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People's United Financial 10-Q 2011 Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2011 Commission File Number 001-33326
PEOPLE’S UNITED FINANCIAL, INC. (Exact name of registrant as specified in its charter)
(203) 338-7171 (Registrant’s telephone number, including area code)
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 x 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 x No ¨ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x As of October 31, 2011, there were 360,639,638 shares of the registrant’s common stock outstanding.
Table of ContentsTable of Contents
Table of ContentsPeople’s United Financial, Inc. Consolidated Statements of Condition - (Unaudited)
See accompanying notes to consolidated financial statements.
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Table of ContentsPeople’s United Financial, Inc. Consolidated Statements of Income - (Unaudited)
See accompanying notes to consolidated financial statements.
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Table of ContentsPeople’s United Financial, Inc. Consolidated Statements of Changes in Stockholders’ Equity - (Unaudited)
See accompanying notes to consolidated financial statements.
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Table of ContentsPeople’s United Financial, Inc. Consolidated Statements of Cash Flows - (Unaudited)
See accompanying notes to consolidated financial statements.
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Table of ContentsPeople’s United Financial, Inc. Notes to Consolidated Financial Statements – (Unaudited) NOTE 1. GENERAL
In the opinion of management, the accompanying unaudited consolidated financial statements of People’s United Financial, Inc. (“People’s United Financial” or the “Company”) have been prepared to reflect all adjustments necessary to present fairly the financial position and results of operations as of the dates and for the periods shown. All significant intercompany transactions and balances are eliminated in consolidation. Certain reclassifications have been made to prior period amounts to conform to the current period presentation. With regard to the Consolidated Statements of Condition, such reclassifications include the presentation of (i) loans held for sale as a separate line item (rather than as a component of total loans) and (ii) loans in process as a component of other assets (rather than as a component of total loans). In addition to these reclassifications, expenses related to the Company’s merchant services business and customer derivative activities have been presented on a net basis, along with the respective revenues, within non-interest income in the Consolidated Statements of Income for all periods presented. 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. The current economic environment has increased the degree of uncertainty inherent in these significant estimates. Note 1 to People’s United Financial’s audited consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2010, as supplemented by the Quarterly Report for the periods ended March 31, 2011 and June 30, 2011 and this Quarterly Report for the period ended September 30, 2011, provides disclosure of People’s United Financial’s significant accounting policies. Several accounting estimates are particularly critical and are susceptible to significant near-term change, including the allowance for loan losses, the valuation of derivative financial instruments, and asset impairment judgments, such as the recoverability of goodwill and other intangible assets, and other-than-temporary declines in the value of securities. These significant accounting policies and critical estimates are reviewed with the Audit Committee of the Board of Directors. The judgments used by management in applying these critical accounting policies may be affected by a further and prolonged deterioration in the economic environment, which may result in changes to future financial results. For example, subsequent evaluations of the loan portfolio, in light of the factors then prevailing, may result in significant changes in the allowance for loan losses in future periods, and the inability to collect outstanding principal may result in increased loan losses.
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Table of ContentsPeople’s United Financial, Inc. Notes to Consolidated Financial Statements – (Unaudited)
Certain information and footnote disclosures normally included in consolidated financial statements prepared in conformity with U.S. generally accepted accounting principles have been omitted or condensed. As a result, the accompanying consolidated financial statements should be read in conjunction with People’s United Financial’s Annual Report on Form 10-K for the year ended December 31, 2010. The results of operations for the three and nine months ended September 30, 2011 are not necessarily indicative of the results of operations that may be expected for the entire year or any other interim period. NOTE 2. ACQUISITIONS
Acquisition Completed in 2011 After the close of business on June 30, 2011, People’s United Financial acquired Danvers Bancorp, Inc. (“Danvers”) based in Danvers, Massachusetts. The transaction was effective July 1, 2011. Total consideration paid in the Danvers acquisition of approximately $462 million consisted of approximately $214 million in cash and 18.5 million shares of People’s United Financial common stock with a fair value of approximately $248 million. Cash consideration was paid at the rate of $23.00 per share of Danvers common stock and stock consideration was paid at the rate of 1.624 shares of People’s United Financial common stock per share of Danvers common stock. At the acquisition date, Danvers operated 28 branches in the greater Boston area. The assets acquired and liabilities assumed were recorded by People’s United Financial at their estimated fair values as of the effective date and People’s United Financial’s results of operations for the three and nine months ended September 30, 2011 include the results of Danvers beginning with the effective date. Merger-related expenses recorded in the first nine months of 2011 totaled $16.2 million, including: (i) fees for investment advisory, legal, accounting and valuation services; (ii) debt prepayment costs; and (iii) compensatory charges.
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Table of ContentsPeople’s United Financial, Inc. Notes to Consolidated Financial Statements – (Unaudited)
The acquisition-date estimated fair values of the assets acquired and liabilities assumed in the acquisition of Danvers are summarized as follows:
Net deferred tax assets totaling $10.2 million were established in connection with recording the related purchase accounting adjustments (other than goodwill). Approximately $155.0 million of borrowings and all subordinated debentures assumed by People’s United Financial were repaid prior to September 30, 2011. Merger-related expenses for the three and nine months ended September 30, 2011 include debt prepayment costs of $4.3 million relating to the repayment of FHLB advances. Fair value adjustments to assets acquired and liabilities assumed will be amortized on a straight-line basis over periods consistent with the average life, useful life and / or contractual term of the related assets and liabilities. The core deposit intangible will be amortized over a 6-year period using an accelerated amortization method reflective of the manner in which the related benefit attributable to the deposits will be recognized. The above summary includes adjustments to record the acquired assets and assumed liabilities at their respective fair values based on management’s best estimate using the information available at this time. While there may be changes in the respective acquisition-date fair values of certain balance sheet amounts and other items, management does not expect that such changes, if any, will be material. The loans acquired in the Danvers acquisition have been recorded at fair value without a carryover of Danvers’ allowance for loan losses. Fair value of the loans entails estimating the amount and timing of both principal and interest cash flows expected to be collected on such loans and then discounting those cash flows at market interest rates. The discount on the loans acquired in this transaction was due, in part, to credit quality (see Note 4). Included in the Consolidated Statements of Income for the three and nine months ended September 30, 2011 is approximately $24 million of interest income attributable to Danvers since the acquisition date.
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Table of ContentsPeople’s United Financial, Inc. Notes to Consolidated Financial Statements – (Unaudited)
The following table presents selected pro forma financial information of the Company reflecting the acquisition of Danvers assuming the acquisition was completed as of the beginning of the respective periods:
The selected pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the financial results of the combined companies had the acquisition actually been completed at the beginning of the periods presented, nor does it indicate future results for any other interim or full-year period. There are no material, non-recurring pro forma adjustments directly attributable to the Danvers acquisition included in the pro forma financial information. Pro forma basic and diluted earnings per common share were calculated using People’s United Financial’s actual weighted-average shares outstanding for the periods presented, plus the incremental shares issued, assuming the acquisition occurred at the beginning of the periods presented. Acquisitions Completed in 2010 On November 30, 2010, People’s United Financial acquired Smithtown Bancorp, Inc. (“Smithtown”) based in Hauppauge, New York and LSB Corporation (“LSB”) based in North Andover, Massachusetts. Total consideration paid in the Smithtown acquisition of approximately $56 million consisted of approximately $30 million in cash and 2.1 million shares of People’s United Financial common stock with a fair value of approximately $26 million. Cash consideration was paid at the rate of $3.77 per share of Smithtown common stock and stock consideration was paid at the rate of 0.304 shares of People’s United Financial common stock per share of Smithtown common stock. Total consideration paid in the LSB acquisition consisted of approximately $95 million in cash. Merger-related expenses recorded in the first nine months of 2011 and 2010 totaled $12.8 million and $1.0 million, respectively. On April 16, 2010, People’s United Bank entered into a definitive purchase and assumption agreement (the “Agreement”) with the Federal Deposit Insurance Corporation (the “FDIC”) pursuant to which People’s United Bank assumed all of the deposits, certain assets and the banking operations of Butler Bank, located in Lowell, Massachusetts. Merger-related expenses recorded in the first nine months of 2011 and 2010 totaled $0.6 million and $0.4 million, respectively.
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Table of ContentsPeople’s United Financial, Inc. Notes to Consolidated Financial Statements – (Unaudited)
The Agreement also provides for loss-share coverage by the FDIC, up to certain limits, on all covered assets (loans and real estate owned). The FDIC is obligated to reimburse People’s United Bank for 80% of any future losses on covered assets up to $34.0 million. People’s United Bank will reimburse the FDIC for 80% of recoveries with respect to losses for which the FDIC paid 80% reimbursement under the loss-sharing coverage. The asset arising from the loss-sharing coverage, referred to as the “FDIC loss-share receivable,” is included in other assets ($19.5 million at September 30, 2011 and $26.2 million at December 31, 2010) in the Consolidated Statements of Condition. The FDIC loss-share receivable is measured separately from the covered loans because the coverage is not contractually embedded in the loans and is not transferable should People’s United Bank choose to dispose of the covered loans. The FDIC loss-share receivable will be reduced as losses are realized on covered assets and as loss-sharing payments are received from the FDIC. Realized losses in excess of the acquisition date estimates will result in an increase in the FDIC loss-share receivable. Conversely, the FDIC loss-share receivable will be reduced if realized losses are less than the estimates at acquisition. The amount ultimately collected for the FDIC loss-share receivable is dependent upon the performance of the underlying covered assets over time and claims submitted to the FDIC. In the event that losses under the loss-share coverage do not reach expected levels, People’s United Bank has agreed to make a cash payment to the FDIC on approximately the tenth anniversary of the Agreement. On February 19, 2010, People’s United Financial acquired Financial Federal Corporation (“Financial Federal”), a financial services company providing collateralized lending, financing and leasing services nationwide to small and medium sized businesses. Total consideration paid in the Financial Federal acquisition of approximately $699 million consisted of approximately $293 million in cash and 26.0 million shares of People’s United Financial common stock with a fair value of approximately $406 million. Cash consideration was paid at the rate of $11.27 per share of Financial Federal common stock and stock consideration was paid at the rate of one share of People’s United Financial common stock per share of Financial Federal common stock. Merger-related expenses recorded in the first nine months of 2010 totaled $17.1 million. Recent acquisitions have been undertaken with the objective of expanding the Company’s business, both geographically and through the products we offer, as well as realizing synergies and economies of scale by combining with the acquired entities. For these reasons, we paid a market-based premium for the acquired entities which, in turn, resulted in the recognition of goodwill, representing the excess of the respective purchase prices over the estimated fair value of the net assets acquired (see Note 7). All of People’s United Financial’s tax deductible goodwill was created in transactions in which the Company purchased the assets of the target (as opposed to purchasing the issued and outstanding stock of the target). At September 30, 2011, tax deductible goodwill totaled $19.7 million and related, almost entirely, to the Butler Bank acquisition. People’s United Financial’s results of operations include the results of the acquired entities beginning with the respective closing dates.
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Table of ContentsPeople’s United Financial, Inc. Notes to Consolidated Financial Statements – (Unaudited)
NOTE 3. SECURITIES AND SHORT-TERM INVESTMENTS
The amortized cost, gross unrealized gains and losses, and fair value of People’s United Financial’s securities available for sale and securities held to maturity are as follows:
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Table of ContentsPeople’s United Financial, Inc. Notes to Consolidated Financial Statements – (Unaudited)
The following tables summarize debt securities available for sale with unrealized losses, segregated by the length of time the securities have been in a continuous unrealized loss position at the respective dates:
Management conducts a periodic review and evaluation of the securities portfolio to determine if the decline in fair value of any security is deemed to be other-than-temporary. Other-than-temporary impairment losses are recognized on debt securities when: (i) the holder has an intention to sell the security; (ii) it is more likely than not that the security will be required to be sold prior to recovery; or (iii) the holder does not expect to recover the entire amortized cost basis of the security. Other-than-temporary losses are recognized in earnings as realized losses to the extent the impairment is related to credit losses. The amount of the impairment related to non-credit factors is recognized in other comprehensive income. Management has the ability and intent to hold the securities classified as held to maturity until they mature, at which time People’s United Financial expects to receive all amounts contractually due. As of September 30, 2011, management believes that all impairments within the securities portfolio are temporary in nature. No other-than-temporary impairment losses were recognized in the Consolidated Statements of Income for the three and nine month periods ended September 30, 2011 and 2010.
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Table of ContentsPeople’s United Financial, Inc. Notes to Consolidated Financial Statements – (Unaudited)
The following table is a summary of the amortized cost and fair value of debt securities at September 30, 2011, based on remaining period to contractual maturity:
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Table of ContentsPeople’s United Financial, Inc. Notes to Consolidated Financial Statements – (Unaudited)
People’s United Bank, as a member of the Federal Home Loan Bank (“FHLB”) of Boston, is currently required to purchase and hold shares of FHLB capital stock (total cost of $63.9 million at September 30, 2011) in an amount equal to its membership base investment plus an activity based investment determined according to People’s United Bank’s level of outstanding FHLB advances. FHLB stock is a non-marketable equity security and is, therefore, reported at cost, which equals par value (the amount at which shares have been redeemed in the past). As with other investment securities, the investment is periodically evaluated for impairment based on, among other things, the capital adequacy of the FHLB and its overall financial condition. As a result of operating losses and a decline in capital, in February 2009 the FHLB of Boston suspended paying dividends and placed a moratorium on certain stock repurchases. In the first quarter of 2011, the FHLB of Boston resumed dividend payments. Based on the current capital adequacy and liquidity position of the FHLB of Boston, management believes there is no impairment in the Company’s investment at September 30, 2011 and the cost of the investment approximates fair value. As a result of the Smithtown acquisition, People’s United Financial acquired shares of capital stock in the FHLB of New York (total cost of $13.8 million at September 30, 2011), which also pays a dividend. In the third quarter of 2011, People’s United Financial sold residential mortgage-backed securities with an amortized cost of $507 million and recorded $9.1 million of gross realized gains. People’s United Financial records security transactions on the trade date and uses the specific identification method to determine the cost of securities sold. In connection with the sale of its remaining Class B Visa, Inc. shares in 2009, People’s United Financial and the buyer entered into a derivative contract providing for cash settlements that will depend, in part, on the ultimate resolution of certain litigation involving Visa. The amounts recorded for the derivative contract were insignificant through September 30, 2011. The balance of short-term investments at September 30, 2011 and December 31, 2010 principally consisted of $746.2 million and $570.3 million, respectively, of interest-earning deposits at the Federal Reserve Bank of New York. These deposits are an alternative to overnight federal funds sold and had a yield of 0.25% at both September 30, 2011 and December 31, 2010.
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Table of ContentsPeople’s United Financial, Inc. Notes to Consolidated Financial Statements – (Unaudited)
NOTE 4. LOANS
People’s United Financial maintains several significant accounting policies with respect to loans, including:
The Company did not change its policies with respect to loans or its methodology for determining the allowance for loan losses during the nine months ended September 30, 2011. For purposes of disclosures related to the credit quality of financing receivables and the allowance for loan losses, People’s United Financial has identified two loan portfolio segments: Commercial Banking and Retail. The classes of loans within the loan portfolio segments are: commercial real estate, commercial and industrial, and equipment financing for Commercial Banking; and residential mortgage, home equity and other consumer for Retail. Loans acquired in connection with acquisitions beginning in 2010 (see Note 2) are referred to as ‘acquired’ loans as a result of the manner in which they are accounted for (see further discussion under ‘Acquired Loans’ below). All other loans are referred to as ‘originated’ loans. Accordingly, selected credit quality disclosures that follow are presented separately for the ‘originated’ loan portfolio and the ‘acquired’ loan portfolio.
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Table of ContentsPeople’s United Financial, Inc. Notes to Consolidated Financial Statements – (Unaudited)
The following table summarizes People’s United Financial’s loans by loan portfolio segment and class:
Net deferred loan costs that are included in total loans and accounted for as interest yield adjustments totaled $34.4 million and $26.5 million at September 30, 2011 and December 31, 2010, respectively.
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Table of ContentsPeople’s United Financial, Inc. Notes to Consolidated Financial Statements – (Unaudited)
The following table presents a summary, by loan portfolio segment, of activity in the allowance for loan losses. Allocation of a portion of the allowance to one segment does not preclude its availability to absorb losses in another segment.
The following is a summary, by loan portfolio segment and impairment methodology, of the allowance for loan losses and related portfolio balances:
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Table of ContentsPeople’s United Financial, Inc. Notes to Consolidated Financial Statements – (Unaudited)
The recorded investments, by class of loan, of originated non-performing loans are summarized as follows:
The preceding table excludes acquired loans that are (i) accounted for as purchased credit impaired loans or (ii) covered by an FDIC loss-share agreement totaling $226 million and $16 million, respectively, at September 30, 2011 and $342 million and $18 million, respectively, at December 31, 2010. Such loans meet People’s United Financial’s definition of a non-performing loan but are excluded given that the risk of credit loss has been considered by virtue of our estimate of acquisition-date fair value and/or the existence of an FDIC loss-share agreement. The discounts arising from recording these loans at fair value were due, in part, to credit quality. The acquired loans are generally accounted for on a pool basis and the accretable yield on the pools is being recognized as interest income over the life of the loans based on expected cash flows at the pool level. A loan is generally placed on non-accrual status when it becomes 90 days past due as to interest or principal payments. Past due status is based on the contractual payment terms of the loan. A loan may be placed on non-accrual status before it reaches 90 days past due if such loan has been identified as presenting uncertainty with respect to the collectability of interest and principal. A loan past due 90 days or more may remain on accruing status if such loan is both well secured and in the process of collection. Loans past due 90 days or more and still accruing interest totaled $1.2 million at December 31, 2010 (none at September 30, 2011). Certain originated loans whose terms have been modified are considered troubled debt restructurings (“TDRs”). Acquired loans that are modified are not considered for TDR classification because they are evaluated for impairment on a pool basis. Originated loans are considered TDRs if the borrower is experiencing financial difficulty and is afforded a concession by People’s United Financial, such as, but not limited to: (i) payment deferral; (ii) a reduction of the stated interest rate for the remaining contractual life of the loan; (iii) an extension of the loan’s original contractual term at a stated interest rate lower than the current market rate for a new loan with similar risk; (iv) capitalization of interest; or (v) forgiveness of principal or interest. Generally, TDRs are placed on non-accrual status (and reported as non-performing loans) until the loan qualifies for return to accrual status. Loans qualify for return to accrual status once they have demonstrated performance with the restructured terms of the loan agreement for a minimum of six months. Loans may continue to be reported as TDRs after they are returned to accrual status.
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Table of ContentsPeople’s United Financial, Inc. Notes to Consolidated Financial Statements – (Unaudited)
As discussed in Note 13, in the third quarter of 2011, the Company adopted new accounting guidance concerning the identification of TDRs, which applies retrospectively to restructurings occurring on or after January 1, 2011. The application of this guidance did not result in the identification of additional TDRs. People’s United Financial’s recorded investment in originated loans classified as TDRs totaled $94.4 million and $62.6 million at September 30, 2011 and December 31, 2010, respectively. The related allowance for loan losses at September 30, 2011 and December 31, 2010 was $8.8 million and $8.4 million, respectively. Interest income recognized on these loans totaled $1.4 million and $0.1 million for the three months ended September 30, 2011 and 2010, respectively, and $3.3 million and $0.4 million for the nine months ended September 30, 2011 and 2010, respectively. Generally, to the extent commitments to lend additional amounts to borrowers with loans classified as TDRs exist, fundings under such commitments were immaterial for the three and nine months ended September 30, 2011. Originated loans that were modified and classified as TDRs during the three and nine months ended September 30, 2011 principally involve payment deferrals and/or extension of terms (generally ranging from four to twelve months). On occasion, a temporary reduction of interest rates may have been provided (generally less than 200 basis points). The following is a summary of the recorded investments in these TDRs, by class of loan. For purposes of this disclosure, recorded investments represent amounts immediately prior to and subsequent to the restructuring.
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Table of ContentsPeople’s United Financial, Inc. Notes to Consolidated Financial Statements – (Unaudited)
The following is a summary, by class of loan, of information related to TDRs of originated loans completed within the previous 12 months that subsequently defaulted during the three and nine months ended September 30, 2011. For purposes of this disclosure, the previous 12 months is measured from October 1, 2010 and a default represents a previously-modified loan that became past due 30 days or more during the respective periods.
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Table of ContentsPeople’s United Financial, Inc. Notes to Consolidated Financial Statements – (Unaudited)
People’s United Financial’s impaired loans consist of certain originated Commercial Banking and Retail loans, including all TDRs. The following is a summary, by class of loan, of information related to individually-evaluated impaired loans within the originated portfolio. The average recorded investment amounts are based on month-end balances.
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Table of ContentsPeople’s United Financial, Inc. Notes to Consolidated Financial Statements – (Unaudited)
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Table of ContentsPeople’s United Financial, Inc. Notes to Consolidated Financial Statements – (Unaudited)
The following is a summary, by class of loan, of aging information for originated loans:
Included in the “Current” and “30-89 Days” categories above are early non-performing commercial real estate loans, commercial and industrial loans, and equipment financing loans totaling $41.6 million, $15.3 million and $25.2 million, respectively. These loans are less than 90 days past due but have been placed on non-accrual status as a result of having been identified as presenting uncertainty with respect to the collectability of interest and principal.
Included in the “Current” and “30-89 Days” categories above are early non-performing commercial real estate loans, commercial and industrial loans, and equipment financing loans totaling $17.3 million, $6.3 million and $16.7 million, respectively. These loans are less than 90 days past due but have been placed on non-accrual status as a result of having been identified as presenting uncertainty with respect to the collectability of interest and principal.
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Table of ContentsPeople’s United Financial, Inc. Notes to Consolidated Financial Statements – (Unaudited)
The following is a summary, by class of loan, of credit quality indicators:
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