created through the rapid acceleration of commerce conducted over the Internet. This has enabled institutions, including People’s United, to compete in markets outside their traditional geographic boundaries.

Personnel

As of December 31, 2017, People’s United had 5,188 full-time and 396 part-time employees.

Access to Information

As a public company, People’s United is subject to the informational requirements of the Exchange Act, as amended and, in accordance therewith, files reports, proxy and information statements and other information with the SEC. Such reports, proxy and information statements and other information can be inspected and copied at prescribed rates at the public reference room maintained by the SEC at 100 F Street N.E., Washington, D.C. 20549 and are available on the SEC’s EDGAR database on the internet at www.sec.gov. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. People’s United’s common stock is listed on the NASDAQ Global Select Market under the symbol “PBCT.”

Copies of many of these reports are also available through People’s United’s website at www.peoples.com.

People’s United currently provides website access to the following reports:

Form 10-K;

Form 10-Q;

Form 8-K;

Annual Report to Shareholders;

Proxy Statement for Annual Meeting of Shareholders; and

XBRL Interactive Data

 

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Item 1A. Risk Factors

Changes in Interest Rates Could Adversely Affect Our Results of Operations and Financial Condition

People’s United makes most of its earnings based on the difference between interest it earns compared to interest it pays. This difference is called the “interest spread.” People’s United earns interest on loans and to a much lesser extent on securities and short-term investments. These are called “interest-earning assets.” People’s United pays interest on some forms of deposits and on funds it borrows from other sources. These are called “interest-bearing liabilities.”

People’s United’s interest spread can change depending on when interest rates earned on interest-earning assets change, compared to when interest rates paid on interest-bearing liabilities change. Some rate changes occur while these assets or liabilities are still on People’s United’s books. Other rate changes occur when these assets or liabilities mature and are replaced by new interest-earning assets or interest-bearing liabilities at different rates. It may be difficult to replace interest-earning assets quickly, since customers may not want to borrow money when interest rates are high, or People’s United may not be able to make loans that meet its lending standards. People’s United interest spread may also change based on the mix of interest-earning assets and interest-bearing liabilities.

People’s United’s interest spread may be lower if the timing of interest rate changes is different for its interest-earning assets compared to its interest-bearing liabilities. For example, if interest rates go down, People’s United could earn less on some of its interest-earning assets while it is still obligated to pay higher rates on some of its interest-bearing liabilities. On the other hand, if interest rates go up, People’s United might have to pay more on some of its interest-bearing liabilities while it continues to receive lower rates on some of its interest-earning assets.

People’s United manages this risk using many different techniques. If unsuccessful in managing this risk, People’s United may be less profitable.

Changes in Our Asset Quality Could Adversely Affect Our Results of Operations and Financial Condition

Asset quality measures the performance of a borrower in repaying a loan, with interest, on time. While we believe we have benefited from relatively stable asset quality, there are elements of our loan portfolio that inherently present greater credit risk, such as interest-only residential mortgage loans, home equity loans and lines with incomplete first lien data, and commercial real estate loans. Each of these portfolio risk elements, where potentially material in the context of our overall loan portfolio, are discussed in greater detail within Management’s Discussion and Analysis—Asset Quality beginning on page 56. While the Company believes that it manages asset quality through prudent underwriting practices and collection operations, it is possible that our asset quality could deteriorate, depending upon economic conditions and other factors.

The Success of Our Stop & Shop Branches Depends on the Success of the Stop & Shop Brand

One element of our strategy is to focus on increasing deposits by providing a wide range of convenient services to our customers. An integral component of this strategy is the Bank’s supermarket banking initiative, pursuant to which, as of December 31, 2017, the Bank has established 147 full-service Stop & Shop branches throughout Connecticut and southeastern New York, most of which are in close proximity to our traditional branches, which provide customers with the convenience of seven-day-a-week banking. At December 31, 2017, 36% of the Bank’s branches were located in Stop & Shop supermarkets and 14% of our total deposits at that date were held in Stop & Shop branches.

The Bank currently has exclusive branching rights in Stop & Shop supermarkets in the state of Connecticut and certain counties in the state of New York, in the form of licensing agreements between The Stop & Shop Supermarket Company and the Bank, which provides for the leasing of space to the Bank within Stop & Shop supermarkets for branch use. The Bank has the exclusive right to branch in these supermarkets until 2027, provided that the Bank does not default on its obligations under the licensing agreement.

 

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Under the terms of the licensing agreements, the Bank has the obligation to open branches in new Stop & Shop locations, even if Stop & Shop’s market share declines or the value of the Stop & Shop brand is diminished. The licensing agreements do not stipulate the number of branch openings per year but, rather, apply only to those new Stop & Shop locations that meet or exceed specified thresholds as to size (square footage) and/or customer traffic. Based on our experience, we would expect the application of these thresholds to result in the opening of approximately 3-5 new branches per year in Stop & Shop locations.

Stop & Shop is a leading grocery store in Connecticut. The success of the Bank’s supermarket branches is dependent, in part, on the success of the Stop & Shop supermarkets in which they are located. A drop in Stop & Shop’s market share, a decrease in the number of Stop & Shop locations or customers, or a decline in the overall quality of Stop & Shop supermarkets could result in decreased business for the Stop & Shop branches, in the form of fewer loan originations, lower deposit generation and fewer overall branch transactions, and could influence market perception of the Bank’s Stop & Shop supermarket branches as convenient banking locations.

We Depend on Our Executive Officers and Key Personnel to Continue Implementing Our Long-Term Business Strategy and Could Be Harmed by the Loss of Their Services

We believe that our continued growth and future success will depend in large part upon the skills of our management team. The competition for qualified personnel in the financial services industry can be intense, and the loss of our key personnel or an inability to continue to attract, retain and motivate key personnel could adversely affect our business.

Our Business Is Affected by the International, National, Regional and Local Economies in Which We Operate

Changes in international, national, regional and local economic conditions affect our business. If economic conditions change significantly or quickly, our business operations could suffer, and we could become weaker financially as a result.

During certain economic cycles, the housing and real estate markets, as well as the broader economy, may experience declines, both on a national and local level. Housing market conditions in the New England and New York metro regions, where much of our lending activity occurs, may be adversely impacted, leading to a reduced level of sales, an increased inventory of houses on the market, a decline in house prices and an increase in the length of time houses remain on the market. No assurance can be given that these economic conditions will not occur or that such conditions will not result in a decrease in our interest income, an increase in our non-performing loans, an increase in our provision for loan losses or an adverse impact on our loan losses.

Significant volatility in the financial and capital markets during this time led to credit and liquidity concerns, a recessionary economic environment and, in turn, weakness within the commercial sector. Our loan portfolio is not immune to potential negative consequences arising as a result of general economic weakness and, in particular, a prolonged downturn in the housing market on a national scale. Decreases in real estate values could adversely affect the value of property used as collateral for loans. In addition, adverse changes in the economy could have a negative effect on the ability of borrowers to make scheduled loan payments, which would likely have an adverse impact on earnings. Further, an increase in loan delinquencies may serve to decrease interest income and adversely impact loan loss experience, resulting in an increased provision and allowance for loan losses.

International economic uncertainty continues to have an impact on the U.S. financial markets, potentially suppressing stock prices and adding to volatility. Our foreign country exposure, which is defined as the aggregation of exposure maintained with financial institutions, companies or individuals in a given country outside of the U.S., is minimal and indirect, with the majority of such exposure comprised of corporate debt securities. Our sovereign credit exposure is comprised of an immaterial amount of government bonds issued by a single non-European sovereign.

 

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The Geographic Concentration of Our Loan Portfolio Could Make Us Vulnerable to a Downturn in the Economies in Which We Operate

At December 31, 2017, 24%, 23% and 17% of the Company’s loans by outstanding principal amount were to customers located within Connecticut, New York and Massachusetts, respectively. Loans to people and businesses located in the New England states as a group represented 54% of total loans at that date. How well our business performs depends very much on the health of these regional and local economies. We could experience losses in our real estate-related loan portfolios if the prices for housing and other kinds of real estate decreased significantly in New England or southeastern New York.

If the economic environment deteriorates, or negative trends emerge with respect to the financial markets, the New England and southeastern New York economies could suffer more than the national economy. This would be especially likely in Fairfield County, Connecticut (where the Company is headquartered) as well as the suburban communities of New York City and Boston as a result of the significant number of people living in these areas who also work in the financial services industry.

In addition, our ability to continue to originate real estate loans may be impaired by adverse changes in the local and regional economic conditions in these real estate markets. Decreases in real estate values could adversely affect the value of property used as collateral for our loans. Adverse changes in the economy may also have a negative effect on the ability of our borrowers to make timely repayments of their loans, which would have an adverse impact on our earnings. In addition, if poor economic conditions result in decreased demand for real estate loans, our profits may decrease because our alternative investments may earn less income for us than real estate loans.

Our equipment financing business, which operates nationally, could be negatively affected by adverse changes in the national economy, even if those changes have no significant effect on the local and regional economies in which our other businesses operate.

No assurance can be given that such conditions will not occur or that such conditions will not result in a decrease in our interest income, an increase in our non-performing loans, an increase in our provision for loan losses or an adverse impact on our loan losses.

In Response to Competitive Pressures, Our Costs Could Increase if We Were Required to Increase Our Service and Convenience Levels or Our Margins Could Decrease if We Were Required to Increase Deposit Rates or Lower Interest Rates on Loans

People’s United faces significant competition for deposits and loans. In deciding where to deposit their money, many people look first at the interest rate they will earn. They also might consider whether a bank offers other kinds of services they might need and, if they have been a customer of a bank before, what their experience was like. People also like convenience, so the number of offices and banking hours may be important. Some people also prefer the availability of on-line services.

People’s United competes with other banks, credit unions, brokerage firms and money market funds for deposits. Some people may decide to buy bonds or similar kinds of investments issued by companies or by federal, state and local governments and agencies, instead of opening a deposit account.

In making decisions about loans, many people consider the interest rate they will have to pay. They also consider any extra fees they might have to pay in order to get the loan. Many business loans are more complicated because there may not be a standard type of loan that meets all of the customer’s needs. Business borrowers consider many different factors that are not all financial in nature, including the type and amount of security the lender wants and other terms of the loan that do not involve the interest rate.

 

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People’s United competes with other banks, credit unions, credit card issuers, finance companies, mortgage lenders and mortgage brokers for loans. Insurance companies also compete with People’s United for some types of commercial loans.

Several of People’s United’s competitors have branches in the same market area as it does, some of which are much larger than it is. The New England region, including Connecticut, which is People’s United’s predominant market, and specifically Fairfield County, where People’s United is headquartered, is an attractive banking market. As locally-based banks continue to be acquired by large regional and national companies, there are not as many bank competitors in our market as there used to be, but the remaining ones are usually larger and have more resources than the banks they acquired.

People’s United also has competition from outside its own market area. A bank that does not have any branches in our primary markets can still have customers there by providing banking services on-line. It costs money to set up and maintain a branch system. Banks that do not spend as much money as People’s United does on branches might be more profitable than it is, even if they pay higher interest on deposits and charge lower interest on loans.

Changes in Federal and State Regulation Could Adversely Affect Our Results of Operations and Financial Condition

The banking business is heavily regulated by the federal and state governments. Banking laws and rules are for the most part intended to protect depositors, not stockholders.

Banking laws and rules can change at any time. The government agencies responsible for supervising People’s United’s businesses can also change the way they interpret these laws and rules, even if the rules themselves do not change. We need to make sure that our business activities comply with any changes in these rules or the interpretation of the rules. We might be less profitable if we have to change the way we conduct business in order to comply. Our business might suffer in other ways as well.

Changes in state and federal tax laws or the accounting standards we are required to follow can make our business less profitable. Changes in the government’s economic and monetary policies may hurt our ability to compete for deposits and loans. Changes in these policies can also make it more expensive for us to do business.

The government agencies responsible for supervising our business can take drastic action if they think we are not conducting business safely or are too weak financially. They can force People’s United to hold additional capital, pay higher deposit insurance premiums, stop paying dividends, stop making certain kinds of loans or stop offering certain kinds of deposits. If the agencies took any of these steps or other similar steps, it would probably make our business less profitable.

Enactment of the DFA has resulted in significant changes in the financial regulatory landscape, many of which affect us. Among the more significant provisions of the DFA, as well as their actual or anticipated impact, if quantifiable, are:

 

   

Changes to the regulatory landscape, including:

 

   

creation of the CFPB, which is empowered to promulgate new consumer protection regulations and revise existing regulations in many areas of consumer protection, and exercise exclusive authority over our consumer compliance examinations; and

 

   

restrictions on the ability of federal bank regulatory authorities to preempt the application of state consumer protection laws and regulations.

 

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Limitations on the amount of interchange fees that an issuer of debit cards may charge or receive:

 

   

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.

 

   

Changes impacting the financial products and services we offer to our 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 of December 31, 2017, the Bank’s non-interest bearing deposits totaled $8.0 billion, or 24% of total deposits. The Company’s interest expense may increase and net interest margin may decrease if it begins to offer higher rates of interest than are currently offered on demand deposits.

 

   

Stricter capital requirements for bank holding companies:

 

   

The DFA imposes stringent capital requirements on bank holding companies by, among other things, imposing leverage ratios on holding companies and prohibiting the inclusion of new trust preferred issuances in Tier I capital. The DFA also increases regulation of derivatives and hedging transactions, which could limit the ability of People’s United to enter into, or increase the costs associated with, interest rate and other hedging transactions.

 

   

Mortgage rules promulgated by the CFPB:

 

   

The CFPB has issued a series of final rules to implement provisions in the DFA related to mortgage origination and mortgage servicing. These rules, which went into effect in January 2014 and which may increase the cost of originating and servicing residential mortgage loans, include:

 

   

A rule to implement the requirement that creditors make a reasonable, good faith determination of a consumer’s ability to repay any consumer credit transaction secured by a dwelling and establish certain protections from liability under this requirement for “qualified mortgages”; and

 

   

A rule addressing mortgage servicers’ obligations to: correct errors asserted by mortgage loan borrowers; provide certain information requested by such borrowers; and provide protections to such borrowers in connection with force-placed insurance. Additionally, this final rule addresses servicers’ obligations to: provide information about mortgage loss mitigation options to delinquent borrowers; establish policies and procedures for providing delinquent borrowers with continuity of contact with servicer personnel capable of performing certain functions; and evaluate borrowers’ applications for available loss mitigation options.

While it is difficult to fully quantify the increase in our regulatory compliance burden, we do believe that costs associated with regulatory compliance will continue to increase. Because certain other provisions of the DFA still require regulatory rulemaking, it is not clear how those new regulations will affect People’s United.

If People’s United’s Allowance for Loan Losses Is Not Sufficient to Cover Actual Loan Losses, Our Earnings Would Decrease

People’s United is exposed to the risk that customers will not be able to repay their loans. This risk is inherent in the lending business. There is also the risk that the customer’s collateral will not be sufficient to cover the balance of their loan, as underlying collateral values fluctuate with market changes. People’s United records an allowance for loan losses to cover probable losses inherent in the existing loan portfolio. 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.

 

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People’s United 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: People’s United’s historical loan loss experience and recent trends in that experience; 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’s independent loan review function; an evaluation of delinquent and non-performing loans and related collateral values; the probability of loss in view of geographic and industry concentrations and other portfolio risk characteristics; the present financial condition of borrowers; and current economic conditions.

While People’s United seeks to use the best available information to make these evaluations and, at December 31, 2017, believed that the allowance for loan losses was appropriate to cover probable losses inherent in the existing loan portfolio, it is possible that borrower defaults could exceed the current estimates for loan losses, which would reduce earnings. In addition, future increases to the allowance for loan losses may be necessary based on changes in economic conditions, results of regulatory examinations, further information obtained regarding known problem loans, increasing charge-offs of existing problem loans, or the identification of additional problem loans and other factors, which would also reduce earnings. See Note 1 to the Consolidated Financial Statements for additional information concerning People’s United’s allowance for loan losses.

Our Goodwill May be Determined to be Impaired at a Future Date Depending on the Results of Periodic Impairment Evaluations

People’s United evaluates goodwill for impairment on an annual basis (or more frequently, if necessary). According to applicable accounting requirements, acceptable valuation methods include present-value measurements based on multiples of earnings or revenues, or similar performance measures. If the quoted market price for People’s United common stock were to decline significantly, or if it was determined that the carrying amount of our goodwill exceeded its implied fair value, we would be required to write down the asset recorded for goodwill as reflected in the Consolidated Statements of Condition. This, in turn, would result in a charge to earnings and, thus, a reduction in stockholders’ equity. See Notes 1 and 6 to the Consolidated Financial Statements for additional information concerning People’s United’s goodwill and the required impairment test.

People’s United May Fail To Successfully Integrate Acquired Companies and Realize All of the Anticipated Benefits of an Acquisition

The ultimate success of an acquisition will depend, in part, on the ability of People’s United to realize the anticipated benefits from combining the businesses of People’s United with those of an acquired company. If People’s United is not able to successfully combine the businesses, the anticipated benefits of a merger may not be realized fully or at all or may take longer to realize than expected.

A Failure In or Breach Of Our Operational or Security Systems or Infrastructure, or Those of Our Third-Party Vendors and Other Service Providers, Including as a Result of Cyber-Attacks, Could Disrupt Our Business, Result in the Disclosure or Misuse of Confidential or Proprietary Information, Damage Our Reputation, Increase Our Costs and Cause Losses

In the ordinary course of business, we rely on our ability to securely process, record, monitor and store data associated with a large number of customer transactions on a continuous basis. In doing so, our business relies on various digital technologies, computer and email systems, software and networks to conduct operations, and for which we have information security procedures and controls in place. Still, as customer, public and regulatory expectations regarding operational and information security have increased, our operational systems and infrastructure must continue to be safeguarded and monitored for potential failures, disruptions, breakdowns and security breaches.

 

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Security breaches and cybersecurity-related incidents may include, but are not limited to, attempts to access information, including customer and company information, malicious code, computer viruses and denial of service attacks that could result in unauthorized access, misuse, loss or destruction of data (including confidential customer or proprietary information), account takeovers, unavailability of service or other events. These types of threats may derive from human error, fraud or malice on the part of external or internal parties, or may result from accidental technological failure. Further sources of operational and information security risk to us include (i) our customers, who, when accessing our products and services, may use computers or mobile devices that are beyond our security control systems and (ii) third parties with whom we do business or that facilitate our business activities (including exchanges, clearing houses, financial intermediaries or vendors that provide services or security solutions for our operations) should they suffer breakdowns, failures or capacity constraints of their own systems.

In recent years, information security risks for financial institutions, such as ours, have increased due, in part, to (i) the proliferation of new technologies, including internet and mobile banking capabilities, to conduct financial transactions and (ii) the increased sophistication and activities of organized crime, hackers, terrorists, hostile foreign governments, activists and other external parties. There have been several instances involving financial services and consumer-based companies reporting unauthorized access to, and disclosure of, client or customer information or the destruction or theft of corporate data. There have also been highly-publicized cases where hackers have requested “ransom” payments in exchange for not disclosing customer information.

While we have not, to date, experienced any material losses relating to cyber-attacks or other information security breaches, there can be no assurance that we will not suffer such losses in the future. Our risk and exposure to these matters remains heightened because of, among other things: (i) the constantly evolving nature of these threats; (ii) the size and scale of People’s United; (iii) our plans to continue implementing our internet and mobile banking strategies and develop additional remote connectivity solutions in order to serve our customers when and how they want to be served; (iv) our expanded geographic footprint; (v) the outsourcing of some of our business operations; and (vi) the continued uncertain global economic environment. As a result, cybersecurity and the continued development and enhancement of our controls, processes and practices designed to protect our systems, computers, software, data and networks from attack, damage or unauthorized access remain a focus for us. As threats continue to increase in number, intensity and sophistication, we may be required to expend additional resources to continue to modify or enhance our protective measures or to investigate and remediate information security vulnerabilities.

Disruptions or failures in the physical infrastructure or operating systems that support our business and customers, or cyber-attacks or security breaches of the networks, systems or devices that our customers use to access our products and services could result in customer attrition, regulatory fines, penalties or intervention, reputational harm, reimbursement or other compensation costs, and/or additional compliance costs, any of which could materially adversely affect our results of operations or financial condition.

Availability of First Lien Data With Respect to Our Home Equity Loans and Lines of Credit Could Delay Our Response to Any Deterioration in the Borrower’s Credit

We do not currently have statistics for our entire portfolio of home equity loans and lines of credit with respect to first liens serviced by third parties that have priority over our junior liens, as we did not historically capture that data on our loan servicing systems. As a result, we may therefore be unaware that the loan secured by the first lien is not performing, which could delay our response to an apparent deterioration in the borrower’s creditworthiness. As of December 31, 2017, full and complete first lien position data was not readily available for 28% of the home equity portfolio which, in turn, represented 2% of our overall loan portfolio at that date.

 

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We are actively working with a third-party vendor to obtain the missing first lien information and have, in certain cases, obtained the data through information reported to credit bureaus when the borrower defaults. This data collection effort, however, can be more difficult in cases where more than one mortgage is reported in a borrower’s credit report and/or there is not a corresponding property address associated with a reported mortgage, in which case we are often unable to associate a specific first lien with our junior lien. See the discussion in Management’s Discussion and Analysis—Asset Quality—Portfolio Risk Elements—Home Equity Lending beginning on page 58 for more detail, including steps we are taking to otherwise address this issue.

 

Item 1B. Unresolved Staff Comments

None.

 

Item 2. Properties

People’s United’s corporate headquarters is located in Bridgeport, Connecticut. The headquarters building had a net book value of $52 million at December 31, 2017 and People’s United occupies 89% of the building; all other available office space is leased to an unrelated party. People’s United delivers its financial services through a network of 403 branches located throughout Connecticut, southeastern New York, Massachusetts, Vermont, Maine and New Hampshire. People’s United’s branch network is primarily concentrated in Connecticut, where it has 150 offices (including 85 located in Stop & Shop supermarkets). People’s United also has 112 branches in southeastern New York (including 62 located in Stop & Shop supermarkets), 48 branches in Massachusetts, 40 branches in Vermont, 27 branches in Maine and 26 branches in New Hampshire. People’s United owns 115 of its branches, which had an aggregate net book value of $53 million at December 31, 2017. People’s United’s remaining banking operations are conducted in leased locations. Information regarding People’s United’s operating leases for office space and related rent expense appears in Note 20 to the Consolidated Financial Statements.

 

Item 3. Legal Proceedings

The information required by this item appears in Note 20 to the Consolidated Financial Statements.

 

Item 4. Mine Safety Disclosures

None.

Part II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

The common stock of People’s United is listed on the NASDAQ Global Select Market under the symbol “PBCT.” On February 16, 2018, the closing price of People’s United common stock was $19.84. As of that date, there were approximately 17,300 record holders of People’s United common stock.

 

 

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Five-Year Performance Comparison

The following graph compares total shareholder return on People’s United common stock over the last five fiscal years with: (i) the Standard & Poor’s 500 Stock Index (the “S & P 500 Stock Index”); (ii) the Russell Midcap Index; and (iii) the SNL Large Cap U.S. Bank & Thrift Index (the “SNL Large Cap Index”). Index values are as of December 31 of the indicated year.

 

 

LOGO

The graph assumes $100 invested on December 31, 2011 in each of People’s United’s common stock, the S&P 500 Stock Index, the Russell Midcap Index and the SNL Large Cap Index. The graph also assumes reinvestment of all dividends.

The Russell Midcap Index is a market-capitalization weighted index comprised of 800 publicly-traded companies which are among the 1,000 largest U.S. companies (by market capitalization) but not among the 200 largest such companies. People’s United is included as a component of the Russell Midcap Index. The SNL Large Cap Index is an index prepared by SNL Securities comprised of 38 financial institutions (including People’s United) located throughout the U.S.

 

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Issuer Purchases of Equity Securities

The following table provides information with respect to purchases made by People’s United of its common stock during the three months ended December 31, 2017:

 

Period

   Total number
of shares
purchased
     Average
price paid
per share
     Total number of
shares purchased as
part of publicly
announced plans or
programs
     Maximum number
of shares that may
yet be purchased
under the plans or
programs
 

October 1—31, 2017:

           

Tendered by employees (1)

     —        $ —          —          —    

November 1—30, 2017:

           

Tendered by employees (1)

     2,141      $ 18.35        —          —    

December 1—31, 2017:

           

Tendered by employees (1)

     42,299      $ 18.80        —          —    
  

 

 

       

 

 

    

 

 

 

Total:

           

Tendered by employees (1)

     44,440      $ 18.78        —          —    

 

(1) All shares listed were tendered by employees of People’s United in satisfaction of their related minimum tax withholding obligations upon the vesting of restricted stock awards granted in prior periods and/or in payment of the exercise price and satisfaction of their related minimum tax withholding obligations upon the exercise of stock options granted in prior periods. The average price paid per share is equal to the average of the high and low trading price of People’s United’s common stock on The NASDAQ Global Select Market on the vesting or exercise date or, if no trades took place on that date, the most recent day for which trading data was available. There is no limit on the number of shares that may be tendered by employees of People’s United in the future for these purposes. Shares acquired in payment of the option exercise price or in satisfaction of minimum tax withholding obligations are not eligible for reissuance in connection with any subsequent grants made pursuant to equity compensation plans maintained by People’s United. All shares acquired in this manner are retired by People’s United, resuming the status of authorized but unissued shares of People’s United’s common stock.

Additional information required by this item is included in Part III, Item 12 of this report, and Notes 13 and 25 to the Consolidated Financial Statements.

 

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Item 6. Selected Financial Data

 

As of and for the years ended December 31

(dollars in millions, except per common share data)

   2017     2016     2015     2014     2013  

Earnings Data:

          

Net interest income (fully taxable equivalent)

   $ 1,143.2     $ 1,004.5     $ 957.3     $ 931.1     $ 905.8  

Net interest income

     1,100.5       972.2       932.1       911.9       888.6  

Provision for loan losses

     26.0       36.6       33.4       40.6       43.7  

Non-interest income

     352.9       342.7       352.4       350.8       341.7  

Non-interest expense (1)

     960.3       868.8       860.6       841.5       839.0  

Income before income tax expense

     467.1       409.5       390.5       380.6       347.6  

Net income

     337.2       281.0       260.1       251.7       232.4  

Net income available to common shareholders (1)

     323.1       279.2       260.1       251.7       232.4  

Selected Statistical Data:

          

Net interest margin

     2.98     2.80     2.88     3.09     3.31

Return on average assets (1)

     0.79       0.71       0.71       0.75       0.75  

Return on average common equity

     6.0       5.8       5.5       5.4       4.9  

Return on average tangible common equity (1)

     11.0       10.2       10.0       10.0       8.9  

Efficiency ratio (1)

     57.7       60.5       61.5       62.1       62.3  

Financial Condition Data:

          

Total assets

   $ 44,453     $ 40,610     $ 38,947     $ 36,022     $ 33,219  

Loans

     32,575       29,745       28,411       26,592       24,390  

Securities

     7,043       6,738       6,449       5,012       5,033  

Short-term investments (2)

     378       182       380       769       124  

Allowance for loan losses

     234       229       211       198       188  

Goodwill and other acquisition-related intangible assets

     2,560       2,142       2,088       2,103       2,127  

Deposits

     33,056       29,861       28,417       26,138       22,557  

Borrowings

     4,104       4,057       4,307       3,692       5,057  

Notes and debentures

     902       1,030       1,033       1,027       636  

Stockholders’ equity

     5,820       5,142       4,732       4,633       4,568  

Non-performing assets (3)

     168       167       182       224       248  

Ratios:

          

Net loan charge-offs to average total loans

     0.07     0.06     0.08     0.12     0.19

Non-performing assets to originated loans, real estate owned and repossessed assets (3)

     0.56       0.57       0.66       0.88       1.08  

Originated allowance for loan losses to:

          

Originated loans (3)

     0.77       0.77       0.73       0.74       0.78  

Originated non-performing loans (3)

     155.2       150.6       127.3       95.5       81.9  

Average stockholders’ equity to average total assets

     13.1       12.2       12.7       13.7       15.3  

Stockholders’ equity to total assets

     13.1       12.7       12.2       12.9       13.8  

Tangible common equity to tangible assets (1)

     7.2       7.2       7.2       7.5       7.9  

Total risk-based capital (4)

     12.6       13.3       12.6       13.0       12.4  

Common Share Data:

          

Diluted earnings per common share (1)

   $ 0.97     $ 0.92     $ 0.86     $ 0.84     $ 0.74  

Dividends paid per common share

     0.6875       0.6775       0.6675       0.6575       0.6475  

Common dividend payout ratio (1)

     70.6     73.7     77.3     78.2     88.1

Book value per common share (end of period)

   $ 16.40     $ 15.85     $ 15.62     $ 15.44     $ 15.28  

Tangible book value per common share (end of period) (1)

     8.87       8.92       8.73       8.43       8.17  

Stock price:

          

High

     19.85       20.13       16.95       15.70       15.67  

Low

     15.97       13.62       13.97       13.61       12.22  

Close (end of period)

     18.70       19.36       16.15       15.18       15.12  

 

(1) See Non-GAAP Financial Measures and Reconciliation to GAAP.
(2) Includes securities purchased under agreements to resell.
(3) Excludes acquired loans. See Asset Quality.
(4) Total risk-based capital ratios presented are for People’s United Bank. See Regulatory Capital Requirements.

 

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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 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 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’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’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 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) changes in accounting and regulatory guidance applicable to banks; (7) price levels and conditions in the public securities markets generally; (8) competition and its effect on pricing, spending, third-party relationships and revenues; (9) the successful integration of acquisitions; and (10) 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 does not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

General

 

People’s United is a bank holding company and a financial holding company, and the Bank is a national banking association. The principal business of People’s United is to provide, through the Bank and its subsidiaries, commercial banking, retail banking and wealth management services to individual, corporate and municipal customers. The Bank, which is headquartered in Bridgeport, Connecticut, had $44.5 billion in total assets as of December 31, 2017. Its deposit accounts are insured up to applicable limits by the FDIC under the DIF. The 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 the Bank’s compliance with designated consumer financial laws.

People’s United’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’s three primary operating segments that represent its core businesses: Commercial Banking; Retail Banking; and Wealth Management. People’s United’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’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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Table of Contents

Completed Acquisitions

 

Suffolk Bancorp

Effective April 1, 2017, People’s United completed its acquisition of Suffolk Bancorp (“Suffolk”) based in Riverhead, New York. The fair value of the consideration transferred in the Suffolk acquisition totaled $484.8 million and consisted of 26.6 million shares of People’s United common stock. At the acquisition date, Suffolk operated 27 branches in the greater Long Island area.

LEAF Commercial Capital, Inc.

Effective August 1, 2017, the Bank completed its acquisition of LEAF Commercial Capital, Inc. (“LEAF”), a Philadelphia-based commercial equipment finance company. The fair value of the consideration transferred in the LEAF acquisition consisted of $220.0 million in cash.

People’s United’s results of operations for the year ended December 31, 2017 include the results of Suffolk and LEAF beginning with the respective effective dates. See Note 2 to the Consolidated Financial Statements for a further discussion of these acquisitions.

Critical Accounting Policies

 

In preparing the consolidated financial statements, management is required to make significant estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results could differ from management’s current estimates, as a result of changing conditions and future events.

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.

The judgments used by management in applying critical accounting policies may be affected by economic conditions, 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’s significant accounting policies and critical estimates are summarized in Note 1 to the Consolidated Financial Statements.

The Financial Accounting Standards Board (the “FASB”) has issued changes to several accounting standards, some of which govern key aspects of the Company’s financial statements. Most notably, the FASB’s standard on accounting for credit losses removes from U.S. generally accepted accounting principles (“GAAP”) the existing “probable” threshold for recognizing credit losses and, instead, utilizes an “expected credit loss” measurement principle. The model would be applied in the recognition of credit losses for loans, held-to-maturity securities and other receivables at the time the financial asset is originated or acquired and adjusted each period for changes in expected credit losses. This standard represents a significant change in GAAP and may, upon adoption, result in material changes to the Company’s Consolidated Financial Statements (see Note 1 to the Consolidated Financial Statements).

 

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Table of Contents

Non-GAAP Financial Measures and Reconciliation to GAAP

 

In addition to evaluating People’s United’s results of operations in accordance with GAAP, management routinely supplements its evaluation with an analysis of certain non-GAAP financial measures, such as the efficiency and tangible common equity ratios, tangible book value per common share and operating earnings metrics. Management believes these non-GAAP financial measures provide information useful to investors in understanding People’s United’s underlying operating performance and trends, and facilitates comparisons with the performance of other financial institutions. 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 common equity ratio and tangible book value per common share are used to analyze the relative strength of People’s United’s capital position.

The efficiency ratio, which represents an approximate measure of the cost required by People’s United to generate a dollar of revenue, is the ratio of (i) total non-interest expense (excluding operating lease expense, 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, the netting of operating lease expense 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 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 available to common shareholders 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’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) non-recurring gains/losses; (ii) merger-related expenses, including acquisition integration and other costs; (iii) writedowns of banking house assets and related lease termination costs; (iv) severance-related costs; and (v) charges related to executive-level management separation costs, are generally also excluded when calculating the efficiency ratio. Effective in 2016, recurring writedowns of banking house assets and certain severance-related costs are no longer considered to be non-operating expenses. Operating earnings per common share (“EPS”) is derived by determining the per common share impact of the respective adjustments to arrive at operating earnings and adding (subtracting) such amounts to (from) EPS, as reported. Operating return on average assets is calculated by dividing operating earnings (annualized) by average total assets. Operating return on average tangible common equity is calculated by dividing operating earnings (annualized) by average tangible common equity. The operating common dividend payout ratio is calculated by dividing common dividends paid by operating earnings for the respective period.

The tangible common equity ratio is the ratio of (i) tangible common equity (total stockholders’ equity less preferred stock, 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 common share is calculated by dividing tangible common 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 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’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)

   2017     2016     2015     2014     2013  

Total non-interest expense

   $ 960.3     $ 868.8     $ 860.6     $ 841.5     $ 839.0  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjustments to arrive at operating non-interest expense:

          

Merger-related expenses

     (30.6     (4.0     —         —         —    

Acquisition integration and other costs

     —         (0.7     —         —         (0.9

Writedowns of banking house assets

     —         —         (10.5     (6.2     (9.0

Severance-related costs

     —         —         (2.4     (3.3     (2.8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

     (30.6     (4.7     (12.9     (9.5     (12.7
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating non-interest expense

     929.7       864.1       847.7       832.0       826.3  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating lease expense

     (35.2     (36.3     (37.1     (37.4     (31.3

Amortization of other acquisition-related
intangible assets

     (30.0     (23.6     (23.9     (24.8     (26.2

Other (1)

     (5.1     (5.7     (7.8     (10.3     (10.3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest expense for efficiency ratio

   $ 859.4     $ 798.5     $ 778.9     $ 759.5     $ 758.5  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (FTE basis)

   $ 1,143.2     $ 1,004.5     $ 957.3     $ 931.1     $ 905.8  

Total non-interest income

     352.9       342.7       352.4       350.8       341.7  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     1,496.1       1,347.2       1,309.7       1,281.9       1,247.5  

Adjustments:

          

Operating lease expense

     (35.2     (36.3     (37.1     (37.4     (31.3

Net security losses (gains)

     25.4       5.9       —         (3.0     —    

BOLI FTE adjustment

     3.4       2.8       2.4       2.8       2.1  

Gain on sale of business, net of expenses

     —         —         (9.2     (20.6     —    

Other (2)

     (1.3     (0.8     (0.1     (0.5     (0.8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues for efficiency ratio

   $ 1,488.4     $ 1,318.8     $ 1,265.7     $ 1,223.2     $ 1,217.5  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Efficiency ratio

     57.7     60.5     61.5     62.1     62.3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Items classified as “other” and deducted from non-interest expense for purposes of calculating the efficiency ratio include, as applicable, certain franchise taxes and real estate owned expenses.
(2) Items classified as “other” and 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’s operating earnings, operating EPS and operating return on average assets:

 

Years ended December 31

(dollars in millions, except per common share data)

   2017     2016     2015     2014     2013  

Net income available to common shareholders

   $ 323.1     $ 279.2     $ 260.1     $ 251.7     $ 232.4  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjustments to arrive at operating earnings:

          

Merger-related expenses

     30.6       4.0       —         —         —    

Security losses associated with tax reform (1)

     10.0       —         —         —         —    

Acquisition integration and other costs

     —         0.7       —         —         0.9  

Writedowns of banking house assets

     —         —         10.5       6.2       9.0  

Severance-related costs

     —         —         2.4       3.3       2.8  

Gain on sale of business, net of expenses

     —         —         (9.2     (20.6     —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total pre-tax adjustments

     40.6       4.7       3.7       (11.1     12.7  

Tax effect (2)

     (17.9     (1.6     (1.3     3.9       (4.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total adjustments, net of tax

     22.7       3.1       2.4       (7.2     8.7  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating earnings

   $ 345.8     $ 282.3     $ 262.5     $ 244.5     $ 241.1  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted EPS, as reported

   $ 0.97     $ 0.92     $ 0.86     $ 0.84     $ 0.74  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjustment to arrive at operating EPS:

          

Merger-related expenses

     0.07       0.01       —         —         —    

Security losses associated with tax reform

     0.02       —         —         —         —    

Tax benefit associated with tax reform

     (0.02     —         —         —         —    

Acquisition integration and other costs

     —         —         —         —         —    

Writedowns of banking house assets

     —         —         0.03       0.01       0.03  

Severance-related costs

     —         —         —         0.01       —    

Gain on sale of business, net of expenses

     —         —         (0.02     (0.04     —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total adjustments per common share

     0.07       0.01       0.01       (0.02     0.03  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating EPS

   $ 1.04     $ 0.93     $ 0.87     $ 0.82     $ 0.77  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Average total assets

   $ 42,582     $ 39,784     $ 36,894     $ 33,753     $ 31,009  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating return on average assets

     0.81     0.71     0.71     0.72     0.78
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Security losses incurred as a tax planning strategy in response to tax reform enacted on December 22, 2017 are considered non-operating.
(2) Includes a $6.5 million benefit realized in connection with tax reform enacted on December 22, 2017.

 

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The following tables summarize People’s United’s operating return on average tangible common equity and operating common dividend payout ratio:

 

Years ended December 31 (dollars in millions)

   2017     2016     2015     2014     2013  

Operating earnings

   $ 345.8     $ 282.3     $ 262.5     $ 244.5     $ 241.1  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Average stockholders’ equity

   $ 5,592     $ 4,859     $ 4,697     $ 4,625     $ 4,755  

Less: Average preferred stock

     244       41       —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Average common equity

     5,348       4,818       4,697       4,625       4,755  

Less: Average goodwill and average other
acquisition-related intangible assets

     2,410       2,083       2,094       2,115       2,141  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Average tangible common equity

   $ 2,938     $ 2,735     $ 2,603     $ 2,510     $ 2,614  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating return on average tangible common equity

     11.8     10.3     10.1     9.7     9.2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Years ended December 31 (dollars in millions)

   2017     2016     2015     2014     2013  

Common dividends paid

   $ 227.9     $ 205.7     $ 201.2     $ 196.9     $ 204.8  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating earnings

   $ 345.8     $ 282.3     $ 262.5     $ 244.5     $ 241.1  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating common dividend payout ratio

     65.9     72.9     76.6     80.6     84.9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following tables summarize People’s United’s tangible common equity ratio and tangible book value per common share derived from amounts reported in the Consolidated Statements of Condition:

 

As of December 31 (dollars in millions)

   2017     2016     2015     2014     2013  

Total stockholders’ equity

   $ 5,820     $ 5,142     $ 4,732     $ 4,633     $ 4,568  

Less: Preferred stock

     244       244       —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Common equity

     5,576       4,898       4,732       4,633       4,568  

Less: Goodwill and other acquisition-related
intangible assets

     2,560       2,142       2,088       2,103       2,127  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Tangible common equity

   $ 3,016     $ 2,756     $ 2,644     $ 2,530     $ 2,441  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 44,453     $ 40,610     $ 38,947     $ 36,022     $ 33,219  

Less: Goodwill and other acquisition-related
intangible assets

     2,560       2,142       2,088       2,103       2,127  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Tangible assets

   $ 41,893     $ 38,468     $ 36,859     $ 33,919     $ 31,092  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Tangible common equity ratio

     7.2     7.2     7.2     7.5     7.9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

As of December 31 (in millions, except per common share data)

   2017      2016      2015      2014      2013  

Tangible common equity

   $ 3,016      $ 2,756      $ 2,644      $ 2,530      $ 2,441  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Common shares issued

     435.64        405.00        399.24        396.85        396.45  

Less: Common shares classified as treasury shares

     89.04        89.06        89.06        89.05        89.54  

           Unallocated ESOP common shares

     6.62        6.97        7.32        7.67        8.01  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Common shares

     339.98        308.97        302.86        300.13        298.90  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Tangible book value per common share

   $ 8.87      $ 8.92      $ 8.73      $ 8.43      $ 8.17  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Economic Environment

 

People’s United’s results are subject to fluctuations based on economic conditions that can affect interest rates, deposit flows, credit demand and the ability of borrowers to service debt, among others. Throughout 2017, the U.S. economy continued to expand, with real gross domestic product increasing 2.3% year-over-year, slightly above the 2.2% average throughout the post-financial crisis expansion and ahead of the 1.5% increase in 2016, national employment increasing by 2.2 million jobs and the national unemployment rate declining from 4.7% at the end of 2016 to 4.1% as of December 2017. The yield on the 10-year Treasury note declined marginally from 2.45% to 2.41%, while the yield on the 2-year Treasury note increased from 1.20% to 1.89% in response to three 25 basis point increases in the target range for the federal funds rate during 2017 by the Federal Open Market Committee (the “FOMC”) of the FRB. Inflation moderated during 2017 with the December 2017 year-over-year rates at or below 2016 year-end levels. The Consumer Price Index increased 2.1% (or 1.8% excluding food and energy) over the course of the year, while the Personal Consumption Expenditure price index increased 1.7% (or 1.5% excluding food and energy).

Economic growth in 2017 supported People’s United’s loan and deposit growth and loan performance as the interest rate environment supported a modest expansion of the net interest margin. The Company expects economic growth to accelerate in 2018, which should continue to support loan and deposit growth and loan performance. The FOMC indicated at its December 2017 meeting that three additional 25 basis point increases in the target range for the federal funds rate would likely occur in 2018. Whether three rate increases occur in 2018 will depend on the strength and momentum of the economy and the course of inflation.

The New England region and southeastern New York comprise People’s United’s primary market area, with Connecticut, Massachusetts, New York and Vermont having the largest concentration of People’s United’s loans, deposits and branches. While the New England economy experienced a less severe contraction during the last recession than the U.S. as a whole, since the recession ended it has expanded more slowly. Employment growth since 2008 has exceeded the national average only in Massachusetts and New York. As of December 31, 2017, Connecticut had yet to recover all the jobs lost in the recession, while Vermont, New Hampshire and Maine had increased employment but slower than the nation overall. The combination of the less severe recession but slower subsequent growth resulted in state unemployment rates that are less than the national rate in all states in the Company’s primary market area, except for Connecticut and New York where the unemployment rates were 4.6% in both states as of December 31, 2017 compared to the national average of 4.1%.

Modest economic growth is expected to continue within People’s United’s primary market area, as its skilled labor force should enable it to be competitive in sectors of the economy with high growth potential, including health care, technology, education and advanced manufacturing.

Financial Overview

 

People’s United completed its acquisitions of Suffolk effective April 1, 2017 and LEAF effective August 1, 2017. The assets acquired and liabilities assumed in these transactions were recorded at their estimated fair values as of the respective closing dates and People’s United’s results of operations for the year ended December 31, 2017 include the results of these companies beginning with the respective closing dates. See Note 2 to the Consolidated Financial Statements for a further discussion of these acquisitions. Financial data for prior periods has not been restated to include Suffolk and LEAF and therefore, are not directly comparable to subsequent periods.

 

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Comparison of Financial Condition at December 31, 2017 and 2016. Total assets at December 31, 2017 were $44.5 billion, a $3.8 billion increase from December 31, 2016, reflecting increases of $2.8 billion in total loans, $419 million in goodwill, $305 million in total securities and $196 million in short-term investments. The increase in total loans from December 31, 2016 to December 31, 2017 reflects increases of $2.3 billion in commercial loans and $530 million in retail loans. Originated loans increased $976 million from December 31, 2016 to $30.1 billion (commercial loans increased $592 million and retail loans increased $384 million) and acquired loans increased $1.9 billion. At the respective acquisition dates, the fair value of Suffolk’s and LEAF’s loans totaled $1.6 billion and $718 million, respectively. At December 31, 2017, the carrying amount of the acquired loan portfolio totaled $2.5 billion. The increase in total securities primarily reflects an increase in state and municipal securities.

Non-performing assets (excluding acquired non-performing loans) totaled $168.1 million at December 31, 2017, a $0.8 million increase from December 31, 2016. At December 31, 2017, acquired non-performing loans totaled $29.7 million compared to $24.7 million at December 31, 2016. The allowance for loan losses was $234.4 million at December 31, 2017 ($230.8 million on originated loans and $3.6 million on acquired loans) compared to $229.3 million at December 31, 2016 ($223.0 million on originated loans and $6.3 million on acquired loans). At December 31, 2017, the originated allowance for loan losses as a percentage of originated loans was 0.77% and as a percentage of originated non-performing loans was 155.2%, compared to 0.77% and 150.6%, respectively, at December 31, 2016.

At December 31, 2017, total liabilities were $38.6 billion, a $3.2 billion increase from December 31, 2016, reflecting a $3.2 billion increase in total deposits partially offset by a $129 million decrease in notes and debentures. At the acquisition date, the fair value of Suffolk’s deposits totaled $1.9 billion. The decrease in notes and debentures reflects the repayment of the $125 million 5.80% fixed-rate/floating-rate subordinated notes in February 2017.

People’s United’s total stockholders’ equity was $5.8 billion at December 31, 2017, a $678.0 million increase from December 31, 2016. As a percentage of total assets, stockholders’ equity was 13.1% and 12.7% at December 31, 2017 and 2016, respectively. Tangible common equity as a percentage of tangible assets was 7.2% at both December 31, 2017 and 2016.

People’s United’s (consolidated) Tier 1 Leverage capital ratio and its CET 1, Tier 1 and Total risk-based capital ratios were 8.3%, 9.7%, 10.4% and 12.2%, respectively, at December 31, 2017, compared to 8.4%, 9.9%, 10.7% and 12.5%, respectively, at December 31, 2016. The Bank’s Tier 1 Leverage capital ratio and its CET 1, Tier 1 and Total risk-based capital ratios were 8.5%, 10.7%, 10.7% and 12.6%, respectively, at December 31, 2017, compared to 8.9%, 11.3%, 11.3% and 13.3%, respectively, at December 31, 2016.

Comparison of Results of Operations for the Years Ended December 31, 2017 and 2016. People’s United reported net income of $337.2 million, or $0.97 per diluted common share, for the year ended December 31, 2017, compared to $281.0 million, or $0.92 per diluted common share, for the 2016 period. Included in the 2017 results are merger-related costs totaling $30.6 million ($22.0 million after-tax) or $0.07 per common share. Results for 2016 include merger-related costs totaling $4.7 million ($3.1 million after-tax) or $0.01 per common share. The results for 2017 reflect the benefits from recent acquisitions, continued loan and deposit growth, and meaningful cost control. People’s United’s return on average assets was 0.79% for 2017 compared to 0.71% for the 2016 period. Return on average tangible common equity was 11.0% for 2017 compared to 10.2% for the 2016 period. On an operating basis, return on average assets was 0.81% and return on average tangible common equity was 11.8% for 2017.

FTE net interest income totaled $1.1 billion in 2017, a $138.7 million increase from the year-ago period, and the net interest margin increased 18 basis points from 2016 to 2.98%. The increase in the net interest margin primarily reflects higher yields on the loan portfolio.

 

 

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Average total earning assets increased $2.5 billion compared to 2016, primarily reflecting a $2.5 billion increase in average total loans. Average total funding liabilities increased $2.1 billion compared to 2016, reflecting an increase of $2.5 billion in average total deposits, partially offset by decreases of $238 million in average total borrowings and $127 million in average notes and debentures.

Compared to 2016, total non-interest income increased $10.2 million and total non-interest expense increased $91.5 million. The efficiency ratio was 57.7% for 2017 compared to 60.5% for the year-ago period. The provision for loan losses in 2017 totaled $26.0 million compared to $36.6 million in the year-ago period. Net loan charge-offs as a percentage of average total loans were 0.07% in 2017 compared to 0.06% in 2016.

Comparison of Financial Condition at December 31, 2016 and 2015. Total assets at December 31, 2016 were $40.6 billion, a $1.7 billion increase from December 31, 2015, reflecting increases of $1.3 billion in total loans and $289 million in total securities, partially offset by a $199 million decrease in short-term investments. The increase in total loans from December 31, 2015 to December 31, 2016 reflects increases of $760 million in residential mortgage loans and $654 million in commercial loans, partially offset by an $81 million decrease in home equity loans. Originated loans increased $1.5 billion from December 31, 2015 to $29.1 billion (commercial loans increased $792 million and retail loans increased $729 million) and acquired loans decreased $186 million. At December 31, 2016, the carrying amount of the acquired loan portfolio totaled $610 million. The increase in total securities primarily reflects net purchases of U.S. Treasury securities and state and municipal securities, partially offset by principal repayments and maturities of government sponsored enterprise (“GSEs”) mortgage-backed securities and collateralized mortgage obligations (“CMOs”).

Non-performing assets (excluding acquired non-performing loans) totaled $167.3 million at December 31, 2016, a $14.2 million decrease from year-end 2015, primarily reflecting decreases of $9.8 million in non-performing residential mortgage loans and $7.9 million in non-performing commercial real estate loans, partially offset by an $11.9 million increase in non-performing equipment financing loans. The allowance for loan losses was $229.3 million at December 31, 2016 ($223.0 million on originated loans and $6.3 million on acquired loans) compared to $211.0 million at December 31, 2015 ($202.9 million on originated loans and $8.1 million on acquired loans). At December 31, 2016, the originated allowance for loan losses as a percentage of originated loans was 0.77% and as a percentage of originated non-performing loans was 150.6%, compared to 0.73% and 127.3%, respectively, at December 31, 2015.

At December 31, 2016, total liabilities were $35.5 billion, a $1.3 billion increase from December 31, 2015, reflecting a $1.4 billion increase in total deposits, partially offset by a $251 million decrease in total borrowings.

People’s United’s total stockholders’ equity was $5.1 billion at December 31, 2016, a $410.3 million increase from December 31, 2015. As a percentage of total assets, stockholders’ equity was 12.7% at December 31, 2016 compared to 12.2% at December 31, 2015. Tangible common equity as a percentage of tangible assets was 7.2% at both December 31, 2016 and 2015.

People’s United’s (consolidated) Tier 1 Leverage capital ratio and its CET 1, Tier 1 and Total risk-based capital ratios were 8.4%, 9.9%, 10.7% and 12.5%, respectively, at December 31, 2016, compared to 8.0%, 9.8%, 9.8% and 11.7%, respectively, at December 31, 2015. The Bank’s Tier 1 Leverage capital ratio and its CET 1, Tier 1 and Total risk-based capital ratios were 8.9%, 11.3%, 11.3% and 13.3%, respectively, at December 31, 2016, compared to 8.4%, 10.2%, 10.2% and 12.6%, respectively, at December 31, 2015.

 

 

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Comparison of Results of Operations for the Years Ended December 31, 2016 and 2015. People’s United reported net income of $281.0 million, or $0.92 per diluted common share, for the year ended December 31, 2016, compared to $260.1 million, or $0.86 per diluted common share, for the 2015 period. Included in the 2016 results are merger-related costs totaling $4.7 million ($3.1 million after-tax) or $0.01 per common share. Results for 2015 include a net after-tax gain of $6.1 million ($0.02 per common share) resulting from the sale of the Company’s payroll services business. The results for 2016 reflect continued loan and deposit growth, meaningful cost control and the negative impact of the historically low interest rate environment. People’s United’s return on average assets was 0.71% for both 2016 and 2015. Return on average tangible common equity was 10.2% for 2016 compared to 10.0% for the 2015 period.

FTE net interest income totaled $1.0 billion in 2016, a $47.2 million increase from the year-ago period, and the net interest margin declined eight basis points from 2015 to 2.80%. The decrease in the net interest margin primarily reflects continued pricing pressure within the loan portfolio, which includes the pay-off of higher-yielding loans, partially mitigated by new loan originations at rates higher than the existing portfolio.

Average total earning assets increased $2.7 billion compared to 2015, reflecting increases of $1.5 billion in average total loans and $1.1 billion in average total securities. Average total funding liabilities increased $2.6 billion compared to 2015, reflecting increases of $1.7 billion in average total deposits and $820 million in average total borrowings.

Compared to 2015, total non-interest income decreased $9.7 million and total non-interest expense increased $8.2 million. The efficiency ratio was 60.5% for 2016 compared to 61.5% for the year-ago period. The provision for loan losses in 2016 totaled $36.6 million compared to $33.4 million in the year-ago period. Net loan charge-offs as a percentage of average total loans were 0.06% in 2016 compared to 0.08% in 2015.

Segment Results

 

People’s United’s operations are divided into three primary operating segments that represent its core businesses: Commercial Banking; Retail Banking; and Wealth Management. In addition, the Treasury area manages People’s United’s securities portfolio, short-term investments, brokered deposits, wholesale borrowings and the funding center.

The Company’s operating segments have been aggregated into two reportable segments: Commercial Banking and Retail Banking. These reportable segments have been identified and organized based on the nature of the underlying products and services applicable to each segment, the type of customers to whom those products and services are offered and the distribution channel through which those products and services are made available. With respect to the Company’s traditional wealth management activities, this presentation results in the allocation of the Company’s insurance business and certain trust activities to the Commercial Banking segment, and the allocation of the Company’s brokerage business and certain other trust activities to the Retail Banking segment.

 

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Segment Performance Summary

 

      Net Income  

Years ended December 31 (in millions)

   2017      2016      2015  

Commercial Banking

   $ 285.2      $ 247.4      $ 234.8  

Retail Banking

     19.4        (3.7      (14.1
  

 

 

    

 

 

    

 

 

 

Total reportable segments

     304.6        243.7        220.7  

Treasury

     74.4        59.5        45.7  

Other

     (41.8      (22.2      (6.3
  

 

 

    

 

 

    

 

 

 

Total Consolidated

   $ 337.2      $ 281.0      $ 260.1  
  

 

 

    

 

 

    

 

 

 

People’s United uses an internal profitability reporting system to generate information by operating segment, which is based on a series of management estimates and allocations regarding funds transfer pricing (“FTP”), the provision for loan losses, non-interest expense and income taxes. These estimates and allocations, some of which are subjective in nature, are subject to periodic review and refinement. Any changes in estimates and allocations that may affect the reported results of any segment will not affect the consolidated financial position or results of operations of People’s United as a whole.

FTP, which is used in the calculation of each operating segment’s net interest income, measures the value of funds used in and provided by an operating segment. The difference between the interest income on earning assets and the interest expense on funding liabilities, and the corresponding FTP charge for interest income or credit for interest expense, results in net spread income (see Treasury). For fixed-term assets and liabilities, the FTP rate is assigned at the time the asset or liability is originated by reference to the Company’s FTP yield curve, which is updated daily. For non-maturity-term assets and liabilities, the FTP rate is determined based upon the underlying characteristics, or behavior, of each particular product and results in the use of a historical rolling average FTP rate determined over a period that is most representative of the average life of the particular asset or liability. While the Company’s FTP methodology serves to remove interest rate risk (“IRR”) from the operating segments and better facilitate pricing decisions, thereby allowing management to more effectively assess the longer-term profitability of an operating segment, it may, in sustained periods of low and/or high interest rates, result in a measure of operating segment net interest income that is not reflective of current interest rates.

A five-year rolling average net charge-off rate is used as the basis for the provision for loan losses for the respective operating segment in order to present a level of portfolio credit cost that is representative of the Company’s historical experience, without presenting the potential volatility from year-to-year changes in credit conditions. While this method of allocation allows management to more effectively assess the longer-term profitability of an operating segment, it may result in a measure of an operating segment’s provision for loan losses that does not reflect actual incurred losses for the periods presented.

People’s United allocates a majority of non-interest expenses to each operating segment using a full-absorption costing process (i.e. all expenses are fully-allocated to the segments). Direct and indirect costs are analyzed and pooled by process and assigned to the appropriate operating segment and corporate overhead costs are allocated to the operating segments. Income tax expense is allocated to each operating segment using a constant rate, based on an estimate of the consolidated effective income tax rate for the year. Average total assets and average total liabilities are presented for each reportable segment due to management’s reliance, in part, on such average balances for purposes of assessing segment performance.

For a more detailed description of the estimates and allocations used to measure segment performance, see Note 23 to the Consolidated Financial Statements.

 

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Commercial Banking consists principally of commercial real estate lending, commercial and industrial lending, and commercial deposit gathering activities. This segment also includes equipment financing operations, as well as cash management, correspondent banking, municipal banking, institutional trust services, corporate trust, commercial insurance services provided through PUIA and private banking.

 

Years ended December 31 (in millions)

   2017      2016      2015  

Net interest income

   $ 631.0      $ 566.5      $ 551.6  

Provision for loan losses

     43.7        39.3        47.7  

Total non-interest income

     165.0        156.4        162.0  

Total non-interest expense

     357.1        322.8        313.2  
  

 

 

    

 

 

    

 

 

 

Income before income tax expense

     395.2        360.8        352.7  

Income tax expense

     110.0        113.4        117.9  
  

 

 

    

 

 

    

 

 

 

Net income

   $ 285.2      $ 247.4      $ 234.8  
  

 

 

    

 

 

    

 

 

 

Average total assets

   $ 24,533.9      $ 22,691.1      $ 21,465.7  

Average total liabilities

     7,938.6        6,733.7        5,483.2  
  

 

 

    

 

 

    

 

 

 

Commercial Banking net income increased $37.8 million in 2017 compared to 2016, reflecting increases in net interest income and non-interest income, partially offset by an increase in non-interest expense. The $64.5 million increase in net interest income primarily reflects the benefit from an increase in average commercial loans and leases, including new business yields higher than the total portfolio yield, partially offset by increases in net FTP funding charges and interest expense. Non-interest income increased $8.6 million in 2017 compared to 2016, primarily reflecting increases in commercial banking lending fees and operating lease income, partially offset by a decrease in net customer interest rate swap income. The $34.3 million increase in non-interest expense in 2017 compared to 2016 reflects higher levels of both direct and allocated expenses. Average total assets increased $1.8 billion and average total liabilities increased $1.2 billion compared to 2016, reflecting the Suffolk and LEAF acquisitions, as well as organic loan and deposit growth.

Commercial Banking net income increased $12.6 million in 2016 compared to 2015, reflecting an increase in net interest income, partially offset by a decrease in non-interest income and an increase in non-interest expense. The $14.9 million increase in net interest income in 2016 compared to 2015 primarily reflects the benefit from an increase in average commercial loans, partially offset by increases in interest expense and net FTP funding charges, and continued pricing pressure within the loan portfolio, which includes the pay-off of higher-yielding loans, partially mitigated by new originations at rates higher than the existing portfolio. Non-interest income decreased $5.6 million in 2016 compared to 2015, primarily reflecting decreases in commercial banking lending fees and operating lease income, partially offset by increases in institutional and corporate trust fees, and insurance revenue. The $9.6 million increase in non-interest expense in 2016 compared to 2015 reflects a higher level of direct expenses. Average total assets increased $1.2 billion and average total liabilities increased $1.3 billion compared to 2015, reflecting loan and deposit growth, respectively.

 

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Retail Banking includes, as its principal business lines, consumer lending (including residential mortgage and home equity lending) and consumer deposit gathering activities. This segment also includes brokerage, financial advisory services, investment management services and life insurance provided by PSI and non-institutional trust services.

 

Years ended December 31 (in millions)

   2017      2016      2015  

Net interest income

   $ 403.9      $ 347.5      $ 344.6  

Provision for loan losses

     13.4        13.0        15.2  

Total non-interest income

     183.4        169.0        169.7  

Total non-interest expense

     547.0        508.9        520.2  
  

 

 

    

 

 

    

 

 

 

Income (loss) before income tax
expense (benefit)

     26.9        (5.4      (21.1

Income tax expense (benefit)

     7.5        (1.7      (7.0
  

 

 

    

 

 

    

 

 

 

Net income (loss)

   $ 19.4      $ (3.7    $ (14.1
  

 

 

    

 

 

    

 

 

 

Average total assets

   $ 9,695.1      $ 8,945.8      $ 8,478.1  

Average total liabilities

     20,202.8        19,207.3        19,235.8  
  

 

 

    

 

 

    

 

 

 

Retail Banking net income in 2017 compared to a net loss in 2016 reflects increases in net interest income and non-interest income, partially offset by an increase in non-interest expense. The $56.4 million increase in net interest income in 2017 compared to 2016 primarily reflects the benefits from an increase in average residential mortgage loans, including new business yields higher than the total portfolio yield, and higher net FTP funding credits. Non-interest income increased $14.4 million in 2017 compared to 2016, primarily reflecting the addition of Gerstein, Fisher & Associates, Inc. (“Gerstein Fisher”) in November 2016, partially offset by a $3.1 million decrease in net gains on sales of residential loans. The $38.1 million increase in non-interest expense in 2017 compared to 2016 reflects higher levels of both direct and allocated expenses. Compared to 2016, average total assets increased $749 million and average total liabilities increased $996 million, reflecting the Suffolk acquisition and organic loan and deposit growth.

Retail Banking net loss decreased $10.4 million in 2016 compared to 2015. The $2.9 million increase in net interest income in 2016 compared to 2015 primarily reflects the benefit from an increase in average residential mortgage loans and a decrease in interest expense, partially offset by lower net FTP funding credits and continued pricing pressure within the loan portfolio, which includes the pay-off of higher-yielding loans, partially mitigated by new originations at rates higher than the existing portfolio. The $11.3 million decrease in non-interest expense in 2016 compared to 2015 reflects lower levels of both direct and allocated expenses. Compared to 2015, average total assets increased $468 million, primarily reflecting loan growth, and average total liabilities decreased $29 million, primarily reflecting a decrease in deposits.

 

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Treasury encompasses the securities portfolio, short-term investments, brokered deposits, wholesale borrowings and the funding center, which includes the impact of derivative financial instruments used for risk management purposes.

The income or loss for the funding center represents the IRR component of People’s United’s net interest income as calculated by its FTP model in deriving each operating segment’s net interest income. Under this process, the funding center buys funds from liability-generating business lines, such as consumer deposits, and sells funds to asset-generating business lines, such as commercial lending. The price at which funds are bought and sold on any given day is set by People’s United’s Treasury group and is based on the wholesale cost to People’s United of assets and liabilities with similar maturities. Liability-generating businesses sell newly-originated liabilities to the funding center and recognize a funding credit, while asset-generating businesses buy funding for newly-originated assets from the funding center and recognize a funding charge. Once funding for an asset is purchased from or a liability is sold to the funding center, the price that is set by the Treasury group will remain with that asset or liability until it matures or reprices, which effectively transfers responsibility for managing IRR to the Treasury group.

 

Years ended December 31 (in millions)

   2017      2016      2015  

Net interest income

   $ 107.4      $ 87.6      $ 64.4  

Total non-interest income

     11.2        9.2        11.1  

Total non-interest expense

     15.6        9.8        6.9  
  

 

 

    

 

 

    

 

 

 

Income before income tax expense

     103.0        87.0        68.6  

Income tax expense

     28.6        27.5        22.9  
  

 

 

    

 

 

    

 

 

 

Net income

   $ 74.4      $ 59.5      $ 45.7  
  

 

 

    

 

 

    

 

 

 

Average total assets

   $ 7,512.1      $ 7,443.1      $ 6,399.3  

Average total liabilities

     8,450.6        8,628.7        7,188.4  
  

 

 

    

 

 

    

 

 

 

Treasury net income increased $14.9 million in 2017 compared to 2016, reflecting increases in net interest income and non-interest income, partially offset by an increase in non-interest expense. The $19.8 million increase in net interest income in 2017 compared to 2016 primarily reflects the benefits from an increase in securities income and higher net FTP funding credits, partially offset by an increase in interest expense. Non-interest income in 2017 includes a $16.1 million gain recorded in connection with the exchange of an ownership interest in a non-marketable equity security (previously recorded in other assets) for cash and common stock in a publicly-traded company. Net security losses in 2017 totaling $15.7 million resulting from the sale of low-yielding and short duration U.S. Treasury and CMO securities, with a combined amortized cost of $486.9 million, are also included in non-interest income. Non-interest income in 2016 includes $5.9 million in net security losses (see below) and income relating to distributions from an acquired equity investment. Non-interest income also includes BOLI death benefits received totaling $0.9 million and $1.4 million in 2017 and 2016, respectively. The increase in non-interest expense reflects an increase in allocated expenses, partially offset by a decrease in direct expenses. Compared to 2016, average total assets increased $690 million, primarily reflecting an increase in short-term investments, and average total liabilities decreased $178 million, primarily reflecting decreases in borrowings and notes and debentures, partially offset by an increase in deposits.

Treasury net income increased $13.8 million in 2016 compared to 2015. The $23.2 million increase in net interest income in 2016 compared to 2015 primarily reflects an increase in securities income and lower net FTP funding costs, partially offset by an increase in interest expense. Non-interest income in 2016 includes $5.9 million in net security losses, primarily resulting from the sale of low-yielding and short duration U.S. Treasury and CMO securities with a combined amortized cost of $403.0 million, and income relating to distributions from an acquired equity investment. Non-interest income also includes BOLI death benefits received totaling $1.4 million and $0.5 million in 2016 and 2015, respectively. The increase in non-interest expense in 2016 compared to 2015 reflects an increase in allocated expenses, partially offset by a decrease in direct expenses. Average total assets increased $1.0 billion in 2016 compared to 2015, primarily reflecting an increase in securities. The $1.4 billion increase in average total liabilities in 2016 compared to 2015 primarily reflects an increase in borrowings.

 

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Other includes the residual financial impact from the allocation of revenues and expenses (including the provision for loan losses) and certain revenues and expenses not attributable to a particular segment; assets and liabilities not attributable to a particular segment; reversal of the FTE adjustment since net interest income for each segment is presented on an FTE basis; and the FTP impact from excess capital. Non-interest income in 2017 includes $10.0 million of security losses incurred as a tax planning strategy in response to tax reform enacted on December 22, 2017 and certain gains in 2016 and 2015 totaling $7.5 million and $9.2 million, respectively. Non-interest expense includes certain charges in 2017, 2016 and 2015 totaling $30.6 million, $4.7 million and $12.9 million, respectively. Income tax benefit in 2017 includes a $6.5 million tax benefit realized in connection with tax reform.

 

Years ended December 31 (in millions)

   2017      2016      2015  

Net interest loss

   $ (41.8    $ (29.4    $ (28.5

Provision for loan losses

     (31.1      (15.7      (29.5

Total non-interest income

     (6.7      8.1        9.6  

Total non-interest expense

     40.6        27.3        20.3  
  

 

 

    

 

 

    

 

 

 

Loss before income tax benefit

     (58.0      (32.9      (9.7

Income tax benefit

     (16.2      (10.7      (3.4
  

 

 

    

 

 

    

 

 

 

Net loss

   $ (41.8    $ (22.2    $ (6.3
  

 

 

    

 

 

    

 

 

 

Average total assets

   $ 840.5      $ 704.3      $ 583.8  

Average total liabilities

     398.0        355.2        322.2  
  

 

 

    

 

 

    

 

 

 

Net Interest Income

 

Net interest income and net interest margin are affected by many factors, including changes in average balances; interest rate fluctuations and the slope of the yield curve; sales of loans and securities; residential mortgage loan and mortgage-backed security prepayment rates; product pricing; competitive forces; the relative mix, repricing characteristics and maturity of interest-earning assets and interest-bearing liabilities; non-interest-bearing sources of funds; hedging activities; and asset quality.

 

Net Interest Margin

 

Years ended December 31 (percent)

 

Net Interest Income - FTE

 

Years ended December 31 (dollars in millions)

 

LOGO

 

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In response to signs of a moderately expanding U.S. economy, the FRB has raised the target range for the federal funds rate (currently between 1.25% and 1.50%) five times by a total of 125 basis points since December 2015, including three times during 2017. Until that date, the FRB had not changed the target range for the federal funds rate of between 0% and 0.25% since December 2008. For 2017, the average effective federal funds rate was 1.00%.

The net interest margin was 2.98% in 2017 compared to 2.80% in 2016. The improvement in the net interest margin in 2017 compared to 2016 primarily reflects higher yields on the loan portfolio and an increase in the yield on the securities portfolio (which benefitted the net interest margin by 25 and six basis points, respectively), partially offset by higher funding costs (which reduced the net interest margin by 13 basis points).

2017 Compared to 2016

FTE net interest income increased $138.7 million compared to 2016, reflecting a $185.5 million increase in total interest and dividend income and a $46.8 million increase in total interest expense, and the net interest margin increased 18 basis points to 2.98%.

Average total earning assets were $38.4 billion in 2017, a $2.5 billion increase from 2016, primarily reflecting a $2.5 billion increase in average total loans. The average total commercial and residential mortgage loan portfolios increased $1.7 billion and $829 million, respectively, compared to 2016, reflecting organic growth and loans acquired in the Suffolk and LEAF acquisitions, and the average home equity loan portfolio decreased $59 million. Average total loans, average securities and average short-term investments comprised 81%, 18% and 1%, respectively, of average total earning assets in 2017, compared to 80%, 19% and 1%, respectively, in 2016. In 2017, the yield earned on the total loan portfolio was 3.71% and the yield earned on securities and short-term investments was 2.59%, compared to 3.47% and 2.30%, respectively, in the year-ago period. Excluding adjustable-rate residential mortgage loans, which are mostly of the hybrid variety, 50% of the loan portfolio had floating interest rates at December 31, 2017, compared to 51% at December 31, 2016.

Average total funding liabilities were $36.4 billion in 2017, a $2.1 billion increase from the year-ago period, reflecting a $2.5 billion increase in average total deposits, partially offset by decreases of $238 million in average total borrowings and $127 million in average notes and debentures. The increase in average total deposits reflects organic growth, deposits acquired in the Suffolk acquisition and a $231 million increase in average brokered deposits. Excluding brokered deposits, average savings, interest-bearing checking and money market deposits, and average non-interest-bearing deposits both increased $1.1 billion. Average total deposits comprised 87% and 85% of average total funding liabilities in 2017 and 2016, respectively. The decrease in average notes and debentures reflects the repayment of the $125 million 5.80% fixed-rate/floating-rate subordinated notes in February 2017.

The ten basis point increase to 0.55% from 0.45% in the rate paid on average total funding liabilities in 2017 compared to 2016 primarily reflects the increases in the target federal funds rate discussed above. The rate paid on average total deposits increased seven basis points in 2017, reflecting increases of 12 basis points in savings, interest-bearing checking and money market deposits and two basis points in time deposits, partially offset by the benefit from a $1.1 billion increase in non-interest-bearing deposits. Average savings, interest-bearing checking and money market deposits and average time deposits comprised 61% and 15%, respectively, of average total deposits in 2017 compared to 63% and 16%, respectively, in 2016.

 

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2016 Compared to 2015

FTE net interest income increased $47.2 million compared to 2015, reflecting a $65.5 million increase in total interest and dividend income, partially offset by an $18.3 million increase in total interest expense, and the net interest margin decreased eight basis points to 2.80%, primarily reflecting an increase in funding costs (five basis points).

Average total earning assets were $35.9 billion in 2016, a $2.7 billion increase from 2015, primarily reflecting increases of $1.5 billion in average total loans and $1.1 billion in average securities. The average total commercial and residential mortgage loan portfolios increased $1.0 billion and $602 million, respectively, compared to 2015, reflecting organic growth and the average home equity loan portfolio decreased $26 million. Average total loans, average securities and average short-term investments comprised 80%, 19% and 1%, respectively, of average total earning assets in 2016, compared to 82%, 17% and 1%, respectively, in 2015. In 2016, the yield earned on the total loan portfolio was 3.47% and the yield earned on securities and short-term investments was 2.30%, compared to 3.52% and 2.28%, respectively, in the year-ago period. Excluding adjustable-rate residential mortgage loans, which are mostly of the hybrid variety, 51% of the loan portfolio had floating interest rates at December 31, 2016, compared to 49% at December 31, 2015.

Average total funding liabilities were $34.3 billion in 2016, a $2.6 billion increase from the year-ago period, reflecting increases of $1.7 billion in average total deposits and $820 million in average total borrowings. The increase in average total deposits reflects organic growth, partially offset by a $53 million decrease in average brokered deposits. Excluding brokered deposits, average savings, interest-bearing checking and money market deposits and average non-interest-bearing deposits increased $1.6 billion and $434 million, respectively, while average time deposits decreased $240 million. Average total deposits comprised 85% and 87% of average total funding liabilities in 2016 and 2015, respectively. The increase in average borrowings reflects the additional funding used to support loan growth and securities purchases.

The two basis point increase to 0.45% from 0.43% in the rate paid on average total funding liabilities in 2016 compared to 2015 primarily reflects an increase in the cost of total borrowings, reflecting the increases in the target federal funds rate discussed above. The rate paid on average total deposits decreased one basis point in 2016, primarily reflecting a $434 million increase in non-interest-bearing deposits. Average savings, interest-bearing checking and money market deposits and average time deposits comprised 63% and 16%, respectively, of average total deposits in 2016 compared to 60% and 19%, respectively, in 2015.

Average Balance Sheet, Interest and Yield/Rate Analysis

The table on the following page presents average balance sheets, FTE-basis interest income, interest expense and the corresponding average yields earned and rates paid for the years ended December 31, 2017, 2016 and 2015. The average balances are principally daily averages and, for loans, include both performing and non-performing balances. Interest income on loans includes the effect of deferred loan fees and costs accounted for as yield adjustments, but does not include interest on loans for which People’s United has ceased to accrue interest. Premium amortization and discount accretion (including amounts attributable to purchase accounting adjustments) are also included in the respective interest income and interest expense amounts. The impact of People’s United’s use of derivative instruments in managing IRR is also reflected in the table, classified according to the instrument hedged and the related risk management objective.

 

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Average Balance Sheet, Interest and Yield/Rate Analysis   

 

 

    2017     2016     2015  

Years ended December 31
(dollars in millions)

  Average
Balance
    Interest     Yield/
Rate
    Average
Balance
    Interest     Yield/
Rate
    Average
Balance
    Interest     Yield/
Rate
 

Assets:

                 

Short-term investments (1)

  $ 358.3     $ 3.7       1.04   $ 328.7     $ 1.5       0.45   $ 247.8     $ 0.5       0.20

Securities (2)

    6,785.0       181.3       2.67       6,786.7       158.8       2.34       5,731.5       135.7       2.37  

Loans:

                 

Commercial real estate

    10,961.2       405.7       3.70       10,013.3       344.6       3.44       9,643.9       343.5       3.56  

Commercial and industrial

    8,278.6       313.9       3.79       7,821.8       268.8       3.44       7,357.8       245.8       3.34  

Equipment financing

    3,264.3       152.1       4.66       2,972.3       130.9       4.40       2,831.7       129.6       4.58  

Residential mortgage

    6,653.0       208.4       3.13       5,824.1       181.5       3.12       5,222.4       166.7       3.19  

Home equity and other consumer

    2,107.9       80.0       3.80       2,163.8       73.5       3.40       2,193.1       72.3       3.30  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

    31,265.0       1,160.1       3.71       28,795.3       999.3       3.47       27,248.9       957.9       3.52  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total earning assets

    38,408.3     $ 1,345.1       3.50     35,910.7     $ 1,159.6       3.23     33,228.2     $ 1,094.1       3.29
   

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

 

Other assets

    4,173.3           3,873.6           3,698.7      
 

 

 

       

 

 

       

 

 

     

Total assets

  $ 42,581.6         $ 39,784.3         $ 36,926.9      
 

 

 

       

 

 

       

 

 

     

Liabilities and stockholders' equity:

                 

Deposits:

                 

Non-interest-bearing

  $ 7,329.3     $       —     $ 6,236.1     $       —     $ 5,801.9     $       —  

Savings, interest-bearing checking and money market

    19,486.7       80.1       0.41       18,258.2       53.0       0.29       16,489.3       43.5       0.26  

Time

    4,915.7       50.6       1.03       4,760.4       47.9       1.01       5,241.4       52.0       0.99  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total deposits

    31,731.7       130.7       0.41       29,254.7       100.9       0.34       27,532.6       95.5       0.35  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Borrowings:

                 

FHLB advances

    2,677.5       31.5       1.17       3,093.7       19.2       0.62       2,306.6       9.8       0.42  

Federal funds purchased

    643.5       7.1       1.11       568.1       2.9       0.50       411.0       0.8       0.19  

Customer repurchase agreements

    311.0       0.6       0.19       337.2       0.7       0.19       463.6       0.9       0.19  

Other borrowings

    132.0       2.1       1.60       2.8       —         0.66       0.6       —         1.76  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total borrowings

    3,764.0       41.3       1.10       4,001.8       22.8       0.57       3,181.8       11.5       0.36  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Notes and debentures

    921.3       29.9       3.25       1,048.5       31.4       3.00       1,033.4       29.8       2.89  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total funding liabilities

    36,417.0     $ 201.9       0.55     34,305.0     $ 155.1       0.45     31,747.8     $ 136.8       0.43
   

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

 

Other liabilities

    573.0           619.9           481.8      
 

 

 

       

 

 

       

 

 

     

Total liabilities

    36,990.0           34,924.9           32,229.6      

Stockholders' equity

    5,591.6           4,859.4           4,697.3      
 

 

 

       

 

 

       

 

 

     

Total liabilities and stockholders' equity

  $ 42,581.6         $ 39,784.3         $ 36,926.9      
 

 

 

       

 

 

       

 

 

     

Net interest income/spread (3)

    $ 1,143.2       2.95     $ 1,004.5       2.78     $ 957.3       2.86
   

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

 

Net interest margin

        2.98         2.80         2.88
     

 

 

       

 

 

       

 

 

 

 

(1) Includes securities purchased under agreements to resell.
(2) Average balances and yields for securities are based on amortized cost.
(3) The FTE adjustment was $42.7 million, $32.3 million and $25.2 million for the years ended December 31, 2017, 2016 and 2015, respectively.

 

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Table of Contents
Volume and Rate Analysis  

 

The following table shows the extent to which changes in interest rates and changes in the volume of average total earning assets and average interest-bearing liabilities have affected People’s United net interest income. For each category of earning assets and interest-bearing liabilities, information is provided relating to: (i) changes in volume (changes in average balances multiplied by the prior year’s average interest rates); (ii) changes in rates (changes in average interest rates multiplied by the prior year’s average balances); and (iii) the total change. Changes attributable to both volume and rate have been allocated proportionately.

 

      2017 Compared to 2016
Increase (Decrease)
    2016 Compared to 2015
Increase (Decrease)
 

(in millions)

   Volume     Rate      Total     Volume     Rate     Total  

Interest and dividend income:

             

Short-term investments

   $ 0.1     $ 2.1      $ 2.2     $ 0.2     $ 0.8     $ 1.0  

Securities

     —         22.5        22.5       24.7       (1.6     23.1  

Loans:

             

Commercial real estate

     34.0       27.1        61.1       12.9       (11.8     1.1  

Commercial and industrial

     16.3       28.8        45.1       15.8       7.2       23.0  

Equipment financing

     13.3       7.9        21.2       6.3       (5.0     1.3  

Residential mortgage

     26.0       0.9        26.9       18.8       (4.0     14.8  

Home equity and other consumer

     (1.9     8.4        6.5       (1.0     2.2       1.2  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

     87.7       73.1        160.8       52.8       (11.4     41.4  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total change in interest and dividend income

     87.8       97.7        185.5       77.7       (12.2     65.5  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense:

             

Deposits:

             

Savings, interest-bearing checking and
money market

     3.8       23.3        27.1       4.9       4.6       9.5  

Time

     1.6       1.1        2.7       (4.8     0.7       (4.1
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total deposits

     5.4       24.4        29.8       0.1       5.3       5.4  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Borrowings:

             

FHLB advances

     (2.9     15.2        12.3       4.0       5.4       9.4  

Federal funds purchased

     0.4       3.8        4.2       0.4       1.7       2.1  

Customer repurchase agreements

     (0.1     —          (0.1     (0.2     —         (0.2

Other borrowings

     2.1       —          2.1       —         —         —    
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total borrowings

     (0.5     19.0        18.5       4.2       7.1       11.3  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Notes and debentures

     (4.0     2.5        (1.5     0.4       1.2       1.6  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total change in interest expense

     0.9       45.9        46.8       4.7       13.6       18.3  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Change in net interest income

   $ 86.9     $ 51.8      $ 138.7     $ 73.0     $ (25.8   $ 47.2  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

The following table provides the weighted average yields earned and rates paid for each major category of earning assets and funding liabilities as of December 31, 2017:

 

(dollars in millions)

   Balance      Yield/Rate  

Earning assets:

     

Short-term investments

   $ 377.5        0.32

Securities

     7,042.6        2.69  

Loans

     32,575.3        3.74  
  

 

 

    

 

 

 

Total earning assets

   $ 39,995.4        3.53
  

 

 

    

 

 

 

Funding liabilities:

     

Non-interest-bearing deposits

   $ 8,002.4        —  

Interest-bearing deposits:

     

Money market

     9,138.4        0.60  

Interest-bearing checking

     6,050.7        0.53  

Time

     5,454.3        1.17  

Savings

     4,410.5        0.14  

Borrowings

     4,103.8        1.53  

Notes and debentures

     901.6        3.81  
  

 

 

    

 

 

 

Total funding liabilities

   $ 38,061.7        0.67
  

 

 

    

 

 

 

Non-Interest Income

 

 

                        Percentage
Increase (Decrease)
 

Years ended December 31 (dollars in millions)

   2017     2016     2015      2017/2016     2016/2015  

Bank service charges

   $ 98.5     $ 98.0     $ 100.7        0.5     (2.7 )% 

Investment management fees

     66.5       48.3       43.7        37.7       10.5  

Operating lease income

     43.8       41.2       42.3        6.3       (2.6

Insurance revenue

     33.2       32.9       30.7        0.9       7.2  

Commercial banking lending fees

     35.5       31.6       42.6        12.3       (25.8

Cash management fees

     26.1       25.0       24.5        4.4       2.0  

Brokerage commissions

     12.1       12.2       12.6        (0.8     (3.2

Net gains on sales of residential mortgage loans

     3.2       6.3       5.5        (49.2     14.5  

Net security losses

     (25.4     (5.9     —          n/m       n/m  

Other non-interest income:

           

Customer interest rate swap income, net

     12.3       14.4       14.5        (14.6     (0.7

BOLI

     6.3       5.7       4.6        10.5       23.9  

Net gains on sales of acquired loans

     2.4       —         1.7        n/m       n/m  

Gain on sale of business, net of expenses

     —         —         9.2        n/m       n/m  

Other

     38.4       33.0       19.8        16.4       66.7  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total other non-interest income

     59.4       53.1       49.8        11.9       6.6  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total non-interest income

   $ 352.9     $ 342.7     $ 352.4        3.0     (2.8 )% 
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

n/m – not meaningful

Total non-interest income in 2017 increased $10.2 million compared to 2016 and, excluding the effect of the gain on sale of business in 2015 discussed below, decreased $0.5 million in 2016 compared to 2015. The increase in non-interest income in 2017 compared to 2016 primarily reflects increases in investment management fees and commercial banking lending fees, partially offset by an increase in net security losses.

 

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Bank service charges continue to reflect lower overdraft fees and the adverse effects of certain provisions of the DFA. The improvement in investment management fees in both 2017 and 2016 reflects the continued benefits from new revenue initiatives, the acquisition of Gerstein Fisher in November 2016 (see Note 2 to the Consolidated Financial Statements), additional personnel in our key markets and a broader suite of product offerings. Assets under administration and those under full discretionary management, neither of which are reported as assets of People’s United, totaled $14.7 billion and $9.1 billion, respectively, at December 31, 2017 compared to $13.3 billion and $8.0 billion, respectively, at December 31, 2016. The level of insurance revenue over the past few years reflects the continued soft commercial insurance market as well as the benefits from the recent acquisitions (see Note 2 to the Consolidated Financial Statements).

The increase in operating lease income in 2017 compared to 2016 primarily reflects the acquisition of LEAF in August 2017. The fluctuation in commercial banking lending fees in both periods is primarily related to the level of prepayment fees collected in each year.

The decrease in net gains on sales of residential mortgage loans in 2017 compared to 2016 primarily reflects a 33% decrease in the volume of residential mortgage loans sold, as well as narrower spreads on pricing. Loans held-for-sale at December 31, 2017 and 2016 consisted of newly-originated residential mortgage loans with carrying amounts of $16.6 million and $39.3 million, respectively. The increase in net gains on sales of residential mortgage loans in 2016 compared to 2015 primarily reflects an improvement in spreads on pricing, partially offset by a 6% decrease in the volume of residential mortgage loan sales.

Net security losses in 2017 reflect (i) $10.0 million of gross realized losses resulting from the sale of U.S. Treasury and CMO securities, with a combined amortized cost of $291.3 million, in response to tax reform enacted on December 22, 2017 and (ii) $15.7 million of gross realized losses resulting from the sale of low-yielding and short duration U.S. Treasury and CMO securities with a combined amortized cost of $486.9 million. Net security losses in 2016 primarily reflect the sale of low-yielding and short duration U.S. Treasury and CMO securities with a combined amortized cost of $403.0 million.

On an FTE basis, BOLI income totaled $9.7 million in 2017, compared to $8.5 million in 2016 and $7.0 million in 2015. BOLI income includes death benefits received totaling $0.9 million, $1.4 million and $0.5 million in 2017, 2016 and 2015, respectively. Net gains on sales of acquired loans in 2017 and 2015 (none in 2016) reflect sales of acquired loans with contractual balances of $7.9 million and $24.1 million, respectively (carrying amounts of $5.0 million and $22.3 million, respectively).

During the quarter ended March 31, 2017, the Company exchanged its ownership interest in a non-marketable equity security (previously recorded in other assets) for total consideration of $16.3 million, including (i) cash and (ii) common stock in a publicly-traded company with a fair value of approximately $10.8 million at acquisition. Included in other non-interest income is a $16.1 million gain recorded in connection with this transaction. Included in other non-interest income in 2016 are gains totaling $7.5 million resulting from the sale of an ownership interest in a legacy privately-held investment and an interest in a real estate investment.

During the quarter ended December 31, 2015, the Bank sold its payroll services business to its current payroll software licensor and entered into a long-term referral agreement. A $9.2 million gain (non-operating), net of related expenses, was recognized, which represented the fair value of the Bank’s entire portfolio of payroll services customer contracts that previously had a zero book basis.

 

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Non-Interest Expense

 

 

                       Percentage
Increase (Decrease)
 

Years ended December 31 (dollars in millions)

   2017     2016     2015     2017/2016     2016/2015  

Compensation and benefits

   $ 514.0     $ 455.6     $ 449.5       12.8     1.4

Occupancy and equipment

     159.6       150.4       149.5       6.1       0.6  

Professional and outside services

     81.5       67.8       68.0       20.2       (0.3

Regulatory assessments

     41.7       37.5       35.1       11.2       6.8  

Operating lease expense

     35.2       36.3       37.1       (3.0     (2.2

Amortization of other acquisition-related intangible assets

     30.0       23.6       23.9       27.1       (1.3

Other non-interest expense:

          

Stationery, printing, postage and telephone

     22.8       22.3       22.7       2.2       (1.8

Advertising and promotion

     12.6       11.2       12.0       12.5       (6.7

Other

     62.9       64.1       62.8       (1.9     2.1  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other non-interest expense

     98.3       97.6       97.5       0.7       0.1  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest expense

   $ 960.3     $ 868.8     $ 860.6       10.5     1.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Efficiency ratio

     57.7     60.5     61.5    
  

 

 

   

 

 

   

 

 

     

Total non-interest expense increased $91.5 million in 2017 compared to 2016 and $8.2 million in 2016 compared to 2015. Included in total non-interest expense are merger-related expenses totaling $30.6 million in 2017 and $4.7 million in 2016, and certain other charges (described below) totaling $12.9 million in 2015.

The improvement in the efficiency ratio in 2017 and 2016 reflects increases in both adjusted total revenues and adjusted total expenses (see Non-GAAP Financial Measures and Reconciliation to GAAP).

Compensation and benefits increased $58.4 million in 2017 compared to 2016 and $6.1 million in 2016 compared to 2015. Compensation and benefits includes merger and severance-related costs totaling $3.9 million in 2017, $0.7 million in 2016 and $2.4 million in 2015. Excluding such costs, compensation and benefits increased $55.2 million, or 12.1%, in 2017 compared to 2016, and $7.8 million, or 1.7%, in 2016 compared to 2015. The increase in 2017 compared to 2016 primarily reflects Suffolk, LEAF and Gerstein Fisher personnel costs in the current year, normal merit increases and higher incentive-related and health care costs. The increase in 2016 compared to 2015 primarily reflect normal merit increases, higher incentive-related costs and compensation and benefit costs for additional employees primarily within commercial banking, wealth management and regulatory compliance, partially offset by lower health care and pension-related costs. Effective January 1, 2016, People’s United changed the method used to estimate the interest cost component of net periodic benefit income for its pension and other postretirement plans. For 2016, pension-related expense declined by $3.1 million as a result of this change in accounting estimate (see Note 17 to the Consolidated Financial Statements).

The increase in occupancy and equipment expense in 2017 compared to 2016 primarily reflects higher equipment-related costs and the incremental costs resulting from acquisitions in 2017, partially offset by the benefits from consolidating branches and other office space over the past several years. In 2017, the Company closed 12 branches compared to 11 branches in 2016 and 18 branches in 2015. Since the beginning of 2011, the Company has closed 77 branches, most of which were traditional branches, and opened 28 branches, of which 18 branches are more cost efficient Stop & Shop locations.

 

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Professional and outside services fees include merger-related expenses totaling $15.3 million in 2017 and $3.9 million in 2016 (none in 2015). Excluding such expenses, professional and outside services fees increased $2.3 million in 2017 compared to 2016 and decreased $4.1 million in 2016 compared to 2015. The increase in 2017 compared to 2016 primarily reflects the timing of certain projects, while the decrease in 2016 compared to 2015 is primarily related to the timing of certain projects in 2016 as well as a higher level of spending in 2015. The fluctuations in operating lease expense primarily relates to the levels of equipment leased to equipment financing customers. The fluctuations in advertising and promotion expense primarily reflect the timing of certain advertising campaigns.

Regulatory assessments include FDIC insurance premiums, which are based on the Bank’s average total assets and average tangible equity, and FDIC-defined risk factors. The actual amount of future regulatory assessments will be dependent on several factors, including: (i) the Bank’s average total assets and average tangible equity; (ii) the Bank’s risk profile; and (iii) whether additional special assessments are imposed in future periods and the manner in which such assessments are determined. The increases in regulatory assessments in 2017 and 2016 primarily reflect an increase in the Bank’s average total assets, as well as a change in deposit insurance assessments discussed below.

In March 2016, the FDIC issued a final rule that will serve to implement a DFA provision requiring banks with over $10 billion in assets to be responsible for recapitalizing the DIF to 1.35% of insured deposits after it reaches a 1.15% reserve ratio. The rule became effective on July 1, 2016. For banks with over $10 billion in assets, the rule imposes a 4.5 basis point surcharge to bring the DIF’s reserve ratio to 1.35% by the end of 2018. For the surcharge only, the assessment base would be reduced by $10 billion.

Scheduled amortization expense attributable to other acquisition-related intangible assets for each of the next five years is as follows: $19.9 million in 2018; $18.4 million in 2019; $16.8 million in 2020; $15.0 million in 2021; and $13.5 million in 2022.

Included in other non-interest expense are merger-related costs totaling $10.6 million in 2017 and charges associated with the writedowns of certain banking house assets and related lease termination costs totaling $10.5 million in 2015.

In March 2017, the FASB amended its standards to (i) require that the service cost component of net benefit cost associated with pension and postretirement plans be reported in the same line item in which the related employees’ compensation cost is reported and (ii) specify that only the service cost component is eligible for capitalization. The other components of net benefit cost, which may not be capitalized, are to be presented separately. This new guidance, which is to be applied retrospectively, is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017 (January 1, 2018 for People’s United) and early adoption is permitted. The adoption of this amendment will result in a reclassification of certain net benefit cost components from compensation and benefits expense to other non-interest expense.

 

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Income Taxes

 

Income tax expense totaled $129.9 million, $128.5 million and $130.4 million for the years ended December 31, 2017, 2016 and 2015, respectively. People’s United’s effective income tax rate was 27.8%, 31.4% and 33.4% for the respective years. Income tax expense in each year includes $11.6 million, $5.3 million and $0.4 million, respectively, of federal income tax credits, which relate, primarily, to an increase in tax-advantaged investments. People’s United’s effective income tax rate for 2018 is expected to be approximately 22% (see below).

Differences, if any, arising between People’s United’s effective income tax rate and the U.S. federal statutory rate of 35% are generally attributable to: (i) tax-exempt interest earned on certain investments; (ii) tax-exempt income from BOLI; and (iii) state income taxes.

The Tax Cuts and Jobs Act (the “Act”) was enacted on December 22, 2017. The most significant provision of the Act applicable to the Company serves to reduce the U.S. federal corporate income tax rate, effective January 1, 2018, from 35% to 21%. In connection with its accounting for enactment of the Act, the Company recognized a one-time income tax benefit of $6.5 million during the quarter ended December 31, 2017. This benefit, which served to reduce income tax expense, reflects the revaluation of certain deferred tax assets ($105.7 million) and deferred tax liabilities ($112.2 million) based on the rates at which they are expected to reverse in the future (generally 21%). Forthcoming guidance, such as new regulations or technical corrections, could change how the Company interpreted certain provisions of the Act.

Effective January 1, 2017, People’s United adopted new stock-based compensation accounting rules, which require the income tax effects of vestings and exercises be recognized in income tax expense. As a result, the Company realized windfall income tax benefits totaling $1.1 million for the year ended December 31, 2017. This amount, which was recognized as a discrete period income tax benefit, served to lower the Company’s 2017 effective income tax rate by 0.2%.

People’s United holds ownership interests in limited partnerships formed to develop and operate affordable housing units for lower income tenants throughout its franchise area. The underlying partnerships, which are considered variable interest entities, are not consolidated into the Company’s Consolidated Financial Statements. These investments have historically played a role in enabling the Bank to meet its CRA requirements while, at the same time, providing tax benefits, including federal income tax credits. The cost of the Company’s investments is amortized on a straight-line basis over the period during which the related federal income tax credits are realized (generally ten years). Amortization expense, which is now included as a component of income tax expense, totaled $16.7 million, $12.6 million and $12.6 million for the years ended December 31, 2017, 2016 and 2015, respectively.

Income tax expense for all three years reflects the state tax benefit resulting from the formation of People’s Mortgage Investment Company, a wholly owned subsidiary of the Bank. The formation of this subsidiary was a result of Connecticut tax legislation, which became effective on January 1, 1999, that allows for the transfer of mortgage loans to a passive investment subsidiary. The related earnings of the subsidiary, and any dividends it pays to the parent, are not subject to Connecticut income tax.

See Notes 1 and 12 to the Consolidated Financial Statements for additional information concerning income tax expense.

 

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Securities

 

 

     2017      2016      2015  

As of December 31 (in millions)

   Amortized
Cost
     Fair Value      Amortized
Cost
     Fair Value      Amortized
Cost
     Fair Value  

Securities held-to-maturity:

                 

Debt securities:

                 

State and municipal

   $ 2,060.4      $ 2,120.3      $ 1,499.1      $ 1,509.5      $ 1,019.6      $ 1,075.3  

GSE mortgage-backed securities

     1,474.9        1,459.8        500.8        497.6        588.5        585.7  

Corporate

     51.3        52.1        4.0        4.0        —          —    

Other

     1.5        1.5        1.5        1.5        1.5        1.5  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total securities held-to-maturity

   $ 3,588.1      $ 3,633.7      $ 2,005.4      $ 2,012.6      $ 1,609.6      $ 1,662.5  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Securities available-for-sale:

                 

Debt securities:

                 

U.S. Treasury and agency

   $ 687.1      $ 668.8      $ 889.9      $ 859.7      $ 363.7      $ 362.8  

GSE mortgage-backed securities and CMOs

     2,477.8        2,456.5        3,573.1        3,550.0        4,191.3        4,164.7  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities

     3,164.9        3,125.3        4,463.0        4,409.7        4,555.0        4,527.5  

Equity securities

     9.6        8.7        0.2        0.2        0.2        0.2  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available-for-sale

   $ 3,174.5      $ 3,134.0      $ 4,463.2      $ 4,409.9      $ 4,555.2      $ 4,527.7  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

People’s United strives to maintain an appropriate balance between loan portfolio growth and deposit funding. The Company’s management believes that a large securities portfolio funded with wholesale borrowings provides limited economic value and therefore, at December 31, 2017, the securities portfolio only comprised 16% of total assets.

People’s United has historically utilized the securities portfolio for earnings generation (in the form of interest and dividend income), liquidity, IRR management, asset diversification and tax planning. Securities available-for-sale are used as part of People’s United’s asset/liability management strategy and may be sold in response to, or in anticipation of, factors such as changes in market conditions and interest rates, changes in security prepayment rates, liquidity considerations and regulatory capital requirements.

The Company primarily invests in debt securities rated in the highest categories assigned by nationally recognized statistical ratings organizations (“NRSRO”) and all credit risk undergoes an internal creditworthiness assessment separate from NRSRO ratings. Management has internal guidelines for the credit quality and duration of People’s United’s debt securities portfolio and monitors these on a regular basis.

At December 31, 2017, the fair value of People’s United’s securities available-for-sale portfolio totaled $3.13 billion, or 7% of total assets, compared to $4.41 billion, or 11% of total assets, at December 31, 2016 and $4.53 billion, or 12% of total assets, at December 31, 2015. The decrease in the fair value of the securities available-for-sale portfolio in 2017 compared to 2016 primarily reflects: (i) the sale U.S. Treasury and CMO securities in December 2017, with a combined amortized cost of $291.3 million, (with a 3.8 year duration yielding 1.28%) to take advantage of 2017 higher marginal income tax rates ($150 million of the sale proceeds have been reinvested in 2-year duration securities yielding 1.88%); (ii) the sale of low-yielding and short duration U.S. Treasury and CMO securities, with a combined amortized cost of $486.9 million, during the quarter ended March 31, 2017; and (iii) principal repayments and maturities of GSE mortgage-backed securities and CMOs. The decrease in the fair value of the securities available-for-sale portfolio in 2016 compared to 2015 primarily reflects: (i) principal repayments and maturities of GSE mortgage-backed securities and CMOs; (ii) the sale of low-yielding and short duration U.S. Treasury and CMO securities, with a combined amortized cost of $403.0 million, during the quarter ended December 31, 2016; (iii) an increase in the unrealized loss on debt securities; and (iv) purchases of U.S. Treasury securities.

 

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The increase in investment grade state and municipal securities in both 2017 and 2016 reflects the Company’s continued investment in such securities based on their value relative to other securities of comparable duration, yield and credit risk.

During the quarter ended March 31, 2017, the Company exchanged its ownership interest in a non-marketable equity security (previously recorded in other assets) for cash and common stock in a publicly-traded company (fair value of approximately $10.8 million at acquisition).

At December 31, 2017, 2016 and 2015, the amortized cost exceeded the fair value of the securities available-for-sale portfolio by $40.5 million, $53.3 million and $27.5 million, respectively.

With respect to available-for-sale debt securities, all unrealized gains and those unrealized losses representing temporary declines in value due to factors other than credit are recorded in stockholders’ equity, net of income taxes. As a result, management anticipates continued fluctuations in stockholders’ equity due to changes in the fair value of such securities, albeit on a relatively modest scale due to the duration of the portfolio. The duration of the debt securities portfolio was approximately 4.9 years, 4.7 years and 4.2 years at December 31, 2017, 2016 and 2015, respectively.

With respect to equity securities classified as available-for-sale, beginning January 1, 2018, any changes in the fair value of such securities will be recorded in net income (see Note 1 to the Consolidated Financial Statements).

In addition to the held-to-maturity and available-for-sale securities discussed above, the Bank holds shares of capital stock in both the FHLB of Boston and New York (total amortized cost of $142.0 million at December 31, 2017) and the FRB-NY (total amortized cost of $170.3 million at December 31, 2017). Dividend income on FHLB capital stock totaled $6.6 million, $5.8 million and $4.6 million for the years ended December 31, 2017, 2016 and 2015, respectively. Dividend income on FRB-NY capital stock totaled $3.7 million, $3.1 million and $7.1 million for the years ended December 31, 2017, 2016 and 2015, respectively. The level of dividend income on FRB-NY capital stock in 2017 and 2016 reflects the effect of an interim final rule issued by the FRB on February 18, 2016, which served to implement a reduction in the dividend rate paid on Federal Reserve Bank capital stock from an annual fixed-rate of 6% to the lesser of 6% or a rate based on 10-year Treasury notes, for those banks with total assets greater than $10 billion, including the Bank.

Lending Activities

 

People’s United conducts its lending activities principally through its Commercial Banking and Retail Banking operating segments. The Company’s lending activities consist of originating loans secured by commercial and residential properties, and extending secured and unsecured loans to commercial and consumer customers.

Total loans increased $2.83 billion in 2017 compared to 2016 and increased $1.33 billion in 2016 compared to 2015. At the respective acquisition dates, the fair value of Suffolk’s and LEAF’s loans totaled $1.6 billion and $718 million, respectively. Loans acquired in connection with business combinations are referred to as ‘acquired’ loans as a result of the manner in which they are accounted for (see further discussion under ‘Acquired Loans’ in Note 1 to the Consolidated Financial Statements). All other loans are referred to as ‘originated’ loans. At December 31, 2017, 2016 and 2015, the carrying amount of the acquired loan portfolio totaled $2.5 billion, $610.2 million and $796.6 million respectively.

 

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The following table summarizes the loan portfolio before deducting the allowance for loan losses:

 

As of December 31 (in millions)

   2017      2016      2015      2014      2013  

Commercial:

              

Commercial real estate

   $ 11,068.7      $ 10,247.3      $ 10,028.8      $ 9,404.3      $ 8,921.6  

Commercial and industrial

     8,731.1        8,125.1        7,748.7        7,189.6        6,302.1  

Equipment financing

     3,905.4        3,032.5        2,973.3        2,865.5        2,593.1  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Commercial Portfolio

     23,705.2        21,404.9        20,750.8        19,459.4        17,816.8  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Retail:

              

Residential mortgage:

              

Adjustable-rate

     5,926.6        5,549.1        4,851.2        4,393.8        3,895.3  

Fixed-rate

     879.1        667.6        605.8        538.2        521.3  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total residential mortgage

     6,805.7        6,216.7        5,457.0        4,932.0        4,416.6  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Home equity and other consumer:

              

Home equity

     2,015.2        2,072.6        2,153.7        2,143.1        2,084.6  

Other consumer

     49.2        50.7        49.4        57.5        72.3  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total home equity and
other consumer

     2,064.4        2,123.3        2,203.1        2,200.6        2,156.9  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Retail Portfolio

     8,870.1        8,340.0        7,660.1        7,132.6        6,573.5  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 32,575.3      $ 29,744.9      $ 28,410.9      $ 26,592.0      $ 24,390.3  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

People’s United’s loan portfolio is primarily concentrated within New England and New York. At December 31, 2017, 54% and 23% of the total loan portfolio represented loans to customers located within the New England states and New York, respectively, as compared to 59% and 19% of the total loan portfolio, respectively, at December 31, 2016.

Total Loans

As of December 31 (dollars in millions)

 

LOGO

 

 

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Contractual Maturity and Interest Rate Sensitivity

The following table presents the contractual maturity of People’s United’s loan portfolio as of December 31, 2017:

 

(in millions)

   Commercial      Retail      Total  

Amounts due:

        

One year or less

   $ 3,228.4      $ 103.9      $ 3,332.3  
  

 

 

    

 

 

    

 

 

 

After one year:

        

One to five years

     10,137.4        181.1        10,318.5  

Over five years

     10,339.4        8,585.1        18,924.5  
  

 

 

    

 

 

    

 

 

 

Total due after one year

     20,476.8        8,766.2        29,243.0  
  

 

 

    

 

 

    

 

 

 

Total

   $ 23,705.2      $ 8,870.1      $ 32,575.3  
  

 

 

    

 

 

    

 

 

 

The following table presents, as of December 31, 2017, loan amounts due after December 31, 2018, and whether these loans have adjustable or fixed interest rates:

 

     Interest Rate         

(in millions)

   Adjustable      Fixed      Total  

Commercial

   $ 12,008.9      $ 8,467.9      $ 20,476.8  

Retail

     7,497.0        1,269.2        8,766.2  
  

 

 

    

 

 

    

 

 

 

Total loans due after one year

   $ 19,505.9      $ 9,737.1      $ 29,243.0  
  

 

 

    

 

 

    

 

 

 

The following tables set forth the contractual maturity (based on final payment date) and interest rate sensitivity (based on next repricing date) of People’s United’s commercial and industrial loans and construction loans:

 

As of December 31, 2017 (in millions)

   One Year
or Less
     After One
Year Through
Five Years
     After
Five Years
     Total  

Contractual maturity:

           

Commercial and industrial loans

   $ 1,977.4      $ 3,706.6      $ 3,047.1      $ 8,731.1  

Construction loans:

           

Commercial real estate

     83.6        146.0        193.0        422.6  

Residential mortgage

     8.4        56.9        —          65.3  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,069.4      $ 3,909.5      $ 3,240.1      $ 9,219.0  
  

 

 

    

 

 

    

 

 

    

 

 

 

As of December 31, 2017 (in millions)

   One Year
or Less
     After One
Year Through
Five Years
     After
Five Years
     Total  

Interest rate sensitivity:

           

Variable rates

   $ 6,499.3      $ 511.7      $ 166.7      $ 7,177.7  

Fixed rates

     215.2        797.3        1,028.8        2,041.3  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,714.5      $ 1,309.0      $ 1,195.5      $ 9,219.0  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Commercial Portfolio

The commercial lending businesses include commercial real estate, commercial and industrial lending, and equipment financing.

Commercial Real Estate

People’s United manages the commercial real estate portfolio by limiting the concentration in any particular loan type, term, industry, or to any individual borrower. People’s United’s highest loan concentration in the commercial real estate loan portfolio is in the residential (multi-family) sector, which represented 35% of this loan portfolio at December 31, 2017 (37% at December 31, 2016).

 

As of December 31 (in millions)

   2017      2016  

Property Type:

     

Residential (multi-family)

   $ 3,894.0      $ 3,790.1  

Retail

     2,901.5        2,530.1  

Office buildings

     2,142.7        2,173.7  

Industrial/manufacturing

     642.4        604.9  

Hospitality/entertainment

     622.6        548.9  

Health care

     394.8        124.5  

Mixed/special use

     205.1        220.3  

Self-storage

     173.0        170.3  

Land

     44.0        41.8  

Other

     48.6        42.7  
  

 

 

    

 

 

 

Total commercial real estate

   $ 11,068.7      $ 10,247.3  
  

 

 

    

 

 

 

Commercial Real Estate Portfolio

As of December 31 (dollars in millions)

 

LOGO

The commercial real estate portfolio increased $821 million in 2017 compared to 2016, reflecting organic loan growth of $114 million, or 1% of the commercial real estate portfolio, and the addition of loans acquired in connection with the Suffolk acquisition completed in 2017, partially offset by run-off in the acquired portfolio. The commercial real estate portfolio increased $219 million in 2016 compared to 2015, reflecting organic loan growth of $316 million, or 3% of the commercial real estate portfolio, partially offset by run-off in the acquired portfolio. Included in the commercial real estate portfolio are construction loans totaling $423 million and $537 million at December 31, 2017 and 2016, respectively, net of the unadvanced portion of such loan totaling $294 million and $256 million, respectively. During 2017 and 2015 (none in 2016), the Company sold acquired loans with outstanding principal balances totaling $7.9 million and $24.1 million, respectively (carrying amounts of $5.0 million and $22.3 million, respectively) and recognized net gains on sales totaling $2.4 million and $1.7 million, respectively.

 

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At December 31, 2017 and 2016, 38% and 35%, respectively, of People’s United’s commercial real estate portfolio was secured by properties located in New York, and 19% was secured by properties located in Connecticut at both dates. In addition, 24% and 26% of the commercial real estate portfolio was secured by properties located in Massachusetts, Vermont and New Hampshire at December 31, 2017 and 2016, respectively. No other state exposure was greater than 5%