People's United Financial, Inc. (NYSE: PBCT) is the largest regional bank in New England. PBCT offers a full range of financial services including personal and commercial banking, lending, investment and equipment leasing services. Its biggest source of revenue is interest it earns on loans, which made up 73% of total 2007 revenues. The biggest portion of this interest-earning portfolio of loans is made up of residential mortgages, which accounted for 36% of the 2007 portfolio.At the beginning of 2008, it had over $21 billion in assets, with 300 branches from New York to Maine (47% of which are located inside Stop and Shop supermarkets).
PBCT's revenue and net income increased in 2007 by 20.6% and 21.5%, respectively. However, these figures did not include the acquisition of Chittenden Corporation, which took effect on January 1, 2008. This acquisition nearly doubled PBCT's assets from $11 billion to $21 billion.
PBCT avoided the severe effects of the 2007-2008 credit crisis that were felt by most other banks because it refrained from issuing subprime and Alt-A loans. It's strategic status relative to other banks has therefore increased, putting it in a position to look for possible acquisitions. PBCT also benefits from the general economic downturn because the resulting drop in short-term interest rates increases its interest rate spread, which is its largest source of revenues.
PBCT is a savings & loan holding company that offers commercial and consumer banking services. Its offerings include checking and savings accounts, consumer loans, mortgage loans, commercial loans, real estate loans and municipal banking. It also has a subsidiary, People's Capital and Leasing, which finances expensive equipment for firms. To a lesser degree, it offers services such as cash management, financial advising, and insurance.
The following table shows PBCT's total revenue and net income for 2005-2007.
|change from previous year||12.3%||2.5%||20.6%|
|change from previous year||-45.7%||-10.6%||21.5%|
PBCT's operations are divided into two segments: Commercial Banking and Consumer Financial Services. Each of these segments generates revenue both from loan interest as well as from fees for the services they provide. In addition, the Treasury segment manages PBCT's portfolio of securities, as well as short-term investments and wholesale funding activities.
The Commercial Banking business segment contributed $159.8M of revenues and $37.6M (25%) of net income in 2007. This segment primarily includes commercial and industrial lending, commercial real estate lending, commercial banking services and equipment leasing and financing services.
Consumer Financial Services contributed $387.7M of revenues and $67M (44%) of net income in 2007. Included in this segment are PBCT's retail banking, mortgage lending, home equity lending and consumer lending services. Consumer Financial Services also offers financial advisory, investment management and brokerage services, as well as life insurance policies.
The Treasury segment lost $8.6M (-6%) of net income in 2007. The Treasury manages the firm's securities portfolio, wholesale funding, short-term investments and insurance.
The biggest individual portion of PBCT's loan portfolio consists of residential mortgages - it includes both fixed-rate and adjustable-rate loans and makes up 36% of PBCT's total portfolio. The next largest portion is commercial real estate, with 21% of the portfolio, followed by commercial and industrial loans (18%), consumer loans (14%) and equipment financing through subsidiary People's Capital and Leasing Corp. (11%).
Between September 2007 and April 2008, the U.S. Federal Reserve cut short-term interest rates from 5.25% to just 2%, and as of August 4, 2008 they were expected to remain at that level. Low short-term interest rates benefit PBCT because they increase PBCT's net interest margin, which is the difference between interest it earns on its loans and interest it pays on its deposits. Since the interest rate on loans is relatively constant over long periods of time, while interest on deposits is paid at short-term rates, low short-term rates increase the margin. This has a large effect on PBCT's bottom line because interest income accounted for 72% of the firm's total revenues for 2007.
PBCT has conservative loan standards and does not make subprime or Alt-A loans, and therefore has been spared most of the damage of the 2007-2008 subprime crisis. As of August 2008, PBCT had $2.5 billion in excess cash, equal to 44% of its total stock market value. CEO Philip Sherringham has stated that rather than use the money in a stock buyback, the company will look for potential acquisitions. Analysts have reported that the company is open to possible acquisitions from Maine to Washington D.C.
As of December 31, 2007, 75 (47%) of PBCT's branches were located inside Stop & Shop supermarkets. This is the result of a licensing agreement that gives PBCT the exclusive right to open branches insides Stop & Shop stores in Connecticut. These branches provide 7-day-a-week convenience to customers.
As of the end of 2007, Stop & Shop led all supermarkets in Connecticut in market share. However, the licensing agreement PBCT has with Stop & Shop not only gives PBCT the right, but actually requires it to open branches (up to a total of 120) in new Stop & Shop stores in Connecticut. This would hurt PBCT in the event that Stop & Shop becomes less popular or successful.
On the deposit side, PBCT competes with other banks, credit unions, brokerage firms and money market funds. On the loan side, it competes with other banks, credit unions, credit card issuers, finance companies, mortgage lenders and mortgage brokers. In both areas, the main basis of competition is the interest rate paid (charged) on deposits (loans). Three of the biggest competitors in PBCT's market area are Bank of America (BAC), Citizens Financial (CNFL) and Commerce Bancorp (CBH).
|(millions USD)||Net Interest Income||Net Income|
|Bank of America (BAC)||$34,443||$14,982|
|Citizens Financial (CNFL)||$4,054||$1,489|
|Commerce Bancorp (CBH)(acquired by Toronto Dominion Bank (TD) in March 2008)||$538||$207|