As filed with the Securities and Exchange Commission on February 13, 2007 Registration No. 333-138389
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 4 TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
PEOPLES UNITED FINANCIAL, INC.
(exact name of registrant as specified in its charter)
Delaware | 6035 | Pending | ||
(state or other jurisdiction of incorporation or organization |
(Primary Standard Industrial Classification Code Number) |
(IRS Employer Identification No.) |
850 Main Street
Bridgeport, Connecticut 06604
(203) 338-7171
(Address, including zip code, and telephone number,
including area code, of registrants principal executive offices)
John A. Klein
Chairman, Chief Executive Officer and President
Peoples United Financial, Inc.
850 Main Street
Bridgeport, Connecticut 06604
(203) 338-7171
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
V. Gerard Comizio Matthew Dyckman Thacher Proffitt & Wood LLP 1700 Pennsylvania Ave, N.W., Suite 800 Washington, D.C. 20006 (202) 347-8400 |
Raymond B. Check Cleary Gottlieb Steen & Hamilton LLP One Liberty Plaza New York, NY 10006 (212) 225-2000 |
Approximate date of commencement of proposed sale to public: As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box x
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
CALCULATION OF REGISTRATION FEE
Title of each Class of Securities to be Registered |
Amount
to be Registered(1) |
Proposed
Maximum Offering Price Per Share |
Proposed
Maximum Aggregate Offering Price(2) |
Amount of
Registration Fee(3) |
||||
Common Stock, par value $0.01 per share |
371,606,207 | $20.00 | $7,432,124,140 | $795,238 | ||||
(1) | Includes the maximum number of shares that may be issued in connection with this offering. |
(2) | Estimated solely for the purpose of calculating the registration fee. |
(3) | Registration fee of $795,238.00 previously paid. |
The Registrant hereby amends this Registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to Section 8(a), may determine.
The information in this prospectus is not complete and may be changed. We may not sell these securities until the Securities and Exchange Commission declares the registration statement effective. This prospectus is not an offer to sell these securities, and we are not soliciting an offer to buy these securities, in any state or jurisdiction where the offer or sale is not permitted.
SUBJECT TO COMPLETION DATED FEBRUARY 13, 2007
PROSPECTUS
Up to 185,437,500 Shares of Common Stock
(subject to increase to up to 213,253,125 shares)
Peoples United Financial, Inc. is offering up to 185,437,500 shares of its common stock for sale in connection with the conversion of Peoples Bank and Peoples Mutual Holdings from the mutual holding company structure to the stock holding company structure. We may increase the maximum number of shares that we sell in the offering, without notice to persons who have subscribed for shares, by up to 15%, to 213,253,125 shares, as a result of market demand, regulatory considerations or changes in financial markets. The shares of Peoples United Financial common stock are being offered for sale at a price of $20.00 per share. Peoples Bank common stock is currently listed on the Nasdaq Global Select Market under the trading symbol PBCT. We expect Peoples United Financial common stock to trade on that market under the symbol PBCTD for a period of 20 trading days after completion of the offering. Thereafter, Peoples United Financials trading symbol will revert to PBCT. Concurrent with the completion of the offering, shares of Peoples Bank common stock owned by the public will be exchanged for shares of Peoples United Financial common stock so that Peoples Banks existing public stockholders will own approximately the same percentage of Peoples United Financial common stock as they owned of Peoples Banks common stock immediately prior to the conversion. In connection with the conversion, we also intend to form The Peoples Community Foundation and contribute to it 2,000,000 shares of Peoples United Financial common stock and $20.0 million in cash from the offering proceeds.
We are offering our shares of common stock for sale on a priority basis to Peoples Bank depositors in a subscription offering. Ryan Beck & Co., Inc. will assist us in selling the common stock in the subscription offering on a best efforts basis. In order to complete the subscription offering and the syndicated offering described below, we must sell, in the aggregate, a minimum of 137,062,500 shares. The minimum purchase is 25 shares. The subscription offering is expected to expire at 11:00 a.m., Eastern Time, on March 22, 2007. We may extend this expiration date without notice to you until May 6, 2007. Once submitted, subscription orders are irrevocable unless the offering is terminated or extended beyond May 6, 2007 or the number of shares of common stock to be sold increases above 213,253,125 shares or decreases below 137,062,500 shares. Funds received in the subscription offering will be held in an escrow account at Peoples Bank or, at our discretion, another insured depository institution, and will earn interest at our passbook savings rate. If we extend the offering beyond May 6, 2007, we will promptly return your funds with interest unless you confirm your subscription. If we terminate the offering, we will promptly return your funds with interest. The offering must be completed no later than 24 months after Peoples Banks depositors approve the plan of conversion. After that, the offering may not be extended by us or by the Office of Thrift Supervision.
We are also offering any shares of our common stock not subscribed for in the subscription offering for sale to the general public in a syndicated offering through a syndicate of selected dealers. We may begin the syndicated offering at any time following the commencement of the subscription offering. Morgan Stanley & Co. Incorporated is acting as sole book-running manager, and Keefe, Bruyette & Woods, Inc., Lehman Brothers and Ryan Beck & Co., Inc. are acting as joint lead managers for the syndicated offering, which is being conducted on a best efforts basis. None of Morgan Stanley & Co. Incorporated, Ryan Beck & Co., Inc. or any other member of the syndicate is required to purchase any shares in the subscription or syndicated offering. Alternatively, we may sell any remaining shares in an underwritten public offering, which would be conducted on a firm commitment basis.
Investing in our common stock involves risks. Please read the
OFFERING SUMMARY
Price: $20.00 per share
Minimum | Maximum |
Adjusted
Maximum |
|||||||
Number of shares |
137,062,500 | 185,437,500 | 213,253,125 | ||||||
Gross offering proceeds |
$ | 2,741,250,000 | $ | 3,708,750,000 | $ | 4,265,062,500 | |||
Estimated offering expenses (1) |
$ | 83,572,500 | $ | 122,272,500 | $ | 144,525,000 | |||
Estimated net proceeds |
$ | 2,657,677,500 | $ | 3,586,477,500 | $ | 4,120,537,500 | |||
Estimated net proceeds per share |
$ | 19.39 | $ | 19.34 | $ | 19.32 |
(1) | Includes: (1) selling commissions payable by us to Ryan Beck & Co., Inc. in connection with the subscription offering equal to the lesser of 1% of the aggregate amount of common stock sold in the subscription offering or $12.0 million; (2) fees and selling commissions payable by us to Morgan Stanley & Co. Incorporated, Ryan Beck & Co., Inc. and the other syndicate members participating in the syndicated offering equal to 4% of the aggregate amount of common stock sold in the syndicated offering; and (3) other expenses of the offering estimated to be $10.0 million. Does not include an advisory fee in the amount of $5.0 million payable to Morgan Stanley & Co. Incorporated in the event gross proceeds from the subscription offering equal or exceed $1.75 billion. Also does not include an additional advisory fee in the amount of $2.5 million payable, in Peoples Banks sole discretion, to Morgan Stanley & Co. Incorporated in the event gross proceeds from the subscription offering equal or exceed $2.5 billion. For information regarding compensation to be received by Morgan Stanley & Co. Incorporated, Ryan Beck & Co., Inc. and the other syndicate members that may participate in the syndicated offering, including the assumptions regarding the number of shares that may be sold in the subscription offering and the syndicated offering to determine the estimated offering expenses, see Pro Forma Data on page [ ] and The Conversion and OfferingPlan of Distribution; Selling Agent Compensation on page [ ]. |
These securities are not deposits or savings accounts and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other governmental agency. Neither the Securities and Exchange Commission, the Office of Thrift Supervision nor any state securities regulator has approved or disapproved these securities or determined if this prospectus is accurate or complete. Any representation to the contrary is a criminal offense.
R YAN B ECK & C O .
For assistance, contact the Stock Information Center, toll-free, at (800) 867-5295.
The date of this prospectus is , 2007
NEWINGTON SUPER STOP & SHOP 44 Fenn Road Newington, CT 06111
NEWINGTON 135 Lowrey Place Newington, CT 06111
ROCKY HILL SUPER STOP & SHOP 80 Town Line Road Rocky Hill, CT 06067
SIMSBURY SUPER STOP & SHOP 530 Bushy Hill Road Simsbury, CT 06070
SOUTH WINDSOR SUPER STOP & SHOP 1739 Ellington Road South Windsor, CT 06074
SOUTHINGTON SUPER STOP & SHOP 505 North Main Street Southington, CT 06489
SOUTHINGTON 812 Queen Street Southington, CT 06489
BISHOPS CORNER 714 North Main Street West Hartford, CT 06117
McAULEY 275 Steele Road West Hartford, CT 06117
WEST HARTFORD CENTER 1013 Farmington Avenue West Hartford, CT 06107
WEST HARTFORD/ FARMINGTON 1232 Farmington Avenue West Hartford, CT 06107
WETHERSFIELD SUPER STOP & SHOP 1380 Berlin Turnpike Wethersfield, CT 06109
WETHERSFIELD 1310 Silas Deane Highway Wethersfield, CT 06109
LITCHFIELD COUNTY
NEW MILFORD SUPER STOP & SHOP 180 Danbury Road New Milford, CT 06776
NORTH CANAAN SUPER STOP & SHOP 11 East Main Street North Canaan, CT 06018
TORRINGTON SUPER STOP & SHOP 211 High Street Torrington, CT 06790 |
TORRINGTON FINANCIAL CENTER 1692 East Main Street Torrington, CT 06790
WATERTOWN SUPER STOP & SHOP 757 Straits Turnpike Watertown, CT 06795
WINSTED SUPER STOP & SHOP
200 New Hartford Road,
Winsted, CT 06098
MIDDLESEX COUNTY
CLINTON SUPER STOP & SHOP 215 East Main Street Clinton, CT 06413
CROMWELL SUPER STOP & SHOP 195 West Street Cromwell, CT 06416
MIDDLETOWN SUPER STOP & SHOP 416 East Main Street Middletown, CT 06457
OLD SAYBROOK SUPER STOP & SHOP 105 Elm Street Old Saybrook, CT 06475
NEW HAVEN COUNTY
ANSONIA SUPER STOP & SHOP 100 Division Street Ansonia, CT 06401
LEETES ISLAND SUPER STOP & SHOP 22 Leetes Island Road Branford, CT 06405
BRANFORD 500 East Main Street Branford, CT 06405
CHESHIRE SUPER STOP & SHOP 275 Highland Avenue Cheshire, CT 06410
TROLLEY SQUARE SUPER STOP & SHOP 370 Hemingway Avenue East Haven, CT 06512
HAMDEN SUPER STOP & SHOP 2331 Dixwell Avenue Hamden, CT 06514
PUTNAM PLACE SUPER STOP & SHOP 1245 Dixwell Avenue Hamden, CT 06514
HAMDEN 2165 Dixwell Avenue Hamden, CT 06514 |
WESTWOODS 3496 Whitney Avenue Hamden, CT 06518
MADISON SUPER STOP & SHOP 128 Samson Rock Drive Madison, CT 06443
MADISON CENTER 752 Boston Post Road Madison, CT 06443
MERIDEN SUPER STOP & SHOP 485 Broad Street Meriden, CT 06450
MERIDEN WEST SUPER STOP & SHOP 580 West Main Street Meriden, CT 06451
MILFORD SUPER STOP & SHOP 1364 East Town Road Milford, CT 06460
SILVER SANDS PLAZA SUPER STOP & SHOP 855 Bridgeport Avenue Milford, CT 06460
MILFORD 190 South Broad Street Milford, CT 06460
NAUGATUCK SUPER STOP & SHOP 727 Rubber Avenue Naugatuck, CT 06770
AMITY SUPER STOP & SHOP 112 Amity Road New Haven, CT 06515
CENTURY TOWER 265 Church Street, One Century Tower New Haven, CT 06510
NORTH HAVEN SUPER STOP & SHOP 79 Washington Avenue North Haven, CT 06473
ORANGE SUPER STOP & SHOP 259 Bull Hill Lane Orange, CT 06477
ORANGE 653 Orange Center Road Orange, CT 06477
SEYMOUR SUPER STOP & SHOP 12 Franklin Street Seymour, CT 06483
SOUTHBURY SUPER STOP & SHOP 100 Main Street North Southbury, CT 06488
SOUTHBURY 61 Southbury Plaza Southbury, CT 06488 |
WALLINGFORD SUPER STOP & SHOP 930 North Colony Road Wallingford, CT 06492
REIDVILLE DRIVE SUPER STOP & SHOP 410 Reidville Drive Waterbury, CT 06705
CHASE AVENUE SUPER STOP & SHOP 240 Chase Avenue Waterbury, CT 06704
NAUGATUCK VALLEY SUPER STOP & SHOP 920 Wolcott Road Waterbury, CT 06705
WATERBURY 255 Bank Street Waterbury, CT 06702
WEST HAVEN SUPER STOP & SHOP 460 Elm Street West Haven, CT 06516
SAVIN ROCK 220 Captain Thomas Boulevard West Haven, CT 06516
WOODBRIDGE 198 Amity Road Woodbridge, CT 06525
NEW LONDON COUNTY
COLCHESTER 139 South Main Street Colchester, CT 06415
EAST LYME SUPER STOP & SHOP 248 Flanders Road Niantic, CT 06357
GROTON SUPER STOP & SHOP 220 Groton Square, Route 12 Groton, CT 06340
MONTVILLE 563 Norwich-New London Turnpike Uncasville, CT 06382
MYSTIC PACKER 12 Roosevelt Avenue Mystic, CT 06355
NORWICH SUPER STOP & SHOP 42 Town Street Norwich, CT 06360
NORWICH 4 Broadway Norwich, CT 06360
NORWICHTOWN FINANCIAL CENTER 45 Town Street Norwich, CT 06360 |
WEST MAIN 624 West Main Street Norwich, CT 06360
WATERFORD SUPER STOP & SHOP 117 Boston Post Road, Route 1 Waterford, CT 06385
WATERFORD 716 Broad Street Ext. Waterford, CT 06385
TOLLAND COUNTY
MANSFIELD 155 Storrs Road, Route 195 Mansfield Center, CT 06250
STORRS 1244 Storrs Road Storrs, CT 06268
UCONN CO-OP 2075 Hillside Road Storrs, CT 06269
VERNON SUPER STOP & SHOP 10 Pitkin Road Vernon, CT 06066
VERNON CIRCLE 35 Talcottville Road, Tri City Plaza Vernon, CT 06066
WINDHAM COUNTY
PUTNAM SUPER STOP & SHOP 60 Providence Pike Putnam, CT 06260
WILLIMANTIC SUPER STOP & SHOP 1391 Main Street Willimantic, CT 06226 |
You should rely only on the information contained in this prospectus or to which we have referred you. We have not authorized anyone to provide you with information that is different. This prospectus does not constitute an offer to sell, or the solicitation of an offer to buy, any of the securities offered hereby to any person in any jurisdiction in which such offer or solicitation would be unlawful. The affairs of Peoples Mutual Holdings, Peoples United Financial, Peoples Bank and their subsidiaries may change after the date of this prospectus. Delivery of this prospectus and the sales of shares of our common stock made hereunder does not mean otherwise.
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28 | ||
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31 | ||
36 | ||
42 | ||
44 | ||
45 | ||
46 | ||
48 | ||
50 | ||
COMPARISON OF VALUATION AND PRO FORMA INFORMATION WITH AND WITHOUT THE CHARITABLE FOUNDATION |
58 | |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
59 | |
89 | ||
115 | ||
116 | ||
125 | ||
126 | ||
126 | ||
127 | ||
130 | ||
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT |
172 | |
174 | ||
175 | ||
199 | ||
RESTRICTIONS ON ACQUISITION OF PEOPLES UNITED FINANCIAL AND PEOPLES BANK |
202 | |
206 | ||
207 | ||
207 | ||
207 | ||
207 | ||
208 | ||
PEOPLES BANK AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS |
F-1 |
The following summary highlights the material information from this prospectus and may not contain all the information that is important to you. You should read this entire document carefully, including the sections entitled Risk Factors and The Conversion and Offering and the consolidated financial statements and the notes to the consolidated financial statements, before making a decision to invest in our common stock.
The Companies
Peoples United Financial, Inc. Peoples United Financial is a newly-formed Delaware corporation and currently a wholly-owned subsidiary of Peoples Bank. Peoples United Financial was formed for the purpose of effectuating the conversion and offering described in this prospectus. In connection with those transactions, Peoples United Financial is registering shares of its common stock with the Securities and Exchange Commission and will be selling shares of its common stock to new stockholders and, as described in this prospectus, issuing shares of its common stock to existing stockholders of Peoples Bank in exchange for their shares of Peoples Bank common stock. Peoples United Financial currently does not have significant assets, but as a result of the conversion and offering, it will become the holding company of Peoples Bank.
Peoples Bank. Peoples Bank is a federal stock savings bank and as a result of the conversion and offering will become the wholly-owned subsidiary of Peoples United Financial. Peoples Bank was organized in 1842 as a Connecticut mutual savings bank. In 1988, Peoples Bank reorganized into the mutual holding company structure, converted to a Connecticut-chartered stock savings bank and became the majority-owned subsidiary of Peoples Mutual Holdings, a Connecticut-chartered mutual holding company. Effective August 18, 2006, Peoples Bank converted to a federal stock savings bank regulated by the Office of Thrift Supervision. At September 30, 2006, Peoples Bank had total assets of $10.6 billion, total deposits of $9.0 billion and total stockholders equity of $1.4 billion.
Peoples Mutual Holdings . Peoples Mutual Holdings is the federally-chartered mutual holding company of Peoples Bank. Its principal business is to own a majority of Peoples Banks outstanding shares of common stock. As of September 30, 2006, Peoples Mutual Holdings owned 82,012,500 shares, equivalent to approximately 57.7%, of Peoples Bank common stock. At September 30, 2006, Peoples Mutual Holdings had $8.5 million of net assets, excluding the shares of Peoples Bank. As part of the conversion, Peoples Mutual Holdings will cease to exist as a separate entity.
Our Business
Peoples Bank offers a full range of financial services, primarily in the state of Connecticut, to individual, corporate, municipal and institutional customers. Its traditional banking activities 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, Peoples Bank provides specialized services tailored to specific markets. Its operations are divided into two primary business lines that represent its core businesses:
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Commercial Banking. Commercial banking consists principally of commercial lending, commercial real estate lending and commercial deposit gathering activities. This business line also includes the equipment financing operations of Peoples Capital and Leasing Corp., Peoples Banks wholly-owned subsidiary, as well as cash management, correspondent banking and municipal banking and finance. |
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Retail Banking. Retail banking includes consumer deposit gathering activities, residential mortgage lending and home equity and other consumer lending. In addition to trust services, this business line also includes brokerage, financial advisory services, investment management services and life insurance provided by Peoples Securities, Inc. and other insurance services provided by R.C. Knox and Company, Inc., both wholly-owned subsidiaries of Peoples Bank. |
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Peoples Banks business model and broad product offerings allow it to meet the needs of a diverse customer base with varying demographic characteristics. Peoples Bank delivers its products and services through a network of 75 traditional branches, 73 branches located in Stop & Shop supermarkets, eight limited-service branches, 23 investment and brokerage offices (22 of which are located within branch offices), five wealth management and trust offices, nine Peoples Capital and Leasing offices (eight of which are located outside of Connecticut), seven commercial lending offices, and over 250 ATMs located in the state of Connecticut. Peoples Bank also originates residential mortgage and home equity loans in Connecticut and the contiguous markets of New York and Massachusetts. In addition, Peoples Bank maintains a loan production office in Massachusetts to support its commercial real estate lending initiatives in that state. Its distribution network includes fully integrated online banking and investment trading, a 24-hour telephone banking service and participation in a worldwide ATM network.
During 2005, Peoples Bank opened seven new branches, three of which are traditional branches and four of which are located in Stop & Shop supermarkets. For the first nine months of 2006, Peoples Bank opened three new Stop & Shop branches.
Our Market Area And Customer Base
Connecticut is one of the most attractive banking markets in the United States with a total population of approximately 3.5 million and a median household income of $66,018 as of June 30, 2006, ranking second in the United States and well above the U.S. median household income of $51,546, according to estimates from SNL Securities. Fairfield County, where Peoples Bank is headquartered, is the wealthiest county in Connecticut, with a June 30, 2006 median household income of $81,678 according to estimates from SNL Securities.
While Peoples Banks primary market area is in the state of Connecticut, substantially all of the equipment financing activities of Peoples Capital and Leasing involve customers outside of Connecticut. In addition, Peoples Bank participates in certain loans that aggregate $20 million or more and are shared by three or more supervised financial institutions. These loans are generally referred to as shared national credits. Peoples Banks shared national credits portfolio totaled $542 million at September 30, 2006, approximately 90% of which involved borrowers outside of Connecticut. Peoples Bank competes for deposits, loans and other 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.
Our Competitive Strengths
We believe that the following strengths give us a competitive advantage in our markets:
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Market Position in Connecticut. As of September 30, 2006, Peoples Bank had 156 branches throughout the state of Connecticut. At June 30, 2006, Peoples Bank ranked third in deposit market share in Connecticut and first in Fairfield County, according to the Federal Deposit Insurance Corporation. |
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Stop & Shop Relationship. Peoples Bank has exclusive branching rights in Stop & Shop supermarkets in the state of Connecticut. Stop & Shop is the leading grocery store chain in Connecticut, with nearly twice the market share of its closest competitor, according to Modern Grocer. We believe that the Connecticut market area, with its compact geographical size and high population density, presents a unique opportunity to operate successful supermarket bank branches that complement our traditional branches. Unlike many other supermarket bank branches, Peoples Banks Stop & Shop branches are full-service facilities that provide our customers with the convenience of seven-day-a-week banking. During 2005, these branches originated 27% of Peoples Banks home equity loans, 47% of its retail checking and savings accounts, and 34% of its commercial checking accounts. Approximately 40% of Peoples Banks total branch transactions originate in its Stop & Shop branches. Peoples Bank generally is required to open a branch in each new Connecticut Stop & Shop supermarket that meets projected size and customer criteria until 2012, and has the option to extend its exclusive right to open branches in Connecticut Stop & Shop supermarkets until 2022. |
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Strong Credit Culture. Peoples Banks experienced credit risk professionals and conservative credit culture, combined with centralized processes and consistent underwriting standards across all business lines, have |
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allowed it to maintain a high level of asset quality. Over the last eight quarters through September 30, 2006, Peoples Banks net charge-offs to average loans ratio has averaged 0.08%, compared to 0.22% for the top 50 U.S. banks and thrifts, according to SNL Securities. |
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Highly Experienced Management Team with a Proven Track Record. As a group, our executive officers have an average of 24 years of experience in the banking industry and have successfully operated through various industry economic cycles. In addition, our management team has significant experience operating publicly-traded banking companies. A number of our executive officers, including our president and chief executive officer, have been members of our management team since our conversion from the mutual form of ownership and initial public offering in 1988. |
Our Business Strategy
Our business strategy is to focus on those businesses in which we have proven competencies. We believe that this clear focus will enable us to continue to grow our franchise, both inside and outside of the state of Connecticut, while maintaining our commitment to the quality of our business, assets and customer service. The following are the key elements of our business strategy:
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Expand Our Geographic Reach. Our plans for geographic expansion are based upon both de novo branching and acquisitions of financial institutions and other businesses related to banking that are complementary to our current lines of business. |
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De Novo Branching. As part of its strategy to broaden its footprint by entering markets similar to Connecticut, Peoples Bank plans to expand into the state of New York by opening at least 15 new branches in Westchester County over the next three years. Peoples Bank expects to open seven of these branches by the end of 2007. Westchester County is a contiguous market with comparable demographics to Fairfield County, Connecticut. As of June 30, 2006, the median household income in Westchester County was $80,686. The branches Peoples Bank opens in Westchester County will be traditional branches. |
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Complementary Acquisitions. We believe that acquisition opportunities exist both inside and outside of our current market area. We will consider acquiring select banking and banking-related businesses initially in contiguous or near contiguous market areas that will afford us the opportunity to add complementary products to our existing business or to expand our franchise geographically. |
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Optimize Our Balance Sheet Management and Net Interest Margin. Peoples Bank strives to maintain a balance between loan portfolio growth and core deposit funding. Approximately 95% of its assets are funded by low-cost core deposits and stockholders equity. Peoples Bank believes that, other than for deployment of excess core deposits or excess equity, a large securities portfolio provides limited economic value. During the third quarter of 2006, Peoples Bank sold approximately $810 million of debt securities and used a portion of the proceeds to pay down short-term borrowings and fund additional loan growth. These transactions were undertaken to better position Peoples Banks balance sheet for the then current interest rate environment. At September 30, 2006, Peoples Bank had a securities portfolio of $202 million, or 2% of its assets, and wholesale borrowings of $14 million, or 0.1% of assets, ratios well below industry averages. This focused balance sheet management strategy has allowed Peoples Bank to increase its net interest margin by 42 basis points from 3.47% to 3.89% since the third quarter of 2004, compared to an average decline of 20 basis points for the top 50 U.S. banks and thrifts over the same time period, according to SNL Securities. |
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Maintain a Diversified Loan Portfolio . Peoples Banks loan portfolio is highly diversified with a balance of commercial, residential lending and consumer assets. As of September 30, 2006, 44% of its loan portfolio was comprised of commercial banking loans and 42% was comprised of residential mortgage loans while consumer loans, primarily home equity loans and lines of credit, made up the remainder. In addition, the commercial loan portfolio is diversified across many industries. Loans to the manufacturing industry, which constitute approximately 41% of Peoples Banks commercial loan portfolio, are divided among more than 20 manufacturing industry segments. No single borrower or group of related borrowers represents more than 1% of Peoples Banks loan portfolio. |
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Selected Risk Factors
You should consider carefully the following selected risk factors, as well as the full list of Risk Factors beginning on page [ ], before deciding whether to invest in our common stock.
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Changes in Interest Rates. Peoples Bank makes most of its earnings based on the difference between interest it earns on assets such as loans compared to interest it pays on liabilities such as deposits. This difference is called the interest spread. Peoples Banks interest spread may be lower if the timing of interest rate changes is very different for its interest-earning assets compared to its interest-bearing liabilities. Peoples Bank tries to manage this risk using many different techniques. If Peoples Bank is not successful in managing this risk, it will probably be less profitable. |
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Asset Quality . Asset quality measures the performance of a borrower in repaying a loan, with interest, on time. It is unlikely that our asset quality will stay as strong as it has been for the past several years, particularly if the economy deteriorates. |
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Plans for Growth. Our profitability may suffer if we do not continue to experience the type of growth that we have in the past, if we do not adequately and profitably implement our plans for growth or if we incur additional expenditures beyond current projections. |
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Stop & Shop Branches. A drop in Stop & Shops market share of the grocery market, 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 Peoples Banks Stop & Shop branches. |
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Executive Officers and Key Personnel. Although we have an employment agreement with our president and chief executive officer, the loss of the services of one or more of our executive officers and key personnel could impair our ability to continue to develop and execute our business strategy. |
Our Corporate Information .
The executive offices of Peoples Bank, Peoples Mutual Holdings and Peoples United Financial are located at 850 Main Street, Bridgeport, Connecticut 06604. The telephone number at this address is (203) 338-7171.
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Summary Consolidated Financial And Other Data
The summary information presented below under Summary Financial Condition Data, Summary Operating Data, Per Common Share Data, and Ratios at each of the dates or for each of the periods presented, except for the information at or for the periods ended September 30, 2005 and 2006 (which has not been audited), is derived in part from the audited consolidated financial statements of Peoples Bank. The following information is only a summary and you should read it in conjunction with Peoples Banks audited consolidated financial statements and notes beginning on page F-1. All share, per share and dividend information reflects the three-for-two stock splits effected by Peoples Bank on May 15, 2004 and May 15, 2005.
At September 30,
2006 |
At December 31, | |||||||||||||||||
2005 | 2004 | 2003 | 2002 | 2001 | ||||||||||||||
(In millions) | ||||||||||||||||||
Summary Financial Condition Data: |
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Total assets |
$ | 10,612 | $ | 10,933 | $ | 10,718 | $ | 11,672 | $ | 12,261 | $ | 11,891 | ||||||
Loans |
9,185 | 8,573 | 7,933 | 7,105 | 6,675 | 6,374 | ||||||||||||
Securities, net |
202 | 1,363 | 2,071 | 2,405 | 3,230 | 2,900 | ||||||||||||
Allowance for loan losses |
74 | 75 | 73 | 71 | 69 | 74 | ||||||||||||
Deposits |
8,979 | 9,083 | 8,862 | 8,714 | 8,426 | 7,983 | ||||||||||||
Core deposits (1) |
8,843 | 8,873 | 8,681 | 8,433 | 8,102 | 7,709 | ||||||||||||
Borrowings |
14 | 295 | 341 | 1,516 | 2,437 | 2,542 | ||||||||||||
Stockholders equity |
1,351 | 1,289 | 1,200 | 1,002 | 940 | 935 |
For the Nine
Months Ended September 30, |
For the Year Ended December 31, | |||||||||||||||||||||||||||
2006 | 2005 | 2005 | 2004 | 2003 | 2002 | 2001 | ||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||
Summary Operating Data: |
||||||||||||||||||||||||||||
Net interest income (2) |
$ | 286.3 | $ | 276.7 | $ | 370.0 | $ | 327.4 | $ | 284.3 | $ | 318.5 | $ | 319.5 | ||||||||||||||
Provision for loan losses |
2.0 | 3.3 | 8.6 | 13.3 | 16.7 | 22.2 | 45.3 | |||||||||||||||||||||
Fee based revenues |
113.5 | 111.7 | 151.5 | 142.9 | 143.0 | 136.2 | 113.9 | |||||||||||||||||||||
Net security losses |
(27.2 | ) | (0.1 | ) | (0.1 | ) | (4.7 | ) | (0.6 | ) | (3.3 | ) | (18.5 | ) | ||||||||||||||
All other non-interest income (3) |
15.8 | 9.5 | 21.9 | 13.5 | 23.9 | 16.3 | 38.2 | |||||||||||||||||||||
Non-interest expense (4) |
261.3 | 253.8 | 344.4 | 479.7 | 346.0 | 341.5 | 343.5 | |||||||||||||||||||||
Income (loss) from continuing operations |
83.0 | 91.6 | 125.9 | (5.6 | ) | 62.7 | 67.7 | 38.9 | ||||||||||||||||||||
Income (loss) from discontinued operations (5) |
1.7 | 10.3 | 11.2 | 205.3 | 1.1 | (12.3 | ) | 36.9 | ||||||||||||||||||||
Net income |
84.7 | 101.9 | 137.1 | 199.7 | 63.8 | 55.4 | 75.8 | |||||||||||||||||||||
Adjusted net income (1) |
83.0 | 93.6 | 122.6 | 81.1 | 62.7 | 67.7 | 25.9 |
(1) | See Non-GAAP Financial Measures and Reconciliation to GAAP for a reconciliation of deposits to core deposits, and net income to adjusted net income. |
(2) | Fully taxable equivalent basis. |
(3) | Includes $8.1 million and $20.0 million in gains on asset sales for the years ended December 31, 2005 and 2001, respectively. |
(4) | Includes liability restructuring costs totaling $2.7 million, $133.4 million, $1.2 million and $16.6 million for the years ended December 31, 2005, 2004, 2003 and 2001, respectively. |
(5) | Includes an after-tax gain on sale of $6.2 million for both the nine months ended September 30, 2005 and the year ended December 31, 2005 and $198.5 million for the year ended December 31, 2004 related to the sale of the credit card business in March 2004. |
5
At or For the Nine
Months Ended September 30, |
At or For the Year Ended December 31, | |||||||||||||||||||||||||||
2006 | 2005 | 2005 | 2004 | 2003 | 2002 | 2001 | ||||||||||||||||||||||
Per Common Share Data: |
||||||||||||||||||||||||||||
Basic earnings per share |
$ | 0.60 | $ | 0.72 | $ | 0.97 | $ | 1.43 | $ | 0.46 | $ | 0.40 | $ | 0.55 | ||||||||||||||
Diluted earnings per share |
0.59 | 0.72 | 0.97 | 1.42 | 0.46 | 0.40 | 0.55 | |||||||||||||||||||||
Cash dividends paid per share (1) |
0.72 | 0.63 | 0.85 | 0.75 | 0.68 | 0.63 | 0.59 | |||||||||||||||||||||
Book value (end of period) |
9.51 | 8.95 | 9.10 | 8.52 | 7.18 | 6.77 | 6.76 | |||||||||||||||||||||
Tangible book value (end of period) |
8.77 | 8.20 | 8.35 | 7.74 | 6.37 | 5.95 | 5.92 | |||||||||||||||||||||
Ratios: |
||||||||||||||||||||||||||||
Net interest margin (2) |
3.83 | % | 3.66 | % | 3.68 | % | 3.33 | % | 2.89 | % | 3.24 | % | 3.40 | % | ||||||||||||||
Efficiency ratio (3) |
61.9 | 62.8 | 62.8 | 69.2 | 76.4 | 71.3 | 73.9 | |||||||||||||||||||||
Return on average assets (4) |
1.04 | 1.26 | 1.27 | 1.86 | 0.54 | 0.47 | 0.68 | |||||||||||||||||||||
Return on average stockholders equity (4) |
8.6 | 11.1 | 11.1 | 17.6 | 6.6 | 5.9 | 8.2 | |||||||||||||||||||||
Non-performing assets to total loans, real estate owned and repossessed assets |
0.25 | 0.24 | 0.26 | 0.36 | 0.48 | 0.53 | 0.48 | |||||||||||||||||||||
Non-performing assets to total assets |
0.22 | 0.18 | 0.20 | 0.27 | 0.29 | 0.29 | 0.26 | |||||||||||||||||||||
Net loan charge-offs to average loans (2) |
0.05 | 0.05 | 0.07 | 0.15 | 0.22 | 0.42 | 0.62 | |||||||||||||||||||||
Allowance for loan losses to total loans |
0.81 | 0.87 | 0.87 | 0.91 | 0.99 | 1.04 | 1.16 | |||||||||||||||||||||
Stockholders equity to total assets |
12.7 | 11.6 | 11.8 | 11.2 | 8.6 | 7.7 | 7.9 | |||||||||||||||||||||
Tangible stockholders equity to total tangible assets |
11.9 | 10.8 | 10.9 | 10.3 | 7.7 | 6.8 | 7.0 | |||||||||||||||||||||
Tier 1 capital (5) |
14.7 | 14.9 | 14.8 | 14.6 | 9.9 | 9.1 | 8.8 | |||||||||||||||||||||
Total risk-based capital (5) |
16.2 | 17.0 | 16.4 | 16.7 | 13.1 | 12.5 | 12.3 | |||||||||||||||||||||
Other Information: |
||||||||||||||||||||||||||||
Number of branches |
156 | 152 | 153 | 155 | 154 | 155 | 148 | |||||||||||||||||||||
Full-time equivalent employees (6) |
2,617 | 2,679 | 2,655 | 2,689 | 2,791 | 2,948 | 2,907 |
(1) | Reflects the waiver of dividends on the substantial majority of the common shares owned by Peoples Mutual Holdings. |
(2) | Nine month ratios are presented on an annualized basis. |
(3) | See Non-GAAP Financial Measures and Reconciliation to GAAP for a reconciliation of the efficiency ratio to banking regulatory definitions. |
(4) | Calculated based on net income for all periods. Nine month ratios are presented on an annualized basis. |
(5) | Calculated in accordance with Office of Thrift Supervision regulations as of September 30, 2006 and Federal Deposit Insurance Corporation regulations for all prior period ends. |
(6) | Excluded from 2003, 2002 and 2001 are the employees of Peoples Banks credit card division that was sold in March 2004. |
6
Recent DevelopmentsUnaudited 2006 Results
For the year ended December 31, 2006, Peoples Bank reported net income of $124.0 million, or $0.87 per diluted share, compared to $137.1 million, or $0.97 per diluted share, for the year-ago period. Income from continuing operations totaled $121.7 million, or $0.85 per diluted share, compared to $125.9 million, or $0.89 per diluted share, for the year-ago period. Net interest income increased $12.7 million, or 3%, from the year ended December 31, 2005, and the net interest margin improved 19 basis points to 3.87%. Total assets at December 31, 2006 were $10.7 billion, a decrease of $246 million, or 2%, from December 31, 2005. Total securities declined by $1.3 billion and total loans increased by $799 million compared with year-end 2005. See Recent Developments for more detail on Peoples Banks results for the three-month and one-year periods ended December 31, 2006 and its financial condition as of that date.
Our Conversion And Offering
We are converting from the mutual holding company structure, where Peoples Bank is 42.3% owned by public stockholders, to a stock holding company, which will be 100% owned by public stockholders. This is commonly referred to as a second-step conversion. As part of the conversion, Peoples Mutual Holdings will convert into a federal stock savings bank, which will merge with and into Peoples Bank, with Peoples Bank as the surviving entity. As a result, Peoples Mutual Holdings will cease to exist as a separate entity. Voting rights in Peoples United Financial will be vested solely in the public stockholders immediately following the conversion.
In connection with the conversion, the shares of common stock of Peoples Bank owned by Peoples Mutual Holdings will be canceled and new shares of common stock representing the 57.7% ownership interest of Peoples Mutual Holdings will be offered for sale by Peoples United Financial in the offering. In addition, the net assets of Peoples Mutual Holdings will be added to Peoples Bank as a capital contribution. At September 30, 2006, Peoples Mutual Holdings net assets, excluding its ownership of shares of Peoples Bank common stock, totaled $8.5 million. At the conclusion of the conversion and offering, existing public stockholders of Peoples Bank will receive shares of common stock of Peoples United Financial for each share of Peoples Bank common stock they own at that date, based on an exchange ratio as described in The Conversion and OfferingThe Share Exchange of Peoples Bank Common Stock for Peoples United Financial Common Stock. As a result, Peoples Banks existing public stockholders will own approximately the same percentage of Peoples United Financial common stock as they owned of Peoples Bank common stock immediately prior to the conversion.
In addition, in connection with and immediately following the conversion, we intend to contribute 2,000,000 shares of Peoples United Financial common stock and $20.0 million in cash from the offering proceeds to The Peoples Community Foundation, a charitable foundation to be established in connection with the conversion and offering. The shares of common stock contributed to the charitable foundation will be in addition to the shares being offered for sale. For a further discussion of the charitable foundation, see The Peoples Community Foundation.
7
This chart shows our structure before the conversion and offering:
This chart shows our new structure after the conversion and offering:
Terms Of The Offering
We are offering between 137,062,500 and 185,437,500 shares of our common stock to our depositors and to the public in subscription and syndicated offerings (which we refer to in this document collectively as the offering). We may increase the maximum number of shares that we sell in the offering by up to 15% to 213,253,125 shares as a result of market demand, regulatory considerations or changes in financial markets. The offering price is $20.00 per share. All new investors will pay the same purchase price per share. No commission will be charged to purchasers in the offering.
The shares of common stock are being offered on a priority basis to depositors of Peoples Bank in a subscription offering. Ryan Beck & Co., Inc., our financial advisor and selling agent in connection with the subscription offering,
8
will use its best efforts to assist us in selling our common stock in the subscription offering. Ryan Beck & Co., Inc. is not obligated to purchase any shares of common stock in the subscription offering.
We are also offering for sale to the general public in a syndicated offering through a syndicate of selected dealers shares of our common stock not subscribed for by our depositors in the subscription offering. We may begin the syndicated offering at any time following the commencement of the subscription offering. Morgan Stanley & Co. Incorporated is acting as sole book-running manager and Keefe, Bruyette & Woods, Inc., Lehman Brothers and Ryan Beck & Co., Inc. are acting as joint lead managers for the syndicated offering, which is also being conducted on a best efforts basis. None of Morgan Stanley & Co. Incorporated, Ryan Beck & Co., Inc. or any other member of the syndicate is required to purchase any shares in the syndicated offering. Alternatively, we may sell remaining shares in an underwritten public offering, which would be conducted on a firm commitment basis.
Reasons For The Conversion And Offering
The conversion and offering are intended to provide us with substantially greater access to capital than is currently available to us under the mutual holding company structure and are expected to significantly increase the liquidity of our common stock. In addition, the stock holding company structure will provide us with more flexibility in structuring mergers and acquisitions. The net proceeds raised in the offering will allow us and Peoples Bank to:
|
finance de novo expansion and support organic growth both inside and outside of the state of Connecticut; |
|
acquire other financial institutions, businesses related to banking or branches, although there is no specific agreement with any institution or business at this time; |
|
increase lending to support continued growth in our commercial banking loan portfolios; |
|
form a charitable foundation to benefit the communities we serve; and |
|
use the additional capital for other general corporate purposes. |
See How We Intend to Use the Proceeds from the Offering for a detailed description of how we plan to use the net proceeds we raise in the offering.
After considering the relative merits of the conversion and offering, as well as applicable fiduciary duties, the Board of Trustees of Peoples Mutual Holdings and the Board of Directors of Peoples Bank approved the plan of conversion as being in the best interests of each such institution, the communities they serve and the depositors, stockholders and employees of Peoples Bank. The completion of the conversion and offering is subject to the approval of stockholders and depositors of Peoples Bank who are being asked to vote on the plan of conversion.
How We Determined The Offering Range And The Exchange Ratio
The offering range and the exchange ratio are based on an independent appraisal of the market value of the common stock to be issued both in the offering and in exchange for shares of Peoples Bank common stock. RP Financial, LC., an appraisal firm experienced in appraisals of financial institutions, has advised us that, as of January 18, 2007, the estimated pro forma market value of our common stock, including offering shares, exchange shares and shares issued to the charitable foundation, ranges from a minimum of $4.791 billion to a maximum of $6.468 billion, with a midpoint of $5.630 billion. Based on this valuation range, the percentage of Peoples Bank common stock owned by Peoples Mutual Holdings, the shares issued to the charitable foundation and the $20.00 price per share, the Board of Directors of Peoples Bank and the Board of Trustees of Peoples Mutual Holdings determined to offer shares of Peoples United Financial common stock ranging from a minimum of 137,062,500 shares to a maximum of 185,437,500 shares, with a midpoint of 161,250,000 shares. The exchange ratio ranges from a minimum of 1.6712 to 2.2611 shares of Peoples United Financial common stock per share of Peoples Bank common stock. Under certain circumstances, the pro forma market value can be adjusted upward to reflect changes in market conditions, and, at the adjusted maximum, the estimated pro forma market value of Peoples United Financials common stock would be $7.432 billion, the number of shares offered would equal 213,253,125 shares and the exchange ratio would be 2.6003.
9
The independent appraisal was based in part on our financial condition and results of operations, the pro forma impact of the additional capital raised by the sale of common stock in the offering, and an analysis of a peer group of companies that RP Financial considered comparable to us. RP Financial also considered that we intend to contribute cash and issue shares of Peoples United Financial common stock to The Peoples Community Foundation, a charitable foundation that will be established in connection with the conversion. The intended contribution of cash and shares of common stock to the charitable foundation has the effect of reducing the number of shares that may be offered in the offering. See Comparison of Valuation and Pro Forma Information With and Without the Charitable Foundation . RP Financials independent valuation will be updated before we complete our offering.
The following table presents a summary of selected pricing ratios for the companies comprising the peer group used by RP Financial in its independent appraisal report dated January 18, 2007 and the pro forma pricing ratios for us, as calculated in the table on page [ ] in the section of this prospectus entitled Pro Forma Data . Compared to the median pricing of the peer group, our pro forma pricing ratios at the midpoint of the offering range indicated a premium of 88% on a price-to-earnings basis and discounts of 34% on a price-to-book value basis and 45% on a price-to-tangible book value basis. The estimated appraised value and the resulting premiums and discounts took into consideration the potential financial impact of the conversion and offering and RP Financials analysis of the results of operations and financial condition of Peoples United Financial compared to the peer group.
Price-to-
earnings
|
Price-to-
book value
|
Price-to-
tangible book
|
||||||
Peoples United Financial (pro forma) ( 2) : |
||||||||
Minimum of offering range |
27.27x | 128.12 | % | 131.84 | % | |||
Midpoint of offering range |
30.00x | 135.50 | % | 138.99 | % | |||
Maximum of offering range |
32.61x | 141.44 | % | 144.82 | % | |||
Maximum of offering range, as adjusted |
35.71x | 147.17 | % | 150.26 | % | |||
Valuation of peer group companies as of January 18, 2007 ( 3) : |
||||||||
Average |
17.53x | 209.12 | % | 269.15 | % | |||
Median |
15.96x | 205.31 | % | 250.45 | % |
(1) | Multiples calculated by RP Financial in the independent appraisal are based on an estimate of core, or recurring, earnings for the twelve months ended December 31, 2006, total pro forma outstanding shares of common stock, including all shares owned by our employee stock ownership plan, whether or not allocated to participants, and including shares issued to the charitable foundation, and equal 24.86x, 27.75x, 30.38x and 33.10x, respectively, at the minimum, midpoint, maximum and adjusted maximum of the offering range. Because this is a different method than used by us in calculating the numbers included in this table and in the pro forma information included under Pro Forma Data , the pro forma price-to-earnings multiples in the table do not correspond to the multiples in the independent appraisal. See note 2 to the pro forma information included under Pro Forma Data for more information on our treatment of shares owned by our employee stock ownership plan for purposes of this calculation. |
(2) | Based on Peoples Banks financial data as of and for the nine months ended September 30, 2006. Price-to-earnings multiples for Peoples United Financial are shown on an annualized basis. |
(3) | Reflects earnings for the most recent 12-month period for which data were publicly available. |
The independent appraisal is not necessarily indicative of post-offering trading value. You should not assume or expect that the valuation of Peoples United Financial as indicated above means that the common stock will trade at or above the $20.00 purchase price after the offering is completed.
On [ ], 2007, we received authorization from the Office of Thrift Supervision to conduct the offering. The independent appraisal must be updated before we can complete the offering. The updated appraisal will be subject to the further approval of the Office of Thrift Supervision.
10
After-Market Performance Information Provided By The Independent Appraiser
The following table, prepared by our independent appraiser, presents for all second-step conversions that began trading from January 1, 2004 to January 18, 2007, the percentage change in the trading price from the initial trading date of the offering to the dates shown in the table. The table also presents the average and median trading prices and percentage change in trading prices for the same dates. This information relates to stock performance experienced by other companies that may have no similarities to us with regard to market capitalization, offering size, earnings quality and growth potential, among other factors. Most of the institutions listed in the table are significantly smaller than we are in terms of asset size. In addition, gross proceeds raised in most of the offerings listed in the table are significantly less than the amount of gross proceeds we expect to raise in the offering. Also, two of the three largest offerings listed in the table involved a simultaneous acquisition of another financial institution.
The table is not intended to indicate how our common stock may perform.
Data represented in the table reflects a small number of transactions and
is not indicative of general stock market performance trends or of price
performance trends of companies that undergo second-step conversions. Furthermore, this table presents only short-term price performance and may not be
indicative of the longer-term stock price performance of these companies.
There can be no assurance that our stock price will appreciate or that our stock price will not trade below $20.00 per share.
The movement of any particular
companys stock price is subject to various factors, including, but not limited to, the amount of proceeds a company raises, the companys historical and anticipated operating results, the nature and quality of the companys assets,
the companys market area and the quality of management and managements ability to deploy proceeds (such as through loans and investments, the acquisition of other financial institutions or other businesses, the payment of dividends and
common stock repurchases). In addition, stock prices may be affected by general market and economic conditions, the interest rate environment, the market for financial institutions and merger or takeover transactions and the presence of professional
and other investors who purchase stock on speculation, as well as other unforeseeable events not in the control of management. Before you make an investment decision, please carefully read this prospectus, including
Risk
After Market Trading Activity
Second Step Offerings
Completed Closing Dates between January 1, 2004 and January 18, 2007
Transaction |
Closing
|
Gross
|
Price Performance from Initial Trading
Date |
||||||||||||||
1 Day | 1 Week | 1 Month |
Through
January 18, 2007 |
||||||||||||||
(In millions) | |||||||||||||||||
Osage Bancshares, Inc. |
1/18/07 | $ | 25.1 | -0.5 | % | N/A | N/A | -0.5 | % | ||||||||
New Westfield Financial, Inc. |
1/4/07 | $ | 184.0 | 7.0 | % | 7.5 | % | N/A | 8.8 | % | |||||||
Citizens Community Bancorp, Inc. |
11/1/06 | $ | 52.9 | -2.5 | % | -1.0 | % | -3.3 | % | -2.9 | % | ||||||
Liberty Bancorp, Inc. |
7/24/06 | $ | 28.1 | 2.5 | % | 1.0 | % | 1.5 | % | 5.5 | % | ||||||
First Clover Leaf Financial Corp. (1) |
7/11/06 | $ | 41.7 | 3.9 | % | 6.0 | % | 11.2 | % | 15.0 | % | ||||||
Monadnock Bancorp, Inc. |
6/29/06 | $ | 5.7 | 0.0 | % | -5.0 | % | -13.8 | % | -16.3 | % | ||||||
NEBS Bancshares, Inc. |
12/29/05 | $ | 30.8 | 6.6 | % | 7.0 | % | 7.0 | % | 31.0 | % | ||||||
American Bancorp, Inc. |
10/6/05 | $ | 99.2 | 1.6 | % | -2.5 | % | 1.6 | % | 17.7 | % | ||||||
Hudson City Bancorp, Inc. |
6/7/05 | $ | 3,929.8 | 9.6 | % | 10.8 | % | 15.9 | % | 39.7 | % | ||||||
First Federal of Northern Michigan Bancorp, Inc. |
4/4/05 | $ | 17.0 | -5.1 | % | -8.0 | % | -16.0 | % | -8.5 | % | ||||||
Rome Bancorp, Inc. |
3/31/05 | $ | 59.0 | 0.5 | % | -2.5 | % | -5.6 | % | 24.6 | % | ||||||
Roebling Financial Corp. |
10/1/04 | $ | 9.1 | -1.0 | % | -0.5 | % | -8.0 | % | 22.5 | % | ||||||
DSA Financial Corporation |
7/30/04 | $ | 8.5 | -2.0 | % | -5.0 | % | -7.0 | % | 30.0 | % | ||||||
Partners Trust Financial Group, Inc. (1) |
7/15/04 | $ | 148.8 | -0.1 | % | -0.2 | % | -1.9 | % | 13.5 | % | ||||||
Synergy Financial Group, Inc. |
1/21/04 | $ | 70.4 | 8.1 | % | 8.0 | % | 7.9 | % | 61.8 | % | ||||||
Provident Bancorp, Inc. (1) |
1/15/04 | $ | 195.7 | 15.0 | % | 11.5 | % | 15.1 | % | 45.4 | % | ||||||
Average |
2.7 | % | 1.8 | % | 0.3 | % | 18.0 | % | |||||||||
Median |
1.1 | % | -0.2 | % | 0.2 | % | 16.4 | % |
(1) | Included a simultaneous acquisition. |
11
Public Stockholders Will Receive Shares Through The Exchange Of Peoples Bank Common Stock
Shares of Peoples Bank common stock held by stockholders as of the date of completion of the conversion and offering will be canceled and exchanged for new shares of Peoples United Financial common stock. The number of shares received will be based on an exchange ratio which will be determined as of the date of completion of the conversion and offering and will be based on the percentage of Peoples Bank common stock held by the public prior to the conversion, the final independent appraisal of Peoples United Financial common stock prepared by RP Financial and the number of shares of common stock sold in the offering. The exchange ratio will ensure that existing public stockholders of Peoples Bank common stock will own approximately the same percentage of Peoples United Financial common stock after the conversion and offering as they owned of Peoples Bank common stock immediately prior to completion of the conversion and offering, exclusive of the effect of their purchase of additional shares in the offering and the receipt of cash in lieu of fractional shares. The exchange ratio will not depend on the market price of Peoples Bank common stock.
The following table shows how many shares a hypothetical owner of Peoples Bank common stock would receive in the share exchange, based on the number of shares sold in the offering.
Shares to be sold in this offering |
Shares to be exchanged for shares
of Peoples Bank
|
Shares to be issued to the foundation |
Total
shares of common stock to be outstanding after the conversion |
Exchange
ratio |
Equivalent
per share current market price (1) |
Shares that
would be exchanged per 100 shares of Peoples Bank common stock |
||||||||||||||||||
Amount | Percent | Amount | Percent | Amount | Percent | |||||||||||||||||||
Minimum |
137,062,500 | 57.22 | % | 100,491,584 | 41.95 | % | 2,000,000 | 0.83 | % | 239,554,084 | 1.6712 | $ | 33.42 | 167 | ||||||||||
Midpoint |
161,250,000 | 57.29 | % | 118,225,393 | 42.00 | % | 2,000,000 | 0.71 | % | 281,475,393 | 1.9662 | $ | 39.32 | 196 | ||||||||||
Maximum |
185,437,500 | 57.34 | % | 135,959,202 | 42.04 | % | 2,000,000 | 0.62 | % | 323,396,702 | 2.2611 | $ | 45.22 | 226 | ||||||||||
Maximum, as adjusted |
213,253,125 | 57.39 | % | 156,353,083 | 42.07 | % | 2,000,000 | 0.54 | % | 371,606,208 | 2.6003 | $ | 52.01 | 260 |
(1) | Represents the value of shares of Peoples United Financial common stock and cash in lieu of fractional shares received in the share exchange by a holder of one share of Peoples Bank common stock at the exchange ratio, assuming a market price of $20.00 per share. |
At the midpoint shown in the preceding table, a stockholder owning 100 shares of Peoples Bank common stock would receive 196 shares of Peoples United Financial common stock plus $12.40 in cash.
No fractional shares of our common stock will be issued in the exchange. For each fractional share that would otherwise be issued, we will remit an amount equal to the product obtained by multiplying the fractional share interest to which the holder would otherwise be entitled by the $20.00 per share purchase price.
We also will convert options previously awarded under the Peoples Bank 1998 Long-Term Incentive Plan into options to purchase Peoples United Financial common stock. At September 30, 2006, there were outstanding options to purchase 1,435,055 shares of Peoples Bank common stock. The number of outstanding options and related per share exercise prices will be adjusted based on the exchange ratio. The aggregate exercise price, term and vesting period of the outstanding options will remain unchanged. If any options are exercised before we complete the offering, the number of shares of Peoples Bank common stock outstanding will increase and the exchange ratio could be adjusted. If all currently outstanding options are exercised, stockholders will experience dilution of approximately 1.00% in their ownership interest in Peoples Bank common stock.
Dividend Policy
The amount of dividends that Peoples United Financial initially intends to pay to stockholders following the conversion and offering is intended to approximate the per share dividend amount, adjusted to reflect the share exchange, that Peoples Banks stockholders currently receive on their shares of Peoples Bank common stock. For a detailed description of our dividend policy, see Our Policy Regarding Dividends .
12
Ownership By Officers And Directors
Collectively, our directors and executive officers and their associates expect to purchase a total of 387,500 shares, or approximately 0.2% of the shares of common stock available for sale in the offering plus the shares to be issued to the charitable foundation (assuming the midpoint of the offering range). These shares do not include shares that may be awarded or issued in the future under any of our stock benefit plans. The shares purchased by our directors and executive officers and their associates will be included in determining whether the minimum number of shares necessary to close the offering has been sold. See Proposed Purchases of Common Stock by Management .
After the offering and the exchange of existing shares of Peoples Bank common stock, including stock options exercisable within 60 days of September 30, 2006, our directors and executive officers, together with their associates, are expected to beneficially own approximately 3,928,237 shares of our common stock, or 1.40% of the total outstanding shares of our common stock, including shares to be issued to the charitable foundation, based upon the midpoint of the offering range.
Future Benefit Plans
We intend to implement a tax-qualified employee stock ownership plan in connection with the offering which we expect will purchase an amount of common stock equal to up to 6% of the sum of the shares of common stock that we sell in the offering and those we issue to the charitable foundation, or 11,246,250 shares of common stock, assuming we sell 185,437,500 shares, the maximum of the offering range. We expect that this employee stock ownership plan will, with prior Office of Thrift Supervision approval, purchase these shares in the open market following the offering using funds borrowed from us. However, as a tax-qualified employee benefit plan, this plan may instead purchase shares in the subscription offering consistent with its subscription priority. The plan is a tax-qualified retirement plan for the benefit of all employees who meet certain eligibility requirements. Assuming the employee stock ownership plan purchases 11,246,250 shares, we will recognize additional compensation expense of $224.9 million (or approximately $148.4 million after tax) over a 30-year period, assuming the shares of common stock have a fair market value of $20.00 per share for the full 30-year period. If, in the future, the shares of common stock have a fair market value greater or less than $20.00, the compensation expense will increase or decrease accordingly.
Because investment decisions for our employee stock ownership plan are subject to the discretion of an independent fiduciary, we can offer no assurance as to the amount, timing or other terms of stock purchases by this plan.
We also intend to implement a stock option plan, providing for grants of stock options, and a recognition and retention plan, providing for awards of restricted stock to our key employees, officers and directors. If these stock-based incentive plans are implemented and approved by stockholders within one year of the completion of our conversion, the number of options granted or shares of restricted stock awarded under these stock-based incentive plans may not exceed 10% and 4%, respectively, of the shares of common stock sold in the offering and issued to the charitable foundation. We expect that any shares required for restricted stock awards would be purchased in the open market or privately negotiated transactions following stockholder approval of the plan. Funds necessary for stock purchases would be provided by Peoples United Financial. We anticipate that awards under the stock option plan and recognition and retention plan would vest over a five-year period measured from the award date and that compensation expense would be recognized over the vesting period. Both the stock option plan and recognition and retention plan cannot be adopted sooner than six months after the completion of our conversion and will be contingent on approval of Peoples United Financial stockholders.
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The following table summarizes the number of shares and aggregate dollar value of awards available for grant that are expected under the stock option and recognition and retention plans, if adopted as expected after the offering. A portion of the available stock grants shown in the table below may be made to non-executive employees.
Number of new shares or
options to be granted |
Maximum
|
Value of new
available grants (1) |
|||||||||||||||||||
At minimum
of offering
|
At maximum
of offering
|
At
maximum, as adjusted of offering range |
As a percentage
of common stock to be sold in the offering and issued to the foundation |
At minimum
of offering
|
At
of offering
|
At
maximum, as adjusted of offering range |
|||||||||||||||
Recognition and retention plan |
5,562,500 | 7,497,500 | 8,610,125 | 4.00 | % | 2.27 | % | $ | 111,250,000 | $ | 149,950,000 | $ | 172,202,500 | ||||||||
Stock option plan |
13,906,250 | 18,743,750 | 21,525,313 | 10.00 | % | 5.48 | % | 46,029,688 | 62,041,813 | 71,248,786 | |||||||||||
Total |
19,468,750 | 26,241,250 | 30,135,438 | 14.00 | % | 7.51 | % | $ | 157,279,688 | $ | 211,991,813 | $ | 243,451,286 | ||||||||
(1) | The actual value of restricted stock grants will be determined based on their fair value as of the date that grants are made. For purposes of this table, the fair value of the restricted stock grants is assumed to be the same as the offering price of $20.00 per share. The fair value of stock options has been estimated at $3.31 per option using the Black-Scholes option pricing model with the following assumptions: a grant-date share price and option exercise price of $20.00; dividend yield of 3.0%; expected option life of 10 years; risk-free interest rate of 4.64%; and volatility rate of 11.3% based on an index of publicly-traded thrifts. The actual value of option grants will be determined by the grant-date fair value of the option, which will depend on a number of factors, including the valuation assumptions used in the option pricing model. |
(2) | Assumes shares are issued from authorized but unissued shares and dilution is calculated at the maximum and maximum, as adjusted of the offering range. |
In addition to shares of common stock that could be issued under the future stock option and recognition and retention plans, additional shares can be issued under stock benefit plans currently maintained by Peoples Bank. At September 30, 2006, a total of 9,157,471 shares could be issued under existing stock benefit plans after applying the exchange ratio at the minimum of the offering range, and 12,389,874 shares could be issued under existing stock benefit plans after applying the exchange ratio at the maximum of the offering range. These totals represent shares that would be issued upon exercise of outstanding stock options and shares that would be issued because of future grants under existing benefit plans. The issuance of all of these shares would cause additional dilution of 3.69% at the maximum of the offering range.
Unless a waiver is obtained from the Office of Thrift Supervision, the following additional Office of Thrift Supervision restrictions would apply to the stock option plan and the recognition and retention plan:
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non-employee directors in the aggregate may not receive more than 30% of the options and restricted stock awards authorized under the plans; |
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any one non-employee director may not receive more than 5% of the options and restricted stock awards authorized under the plans; |
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any officer or employee may not receive more than 25% of the options and restricted stock awards authorized under the plans; |
|
the options and restricted stock awards may not vest more rapidly than 20% per year, beginning on the first anniversary of stockholder approval of the plans; and |
|
accelerated vesting is not permitted except for death, disability or upon a change in control of Peoples Bank or Peoples United Financial. |
In the event the Office of Thrift Supervision changes its regulations or policies regarding stock-based incentive plans, including any regulations or policies restricting the size of awards and vesting of benefits as described above, the restrictions described above may not be applicable. Also, these restrictions will not apply to stock-based compensation
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plans currently maintained by Peoples Bank (the Peoples Bank 1998 Long-Term Incentive Plan and the Peoples Bank Directors Equity Compensation Plan), which will continue in effect after the conversion.
The following table presents information regarding the eligible participants in our contemplated employee stock ownership plan and our contemplated stock-based incentive plans, the percentage of outstanding shares of common stock after the offering assuming shares are sold at the maximum of the offering range and the dollar value of the common stock available for issuance or allocation under these plans.
Individuals Eligible to
|
Number of
Shares at the Maximum of Offering Range |
Number of
Shares at the Maximum, as adjusted of Offering Range |
Percentage of
Total Shares Outstanding (including shares issued to the charitable foundation) |
Percentage of
Offering
|
Estimated
Value of Shares at the Maximum of the Offering Range (1) |
Estimated
Value of Shares at the Maximum, as adjusted of Offering Range (1) |
||||||||||||
Employee stock ownership plan |
Officers and Employees | 11,246,250 | 12,915,188 | 3.48 | % | 6.0 | % | $ | 224,925,000 | $ | 258,303,760 | |||||||
Stock option plan |
Directors, Officers and Employees | 18,743,750 | 21,525,313 | 5.80 | % | 10.0 | % | $ | 62,041,813 | $ | 71,248,786 | |||||||
Recognition and retention plan |
Directors, Officers and Employees | 7,497,500 | 8,610,125 | 2.32 | % | 4.0 | % | $ | 149,950,000 | $ | 172,202,500 |
(1) | The actual value of restricted stock grants will be determined based on their fair value as of the date that grants are made. For purposes of this table, the fair value of the restricted stock grants is assumed to be the same as the offering price of $20.00 per share. The fair value of stock options has been estimated at $3.31 per option using the Black-Scholes option pricing model with the following assumptions: a grant-date share price and option exercise price of $20.00; dividend yield of 3.0%; expected option life of 10 years; risk free interest rate of 4.64%; and a volatility rate of 11.3% based on an index of publicly-traded thrifts. The actual value of option grants will be determined by the grant-date fair value of the option, which will depend on a number of factors, including the valuation assumptions used in the option pricing model. |
For a detailed description of these potential plans and their applicable limitations see Management of Peoples Bank Future Benefit Plans . For a detailed description of the benefit plans we currently have in place, see Management of Peoples Bank Director Compensation and Management of Peoples Bank Executive Officer Compensation .
Limits On Purchases Of Common Stock
Limitations on the purchase of common stock in the offering have been set by the plan of conversion adopted by the Peoples Bank Board of Directors and the Peoples Mutual Holdings Board of Trustees. These limitations include the following:
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You may not purchase fewer than 25 shares ($500). |
|
You may not purchase more than $2 million of common stock (100,000 shares). If you are purchasing in the subscription offering, this limit applies to you, together with any persons with whom you are exercising subscription rights through a single qualifying deposit account held jointly. |
|
You, together with any of the following persons (referred to as associates) or persons who may be acting in concert with you, may not purchase more than $2 million of common stock (100,000 shares) in all categories of the offering combined, including the syndicated offering: |
|
your spouse or relatives of you or your spouse living in your house; or |
|
companies, trusts or other entities in which you have an ownership or financial interest or hold a senior position. |
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If you are currently a Peoples Bank stockholder, in addition to the above purchase limitations, there is an additional ownership limitation for you. Shares of common stock that you purchase in the offering individually, and together with associates or persons acting in concert, plus any shares of Peoples United Financial common stock you and they receive in the share exchange, may not exceed 5% of the total shares of Peoples United Financial common stock issued and outstanding at the completion of the conversion and offering.
Subject to the approval of the Office of Thrift Supervision, we may increase or decrease the purchase and ownership limitations at any time. If a purchase limitation is increased, subscribers in the subscription offering who order the maximum amount of shares and so indicate on their stock order forms will be given the opportunity to increase their subscriptions up to the new limit. For a detailed description of purchase limitations, see Limitations on Common Stock Purchases .
Conditions To Completing The Conversion And Offering
We are conducting the conversion and offering pursuant to the terms of our plan of conversion. We cannot complete the conversion and offering unless:
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the plan of conversion is approved by at least a majority of votes eligible to be cast by depositors of Peoples Bank; |
|
the plan of conversion is approved by a majority of the outstanding shares of Peoples Bank common stock entitled to vote at a meeting of stockholders of Peoples Bank (because Peoples Mutual Holdings owns more than 50% of Peoples Banks outstanding shares, we expect that Peoples Mutual Holdings will control the outcome of this vote); |
|
the plan of conversion is approved by a majority of the outstanding shares of Peoples Bank common stock held by the stockholders of Peoples Bank, excluding Peoples Mutual Holdings; |
|
we sell at least the minimum number of shares of common stock offered; and |
|
we receive approval from the Office of Thrift Supervision to complete the conversion and offering. |
In order to establish and fund the charitable foundation, we must receive regulatory, public stockholder and depositor approvals, similar to those described above.
Peoples Mutual Holdings intends to vote its ownership interest in favor of the plan of conversion and the establishment and funding of the charitable foundation. At September 30, 2006, it owned 57.7% of the outstanding common stock of Peoples Bank. As of September 30, 2006, the directors and executive officers of Peoples Bank and their associates beneficially owned 1,800,802 shares of Peoples Bank common stock (including options exercisable within 60 days of September 30, 2006), or 1.26% of the outstanding shares of common stock. They intend to vote their shares in favor of the plan of conversion and establishment and funding of the charitable foundation.
Market For Our Common Stock
Peoples Banks common stock is currently listed on the Nasdaq Global Select Market under the symbol PBCT. Upon completion of the offering, the new shares of Peoples United Financial will replace existing shares and will be traded on the Nasdaq Global Select Market. For a period of 20 trading days following completion of the offering, our symbol will be PBCTD. Thereafter, our trading symbol will revert to PBCT. See Market for the Common Stock .
Tax Aspects of the Conversion
As a general matter, the conversion and offering will not be taxable transactions for federal or state income tax purposes to Peoples Mutual Holdings, Peoples Bank, Peoples United Financial, persons eligible to subscribe in the subscription offering or existing stockholders of Peoples Bank. Existing stockholders of Peoples Bank who receive cash in lieu of a fractional share of Peoples United Financial common stock in the share exchange will recognize a gain or loss equal to the difference between the cash received and the tax basis of such fractional share. Thacher Proffitt & Wood LLP has issued an opinion to us to the effect that consummation of the transactions contemplated by
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the conversion and offering qualifies as a tax-free transaction for federal income tax purposes and will not result in any adverse federal tax consequences to Peoples Mutual Holdings, Peoples Bank, Peoples United Financial, persons eligible to subscribe in the subscription offering or existing stockholders of Peoples Bank before or after the conversion. PricewaterhouseCoopers LLP has issued an opinion to us to the effect that consummation of the transactions contemplated by the conversion and offering should qualify as a tax-free transaction for Connecticut state income tax purposes and should not result in any adverse Connecticut state tax consequences to Peoples Mutual Holdings, Peoples Bank, Peoples United Financial, persons eligible to subscribe in the subscription offering or existing stockholders of Peoples Bank before or after the conversion. See The Conversion and Offering Tax Aspects.
The Subscription Offering
Persons Who May Order Stock in the Subscription Offering.
We are offering shares of Peoples United Financial common stock in a subscription offering in the following descending order of priority:
(1) | Depositors with accounts at Peoples Bank with aggregate balances of at least $50 on June 30, 2005; |
(2) | Our tax-qualified employee stock benefit plans; |
(3) | Depositors with accounts at Peoples Bank with aggregate balances of at least $50 on December 31, 2006; and |
(4) | Peoples Bank depositors on February 5, 2007. |
If you qualify under one of these categories, you will have priority subscription rights and the following provisions will apply to you.
How You May Purchase Common Stock in the Subscription Offering.
To purchase shares of common stock in the subscription offering, you must deliver a properly signed and completed original stock order form, accompanied by full payment or a deposit account withdrawal authorization as described below, so that it is received by us (not postmarked) by 11:00 a.m., Eastern Time, on March 22, 2007. You may submit your stock order form and payment by mail using the return envelope provided, by overnight delivery to the address indicated on the front of the stock order form or by hand, to a secure drop box located in the lobby of Peoples Banks headquarters, 850 Main Street, Bridgeport, Connecticut. Mail or delivery of stock order forms to banking or other offices of Peoples Bank will not be accepted. We are not required to accept orders submitted on photocopied or facsimiled stock order forms.
You may pay for your shares by:
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Personal check, bank check or money order . The check or money order must be made payable directly to Peoples United Financial, Inc. Cash, wire transfers, third party checks, Peoples Bank equity line of credit checks and funds drawn from Peoples Bank personal lines of credit may not be remitted as payment for your purchase; or |
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Authorized deposit account withdrawal . The stock order form includes instructions on how you can authorize direct withdrawals from certain types of Peoples Bank deposit accounts. The funds you designate must be in your account at the time your stock order form is received. A hold will be placed on these funds making them unavailable to you for any reason. Funds authorized for withdrawal will continue to earn interest within the account at the contract rate until the conversion is completed, at which time the designated withdrawal will be made. You may authorize withdrawal from a Peoples Bank certificate of deposit account without incurring an early withdrawal penalty if the withdrawal is authorized for the purchase of shares of common stock in the offering. |
You may not authorize withdrawals from Peoples Bank retirement accounts (IRAs, Keogh) or Peoples Bank accounts with check-writing privileges. If you wish to use funds from an account with check-writing privileges, please
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make payment by a check drawn on such account. You may not purchase shares of Peoples United Financial common stock in your Peoples Bank retirement account. If you wish to use any of the funds that are currently in a Peoples Bank retirement account, the funds must be transferred to a self-directed retirement account maintained by a brokerage firm or other type of independent trustee other than Peoples Securities, Inc., before your order is placed. If you are interested in using funds in a retirement account at Peoples Bank or elsewhere to purchase common stock, you should contact our Stock Information Center as soon as possible for assistance, preferably at least two weeks before the March 22, 2007 end of the offering period, because processing such transactions takes additional time. Your ability to use such funds for the purchasing of shares of common stock in the offering may depend on time constraints as well as limitations imposed by the institution where the funds are held.
Once we receive your properly completed stock order form, you may not change or rescind your order unless the number of shares of common stock to be issued is increased to more than 213,253,125 or decreased below 137,062,500, or the offering is not completed by May 6, 2007. We are not required to notify you of incomplete or improperly executed stock order forms. We have the right to waive or permit the correction of incomplete or improperly executed stock order forms, but do not represent that we will do so.
We may not lend funds, guarantee loans or otherwise extend credit to any person other than our tax-qualified employee stock ownership plan to purchase shares of common stock in the offering.
Funds received in the subscription offering will be held in a segregated escrow account at Peoples Bank established to hold funds received as payment for shares. We will pay interest on these funds at Peoples Banks passbook savings rate from the date payment is received until completion or termination of the conversion and offering. We may, at our discretion, determine during the offering that it is in the best interest of Peoples Bank to hold subscription funds in a segregated escrow account at another insured financial institution instead of Peoples Bank.
Deadline for Ordering Stock in the Subscription Offering.
The subscription offering will expire at 11:00 a.m., Eastern Time, on March 22, 2007. We may extend this expiration date without notice to you up to 45 days until May 6, 2007, but in no event may the offering extend beyond May 6, 2007, unless the Office of Thrift Supervision approves a later date. We may decide to extend the expiration date of the subscription offering for any reason, whether or not subscriptions have been received for shares at the minimum, midpoint or maximum of the offering range. If we extend the offering beyond May 6, 2007, we will promptly return your funds with interest unless you confirm your subscription.
Steps We May Take if We Do Not Sell the Minimum Number of Shares.
We will not complete the subscription and syndicated offerings until at least the minimum number of shares of common stock have been sold. If at least 137,062,500 shares have not been sold by May 6, 2007 and the Office of Thrift Supervision has not consented to an extension, all funds delivered to us to purchase shares of common stock in the subscription offering will be returned promptly to the subscribers with interest at Peoples Banks passbook savings rate and all deposit account withdrawal authorizations will be canceled. If an extension beyond May 6, 2007 is granted by the Office of Thrift Supervision, we will notify each person who subscribed for common stock in the subscription offering, indicating that each such person who subscribed for common stock may increase, decrease, or rescind their subscription within the resolicitation period.
We reserve the right in our sole discretion to terminate the offering at any time and for any reason, in which case we will cancel all deposit account withdrawal authorizations and will return by check all funds submitted in the subscription offering, plus interest at Peoples Banks passbook savings rate calculated from the date of receipt of the stock order.
Delivery of Shares.
Subscribers who purchase shares of Peoples United Financial common stock in the subscription offering will receive stock certificates representing those shares. Certificates will be mailed to the persons entitled to the certificates
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at the certificate registration address noted by them on the stock order form as soon as practicable following consummation of the offering and receipt of all regulatory approvals. Until certificates for the common stock are delivered to purchasers, purchasers might not be able to sell the shares of common stock which they ordered, even though the common stock will have commenced trading.
If you are currently a stockholder of Peoples Bank, see Public Stockholders Will Receive Shares Through The Exchange of Peoples Bank Common Stock .
You May Not Sell or Transfer Your Subscription Rights.
Office of Thrift Supervision regulations prohibit you from transferring your subscription rights. Your subscription rights may only be exercised by you for your own account. Common stock may also be registered to you or in the name of a trust for which you are the sole beneficiary or sole income beneficiary. For this purpose, an individual retirement account that is held as a custodial account is deemed to be a trust. When completing your stock order form, you should not add the name(s) of persons who do not have subscription rights or who qualify in a lower subscription priority than you do. If you do so, you will lose your subscription rights. If you order shares of common stock in the subscription offering, you will be required to certify on the stock order form that you are purchasing shares solely for your own account and that you have no agreement or understanding to sell or transfer your subscription rights or the shares of common stock to be issued upon their exercise. The regulations also prohibit any person from offering or making an announcement of an offer or intent to make an offer to purchase subscription rights or shares of common stock to be issued upon their exercise. We will pursue any and all legal and equitable remedies in the event we become aware of the transfer of subscription rights. We will not honor orders that we believe involve the transfer of subscription rights. In addition, if you attempt to sell or otherwise transfer your subscription rights, you may be subject to criminal prosecution and/or other sanctions.
Stock Information Center.
If you have any questions regarding the offering or the conversion, please call our Stock Information Center, toll-free, at (800) 867-5295, from 10:00 a.m. to 4:00 p.m., Eastern Time, Monday through Friday. The Stock Information Center is closed on weekends and bank holidays. Our banking and other offices will not have offering materials and cannot accept completed stock order forms or proxy cards.
To ensure that you receive a prospectus at least 48 hours before the offering deadline, we may not mail prospectuses any later than five days prior to the offering deadline or hand-deliver any prospectus later than two days prior to the offering deadline. Stock order forms may only be distributed with or preceded by a prospectus.
By signing the stock order form, you are acknowledging your receipt of a prospectus and your understanding that the shares are not a deposit account and are not insured or guaranteed by Peoples Mutual Holdings, Peoples United Financial, Peoples Bank, the Federal Deposit Insurance Corporation or any other federal or state governmental agency.
We will make reasonable attempts to provide a prospectus and offering materials to holders of subscription rights. The subscription offering and all subscription rights are expected to expire at 11:00 a.m., Eastern Time, on March 22, 2007, whether or not we have been able to locate each person entitled to subscription rights.
The Syndicated Offering
We are also offering any shares of our common stock not subscribed for by our depositors in the subscription offering for sale to the general public in a syndicated offering through a syndicate of selected dealers. We may begin the syndicated offering at any time following the commencement of the subscription offering. Morgan Stanley & Co. Incorporated is acting as sole book-running manager and Keefe, Bruyette & Woods, Inc., Lehman Brothers and Ryan Beck & Co., Inc. are acting as joint lead managers for the syndicated offering, which is being conducted on a best efforts basis. The syndicated offering will terminate no later than 45 days after the expiration of the subscription
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offering, unless extended by us with approval of the Office of Thrift Supervision. None of Morgan Stanley & Co. Incorporated, Ryan Beck & Co., Inc. or any other member of the syndicate is required to purchase any shares in the syndicated offering. Alternatively, we may sell any remaining shares in an underwritten public offering, which would be conducted on a firm commitment basis. For further information on the syndicated offering and any underwritten public offering, see The Conversion and OfferingSyndicated Offering/Underwritten Public Offering .
The Peoples Community Foundation
To continue our long-standing commitment to our local communities, we intend to establish a charitable foundation, The Peoples Community Foundation, as a non-stock Delaware corporation in connection with the conversion. We will fund the charitable foundation with 2,000,000 shares of Peoples United Financial common stock and $20.0 million in cash from the offering proceeds. The shares of common stock contributed to the charitable foundation will be issued in addition to the shares being offered for sale in the offering and will not be included in determining whether the minimum number of shares of common stock has been sold in order to complete the offering. Our contribution to the charitable foundation would reduce net earnings by approximately $39.6 million, after tax, in 2007.
Currently, there are no plans to make further contributions to the charitable foundation in the future. The amount of common stock that we offer for sale in the offering would be greater if the offering were to be completed without the contribution to The Peoples Community Foundation. The establishment and funding of the charitable foundation requires the affirmative vote of a majority of the votes eligible to be cast by Peoples Banks depositors and the affirmative vote of a majority of the stockholders of Peoples Bank, excluding Peoples Mutual Holdings. If these approvals are not obtained, the foundation will not be established and the shares of Peoples United Financial common stock we intend to issue to the foundation will remain unissued. The charitable foundation will be required to vote its shares of Peoples United Financial common stock in the same ratio as all other shares of the common stock on all proposals considered by Peoples United Financials stockholders.
Issuing shares of common stock to the charitable foundation will:
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dilute the ownership interests of holders of Peoples United Financial common stock; and |
|
result in an expense, and a reduction in earnings, during the year in which the contribution is made, equal to the full amount of the contribution to the charitable foundation, offset in part by a corresponding tax benefit. |
For a further discussion of the financial impact of the charitable foundation, including its effect on those who purchase shares in the offering, see Risk FactorsThe Contribution To The Peoples Community Foundation Will Hurt Our Profits For 2007 And Dilute Your Ownership Interest , Comparison of Valuation and Pro Forma Information With and Without the Charitable Foundation and The Peoples Community Foundation .
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You should consider carefully the following risk factors before deciding whether to invest in our common stock. Our business could be harmed by any of these risks. The trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment. In assessing these risks you should also refer to the other information contained in this prospectus, including our consolidated financial statements and related notes.
Risks Related To Our Business
Changes in Interest Rates Could Adversely Affect Our Results of Operations and Financial Condition . Peoples Bank 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. Peoples Bank earns interest on loans and to a much lesser extent on securities and short-term investments. These are called interest-earning assets. Peoples Bank pays interest on some forms of deposits and on funds it borrows from other sources. These are called interest-bearing liabilities.
Peoples Banks 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 Peoples Banks 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 Peoples Bank may not be able to make loans that meet its lending standards. Peoples Banks interest spread may also change based on the mix of interest-earning assets and interest-bearing liabilities.
Peoples Banks 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, Peoples Bank may earn less on its interest-earning assets while it is still locked in to paying higher rates on its interest-bearing liabilities. On the other hand, if interest rates go up, Peoples Bank might have to pay more on its interest-bearing liabilities while it is still locked in to receiving lower rates on its interest-earning assets.
Peoples Bank manages this risk using many different techniques. If it is not successful in managing this risk, Peoples Bank will probably 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. It is unlikely that our asset quality will stay as strong as it has been for the past several years, particularly if the economy deteriorates.
We May Not Be Able to Successfully Implement Our Plans for Growth. Since our conversion to the mutual holding company form of organization in 1988, we have experienced significant growth. We will be raising a significant amount of capital from the offering, which we plan to use to continue implementing our growth strategy, primarily by building our core banking business through internal growth and increased de novo branching and acquisitions. During 2005, Peoples Bank opened seven new branches, three of which are traditional branches and four of which are located in Stop & Shop supermarkets. During the first nine months of 2006, Peoples Bank opened three new Stop & Shop branches. Peoples Bank also plans to expand into New York State by opening at least 15 new traditional branches in Westchester County over the next three years. Seven of these branches are expected to be open by the end of 2007. Peoples Bank also plans to continue its branch expansion in Connecticut by opening new traditional and Stop & Shop branches. In addition, we will consider expansion opportunities such as the acquisition of branches and other financial institutions, although we do not have any current understandings, agreements or arrangements for expansion by the acquisition of any branches or other financial institutions. Significant changes in interest rates or the competition we face may make it difficult to attract the level of customer deposits needed to fund our internal growth at projected levels. In addition, Peoples Bank may have difficulty finding suitable sites for de novo branches. Our expansion plans may result in Peoples Bank opening branches in geographic markets in which it has no previous experience. Our ability to grow effectively in those markets will be dependent on our ability to identify and retain personnel familiar with the new markets. Any future acquisitions of branches or of other financial institutions would present many challenges associated with integrating merged institutions and expanding operations. Our profitability may suffer if we do not continue to experience the type of growth that we have in the past, if we
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do not adequately and profitably implement our plans for growth or if we incur additional expenditures beyond current projections to support our growth.
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 Peoples Banks supermarket banking initiative, pursuant to which, as of September 30, 2006, Peoples Bank has established 73 full-service Stop & Shop branches that provide customers with the convenience of seven-day-a-week banking. At September 30, 2006, 47% of Peoples Banks branches were located in Stop & Shop supermarkets. During 2005, the Stop & Shop branches originated 27% of Peoples Banks home equity loans, 47% of retail checking and savings accounts, and 34% of commercial checking accounts. Approximately 40% of Peoples Banks branch transactions originate in Stop & Shop branches.
Peoples Bank currently has exclusive branching rights in Stop & Shop supermarkets in the state of Connecticut, in the form of a license agreement between The Stop & Shop Supermarket Company and Peoples Bank, which provides for the leasing of space to Peoples Bank within Stop & Shop supermarkets for branch use. Under the terms of the license agreement, Peoples Bank generally is required to open a branch in each new Connecticut Stop & Shop supermarket (up to a maximum of 120 supermarkets) that has either (1) a total square footage of greater than 45,000 square feet or (2) if less than 45,000 square feet in size, the store has projected customers of at least 15,000 per week. Peoples Bank has the exclusive right to branch in these supermarkets until 2012, provided that Peoples Bank does not default on its obligations under the licensing agreement. Peoples Bank has the option to extend the license agreement until 2022.
Stop & Shop is currently the leading grocery store in Connecticut, with nearly twice the market share of its closest competitor, according to Modern Grocer. The success of Peoples Banks supermarket branches is dependent, in part, on the success of the Stop & Shop supermarkets in which they are located. The existing labor agreements between Stop & Shop and a number of the unions representing its employees in Connecticut expire on or around February 18, 2007. As of the date of this prospectus, members of at least one union have voted to strike if new labor agreements are not reached. A drop in Stop & Shops market share, a decrease in the number of Stop & Shop locations or customers, a disruption in Stop & Shops operations due to labor disputes or otherwise, 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 Peoples Banks Stop & Shop supermarket branches as convenient banking locations. Under the terms of the license agreement, Peoples Bank has the obligation to open branches in new Connecticut Stop & Shop locations through 2012, even if Stop & Shops market share declines or the value of the Stop & Shop brand is diminished.
In addition, Peoples Bank may not be able to renew or renegotiate the license agreement with Stop & Shop beyond 2022. If renewal or renegotiation of the license agreement were unsuccessful, Peoples Bank would be forced to find new locations for and relocate the Stop & Shop branches, or to close those branches and transfer the affected customer accounts to other Peoples Bank branches, either of which would involve significant expense and the possible loss of customer relationships.
We Depend on Our Executive Officers and Key Personnel to Continue the Implementation of 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 is 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. Although Peoples Bank has an employment agreement with its president and chief executive officer, the loss of the services of one or more of our executive officers and key personnel could impair our ability to continue to develop and execute our business strategy.
Our Business Is Affected by the International, National, Regional and Local Economy Generally, and the Geographic Concentration of Our Loan Portfolio and Lending Activities Makes Us Vulnerable to a Downturn in the Local Economy . 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.
At September 30, 2006, approximately 77% of Peoples Banks loans by outstanding principal amount were to people and businesses located in the state of Connecticut, or involved property located here. All of Peoples Banks branches are currently in Connecticut. How well we perform depends very much on the health of the Connecticut economy, and we expect that to remain true for the foreseeable future.
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As of June 30, 2006, the median household income in Connecticut was $66,018, ranking second in the United States and well above the U.S. median household income of $51,546. Our state unemployment rate as of June 2006 was 4.1%, slightly lower than the national rate of 4.6%. A low unemployment rate usually means that businesses have a hard time finding qualified workers, and will have to pay them more if they can find them. Businesses that cannot find qualified workers or that have to pay higher wages might decide not to stay in Connecticut, or to send work outside the state. Someone deciding where to locate a new business or to expand an existing business might decide to go somewhere outside Connecticut.
If the general economic situation deteriorates, or there are negative trends in the stock market, the Connecticut economy could suffer more than the national economy. This would be especially likely in Fairfield County, where Peoples Bank has many of its branches and where many of its customers reside, because of the large number of Fairfield County residents who are professionals in the financial services industry.
Peoples Bank could experience losses in its real estate-related loan portfolios if the prices for housing and other kinds of real estate decreased significantly in Connecticut. Even though Connecticut (especially Fairfield County) has some of the highest housing prices in the country, property values can decrease. This has happened before (as recently as the early 1990s), and can happen again.
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 . Peoples Bank 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 think about whether the bank offers other kinds of services they might need and, if they have ever been a customer of the 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 think that on-line services are important.
Peoples Bank 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 the U.S., state and local governments and agencies, instead of opening a deposit account.
In making decisions about loans, many people look first at the interest rate they will have to pay. They also think about any extra fees they might have to pay in order to get the loan. Some people also think about whether the bank offers other kinds of services they might need and, if they have ever been a customer of the bank before, what their experience was like. Many business loans are more complicated because there may not be a standard kind of loan that meets all of the customers needs. Business borrowers look at many different factors that are not all financial in nature. Examples include the kind and amount of security the lender wants and other terms of the loan that do not involve the interest rate.
Peoples Bank competes with other banks, credit unions, credit card issuers, finance companies, mortgage lenders and mortgage brokers for loans. Insurance companies also compete with Peoples Bank for some kinds of commercial loans.
Many of Peoples Banks competitors have branches in the same market area as it does. Some of them are much larger than it is. Connecticut, and especially Fairfield County, is an attractive banking market. Many locally-based banks have been acquired by large regional and national companies in the last several years. We expect this trend to continue. This means that there are not as many competitors in our market as there used to be, but the ones that are left are usually bigger and have more resources than the ones they acquired.
Peoples Bank also has competition from outside its own market area. A bank that does not have any branches in Connecticut can still have customers here 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 Peoples Bank 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 Peoples Banks business can also change the way they interpret these laws and rules, even if the rules themselves do not change. We need to
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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 can make our business less profitable. Changes in the accounting rules we are required to follow may also make us less profitable. Changes in the governments 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 Peoples Bank 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.
The Office of Thrift Supervision letter dated July 3, 2006 approving, among other things, Peoples Banks conversion from a Connecticut savings bank to a federal savings bank, granted Peoples Bank (1) a phase-in period of three years from the date of its conversion to a federal savings bank, August 18, 2006, to comply with the Home Owners Loan Acts commercial loan limits, with the ability to seek an additional one-year extension if necessary; and (2) an exception from the Qualified Thrift Lender test for a period of four years from the date of conversion. The manner in which the Office of Thrift Supervision interprets or applies its phase-in period can also make it more expensive for us to do business, make our business less profitable and limit our strategic flexibility. See Regulation of Peoples Bank and Peoples United Financial Federally Chartered Savings Bank Regulation and Regulation of Peoples Bank and Peoples United Financial Qualified Thrift Lender Test.
If Peoples Bank Is Not Permitted to Pay Dividends to Us, We May Not Be Able to Fully Fund Our Operations, Pay Dividends or Make Acquisitions. Peoples United Financial will fund its operations and pay dividends to its stockholders through the net offering proceeds it retains, cash and cash equivalents held by Peoples United Financial, dividends paid by Peoples Bank to Peoples United Financial, and borrowings. Dividends may be paid by Peoples Bank only out of current or retained net profits, and prior Office of Thrift Supervision approval is required if dividends for the current year would exceed net income for the current year plus retained net income for the preceding two years. Peoples Bank will also be prohibited from paying cash dividends to Peoples United Financial to the extent that any such payment would reduce Peoples Banks capital below required capital levels, would impair the liquidation account to be established for the benefit of the Peoples Banks eligible account holders and supplemental eligible account holders at the time of the conversion and offering, or if the Office of Thrift Supervision notified Peoples Bank that it was in need of more than normal supervision. Payment of dividends by Peoples Bank also may be restricted at any time at the discretion of the Office of Thrift Supervision if it deems the payment to constitute an unsafe and unsound banking practice.
If Peoples Banks Allowance for Loan Losses Is Not Sufficient to Cover Actual Loan Losses, Our Earnings Could Decrease. Peoples Bank 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 customers collateral will not be sufficient to cover the balance of their loan, as underlying collateral values fluctuate with market changes. Peoples Bank 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 provision expense or 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.
Peoples Bank maintains the allowance for loan losses at a level that it believes is adequate to absorb probable losses inherent in the existing loan portfolio, based on a quarterly evaluation of a variety of factors. These factors include, but are not limited to: its historical loan loss experience and recent trends in that experience; risk ratings assigned by lending personnel to commercial real estate finance, commercial and Peoples Capital and Leasing loans, and the results of ongoing reviews of those ratings by its independent loan review function; an evaluation of 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 Peoples Bank seeks to use the best available information to make these evaluations, and at September 30, 2006, management believed that the allowance for loan losses was adequate 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
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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.
Our Stock Benefit Plans Will Increase Our Costs, Which Will Reduce Our Profitability and Stockholders Equity. We anticipate that our employee stock ownership plan will purchase an amount of common stock equal to up to 6% of the sum of the common stock that is sold in the offering and that is issued to the charitable foundation. The cost of acquiring the employee stock ownership plan shares will be between $166.9 million at the minimum of the offering range and $224.9 million at the maximum of the offering range, or $258.3 million at the adjusted maximum of the offering range, assuming a purchase price of $20.00 per share. Under current accounting standards, we will record annual employee stock ownership plan expenses in an amount equal to the fair market value of shares committed to be released to employees for that year. If our common stock appreciates in value over time, compensation expense relating to the employee stock ownership plan will increase.
We intend to adopt a stock option plan that will provide for grants to key employees, officers, and directors of options to purchase an amount of common stock equal to up to 10% of the shares of common stock sold in the offering and issued to the charitable foundation. We also intend to adopt a recognition and retention plan that will provide for awards of common stock to key employees, officers, and directors in an amount of up to 4% of the shares of common stock sold in the offering and issued to the charitable foundation. We will fund these plans through either open market purchases, if permitted, or from the issuance of authorized but unissued shares. These plans will increase our future costs of compensating our key employees, officers and directors, thereby reducing our earnings. In addition, at the maximum of our offering range, stockholders will experience a 2.27% reduction or dilution in ownership interest in the event authorized but unissued shares are used to fund restricted stock awards and a 5.48% reduction or dilution in ownership interest in the event authorized but unissued shares are used to fund the stock options. Under current accounting standards, we will expense the grant-date fair value of stock options granted to key employees, officers and directors over the vesting period of such awards. Similarly, under current accounting standards, as the restricted stock shares are awarded under the recognition and retention plan, we will recognize compensation expense equal to the fair market value of such shares at grant over the vesting period. Recognizing an expense equal to the grant-date fair value of stock options or shares of restricted stock will increase our compensation costs over the vesting period of the options or shares of restricted stock.
Risks Related To The Offering
After the Offering, Our Return on Average Equity Will Be Low Compared to Other Companies. This Could Negatively Impact the Price of Our Common Stock. The net proceeds from the offering will substantially increase our equity capital. It may take a significant period of time to prudently invest this capital. Our ability to leverage our new capital and grow our balance sheet profitably will be significantly affected by industry competition for loans and deposits. The net proceeds will be invested initially in short-term investments, government securities or government-sponsored agency securities. These investments have lower average yields than a significant portion of our existing interest-earning assets. This excess capital will result in a significantly lower return on equity, which is the ratio of our earnings divided by our average stockholders equity, than we have experienced previously. For the nine months ended September 30, 2006 and the year ended December 31, 2005, our return on average equity was 8.6% and 11.1%, respectively. On a pro forma basis assuming that 185,437,500 shares had been sold at the beginning of the year, the maximum of the offering range, and the net proceeds had been invested at an average yield of 5.25%, our return on pro forma equity for the nine months ended September 30, 2006 and the year ended December 31, 2005 would have been approximately 4.2% and 4.3%, respectively. As a result of the offering, our return on equity will be lower than that of our peers. To the extent that the stock market values a company based in part on its return on equity, our low return on equity relative to our peers could negatively affect the trading price of our common stock.
We Have Broad Discretion in Allocating the Proceeds of the Offering. Our Failure to Effectively Utilize the Proceeds Could Significantly Reduce Our Profitability. Peoples United Financial intends to contribute approximately 50% of the net proceeds of the offering to Peoples Bank. Peoples United Financial may use the remaining net proceeds to purchase investment securities, finance the acquisition of other financial institutions or other businesses that are related to banking or for other general corporate purposes, including repurchases of common stock and the payment of cash dividends. Peoples United Financial expects to use a portion of the net proceeds to fund the purchase by Peoples Banks employee stock ownership plan of shares of Peoples United Financial common stock. We also intend to contribute 2,000,000 shares of Peoples United Financial common stock and $20.0 million in cash to The Peoples Community Foundation. Peoples Bank may use the net proceeds it receives to make acquisitions, fund new loans, purchase investment securities, establish or
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acquire new branches, acquire financial institutions or other businesses that are related to banking, pay dividends to Peoples United Financial or for general corporate purposes. Although the net proceeds of the offering are expected to be invested initially in short-term investments, government securities or government-sponsored agency securities, Peoples United Financial and Peoples Bank will have significant flexibility in determining how much of the net proceeds to apply to different uses and the timing of such applications. The failure by us or Peoples Bank to utilize these funds effectively could significantly reduce our profitability.
Stock Market Volatility May Affect the Price of Our Common Stock. Publicly traded stocks can experience substantial market price volatility that may be unrelated to the operating performance of the particular companies. The final number of shares of common stock sold in the offering will be based on an independent appraisal prepared by RP Financial. The independent appraisal is not intended, and should not be construed, as a recommendation of any kind as to the advisability of purchasing shares of common stock. The valuation is based on estimates and projections of a number of factors, all of which are subject to change. After the shares begin trading, the trading price of our common stock will be determined by the marketplace, and will be influenced not only by our results of operations and financial condition but also by many factors outside of our control, including prevailing interest rates, investor perceptions of us, our performance relative to our peers, research analysts ratings, and general industry and economic conditions. Consequently, if you purchase shares of common stock in the offering, you may not be able to sell them later at or above the $20.00 per share purchase price.
The Certificate of Incorporation and Bylaws of Peoples United Financial and Certain Laws and Regulations May Prevent or Make More Difficult Certain Transactions, Including a Sale or Merger of Peoples United Financial. Provisions of the Certificate of Incorporation and Bylaws of Peoples United Financial, federal regulations and various other factors may make it more difficult for companies or persons to acquire control of Peoples United Financial. The factors that may discourage takeover attempts or make them more difficult include:
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Office of Thrift Supervision regulations . Office of Thrift Supervision regulations prohibit, for three years following the completion of a mutual-to-stock conversion, the offer to acquire or the acquisition of more than 10% of any class of equity security of a converted institution without the prior approval of the Office of Thrift Supervision. |
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Certificate of Incorporation, Bylaws and statutory provisions . Provisions of the Certificate of Incorporation and Bylaws of Peoples United Financial and of Delaware law may make it more difficult and expensive to pursue a takeover attempt that the Board of Directors opposes. These provisions also make more difficult the removal of current directors or management, or the election of new directors. These provisions include: |
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supermajority voting requirements for certain business combinations, removal of directors and changes to some provisions of the Certificate of Incorporation and Bylaws; |
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the election of directors to staggered terms of three years; |
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provisions regarding the timing and content of stockholder proposals and nominations; |
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provisions restricting the calling of special meetings of stockholders; |
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the absence of cumulative voting by stockholders in the election of directors; and |
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limitations imposed by Delaware law on business transactions with certain significant stockholders. |
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Significant ownership by our directors, executive officers and stock benefit plans . Following the conversion and offering, the directors, executive officers and stock benefit plans of Peoples United Financial are expected to own in the aggregate approximately 7.40% of Peoples United Financial common stock to be outstanding based upon the midpoint of the offering range. This significant percentage ownership by directors, executive officers and stock benefit plans could make it more difficult to obtain the required vote for a takeover or merger that management opposes. |
You May Not Revoke Your Decision to Purchase Peoples United Financial Common Stock in the Subscription Offering After You Send Us Your Subscription. Funds submitted or automatic withdrawals authorized in connection with a purchase of shares of common stock in the subscription offering will be held by us until the completion or termination of the conversion and offering, including any extension of the expiration date. Because completion of the conversion and offering will be subject to regulatory approvals and an update of the independent appraisal prepared by RP Financial, among other factors, there may be one or more delays in the completion of the conversion and offering. Orders submitted in the subscription offering are irrevocable, and subscribers will have no access to subscription funds unless the offering is terminated, or extended beyond May 6, 2007, or the number of shares to be sold in the offering is increased to more than 213,253,125 shares or decreased to less than 137,062,500 shares.
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Risks Related to the Formation of Our Charitable Foundation
Our Contribution to The Peoples Community Foundation Will Hurt Our 2007 Profits and Dilute Your Ownership Interest. We intend to contribute 2,000,000 shares of Peoples United Financial common stock and $20.0 million in cash from the offering proceeds to The Peoples Community Foundation. This contribution of common stock and cash will be an additional operating expense and will reduce net income during the fiscal year in which The Peoples Community Foundation is established, which is expected to be the year ending December 31, 2007. Based on the pro forma assumptions, the contribution to The Peoples Community Foundation would reduce net earnings by approximately $39.6 million, after tax, in 2007. In addition, at the midpoint of the offering range, purchasers of shares in the offering and current Peoples Bank stockholders will have their ownership interests diluted by 0.71% at the close of the offering, when we contribute the shares of our common stock to The Peoples Community Foundation from authorized but unissued shares of common stock. For a further discussion regarding the effect of the contribution to the charitable foundation, see Pro Forma Data and Comparison of Valuation and Pro Forma Information With and Without the Charitable Foundation.
Our Contribution to The Peoples Community Foundation May Not Be Tax Deductible, Which Could Hurt Our Profits. We believe that our $60 million pre-tax contribution in cash and shares of our common stock to The Peoples Community Foundation will be deductible for federal income tax purposes. However, we do not have any assurance that the Internal Revenue Service will grant tax-exempt status to the charitable foundation. If the contribution is not deductible, we would not receive any tax benefit from the contribution. In addition, even if the contribution is tax deductible, we may not have sufficient profits to be able to use the deduction fully.
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This prospectus contains forward-looking statements, which may be identified by the use of such words as may, believe, expect, anticipate, should, plan, estimate, predict, continue and potential or the negative of these terms or other comparable terminology. Examples of forward-looking statements include, but are not limited to, estimates with respect to our financial condition, results of operations and business that are subject to various factors which could cause actual results to differ materially from these estimates. These factors include, but are not limited to:
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our business is affected by the international, national, regional and local economy generally, and the geographic concentration of our loan portfolio and lending activities makes us vulnerable to a downturn in the local economy; |
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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; |
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changes in our asset quality could adversely affect our results of operations and financial condition; |
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changes in federal and state regulation could adversely affect our results of operations and financial condition; |
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changes in interest rates could adversely affect our results of operations and financial condition; |
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we have broad discretion in allocating the net proceeds of the offering; our failure to effectively utilize the net proceeds could significantly reduce our profitability; |
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our stock benefit plans will increase our costs, which will reduce our profitability and stockholders equity; |
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after the offering, our return on average equity will be low compared to other companies; this could negatively impact the price of our common stock; |
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stock market volatility may affect the price of our common stock; |
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our contribution to The Peoples Community Foundation will hurt our profits for 2007 and dilute your ownership interest; |
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our contribution to The Peoples Community Foundation may not be tax deductible, which could hurt our profits; |
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applicable technological changes may be more difficult or expensive than we anticipate; |
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success or consummation of new business initiatives may be more difficult or expensive than we anticipate; and |
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litigation or matters before regulatory agencies, whether currently existing or commencing in the future, may delay the occurrence or non-occurrence of events longer than we anticipate. |
Any or all of our forward-looking statements in this prospectus and in any other public statements we make may turn out to be wrong. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. Consequently, no forward-looking statement can be guaranteed. We do not intend to update any of the forward-looking statements after the date of this prospectus or to conform these statements to actual results.
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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The summary information presented below under Selected Financial Condition Data, Selected Operating Data, and Selected Financial Ratios and Other Data at each of the dates or for each of the periods presented, except for the information at or for the periods ended September 30, 2005 and 2006 (which has not been audited), is derived in part from the audited consolidated financial statements of Peoples Bank. The following information is only a summary and you should read it in conjunction with Peoples Banks audited consolidated financial statements and notes beginning on page F-1. All share, per share and dividend information reflects the three-for-two stock splits effected by Peoples Bank on May 15, 2004 and May 15, 2005.
At September 30,
2006 |
At December 31, | |||||||||||||||||
2005 | 2004 | 2003 | 2002 | 2001 | ||||||||||||||
(In millions) | ||||||||||||||||||
Selected Financial Condition Data: | ||||||||||||||||||
Total assets |
$ | 10,612 | $ | 10,933 | $ | 10,718 | $ | 11,672 | $ | 12,261 | $ | 11,891 | ||||||
Loans |
9,185 | 8,573 | 7,933 | 7,105 | 6,675 | 6,374 | ||||||||||||
Securities, net |
202 | 1,363 | 2,071 | 2,405 | 3,230 | 2,900 | ||||||||||||
Allowance for loan losses |
74 | 75 | 73 | 71 | 69 | 74 | ||||||||||||
Deposits |
8,979 | 9,083 | 8,862 | 8,714 | 8,426 | 7,983 | ||||||||||||
Core deposits (1) |
8,843 | 8,873 | 8,681 | 8,433 | 8,102 | 7,709 | ||||||||||||
Borrowings |
14 | 295 | 341 | 1,516 | 2,437 | 2,542 | ||||||||||||
Subordinated notes |
109 | 109 | 122 | 253 | 252 | 252 | ||||||||||||
Stockholders equity |
1,351 | 1,289 | 1,200 | 1,002 | 940 | 935 | ||||||||||||
Non-performing assets |
23 | 22 | 29 | 34 | 36 | 31 |
For the Nine
Months Ended September 30, |
For the Year Ended December 31, | |||||||||||||||||||||||||||
2006 | 2005 | 2005 | 2004 | 2003 | 2002 | 2001 | ||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||
Selected Operating Data: | ||||||||||||||||||||||||||||
Net interest income (2) |
$ | 286.3 | $ | 276.7 | $ | 370.0 | $ | 327.4 | $ | 284.3 | $ | 318.5 | $ | 319.5 | ||||||||||||||
Provision for loan losses |
2.0 | 3.3 | 8.6 | 13.3 | 16.7 | 22.2 | 45.3 | |||||||||||||||||||||
Fee based revenues |
113.5 | 111.7 | 151.5 | 142.9 | 143.0 | 136.2 | 113.9 | |||||||||||||||||||||
Net security losses |
(27.2 | ) | (0.1 | ) | (0.1 | ) | (4.7 | ) | (0.6 | ) | (3.3 | ) | (18.5 | ) | ||||||||||||||
All other non-interest income (3) |
15.8 | 9.5 | 21.9 | 13.5 | 23.9 | 16.3 | 38.2 | |||||||||||||||||||||
Non-interest expense (4) |
261.3 | 253.8 | 344.4 | 479.7 | 346.0 | 341.5 | 343.5 | |||||||||||||||||||||
Income (loss) from continuing operations |
83.0 | 91.6 | 125.9 | (5.6 | ) | 62.7 | 67.7 | 38.9 | ||||||||||||||||||||
Income (loss) from discontinued operations (5) |
1.7 | 10.3 | 11.2 | 205.3 | 1.1 | (12.3 | ) | 36.9 | ||||||||||||||||||||
Net income |
84.7 | 101.9 | 137.1 | 199.7 | 63.8 | 55.4 | 75.8 | |||||||||||||||||||||
Adjusted net income (1) |
83.0 | 93.6 | 122.6 | 81.1 | 62.7 | 67.7 | 25.9 |
(1) | See Non-GAAP Financial Measures and Reconciliation to GAAP for a reconciliation of deposits to core deposits, and net income to adjusted net income. |
(2) | Fully taxable equivalent basis. |
(3) | Includes $8.1 million and $20.0 million in gains on asset sales for the years ended December 31, 2005 and 2001, respectively. |
(4) | Includes liability restructuring costs totaling $2.7 million, $133.4 million, $1.2 million and $16.6 million for the years ended December 31, 2005, 2004, 2003 and 2001, respectively. |
(5) | Includes an after-tax gain on sale of $6.2 million for both the nine months ended September 30, 2005 and the year ended December 31, 2005 and $198.5 million for the year ended December 31, 2004 related to the sale of the credit card business in March 2004. |
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At or For the Nine
Months Ended September 30, |
At or For the Year Ended December 31, | |||||||||||||||||||||||||||
2006 | 2005 | 2005 | 2004 | 2003 | 2002 | 2001 | ||||||||||||||||||||||
Selected Financial Ratios And Other Data: | ||||||||||||||||||||||||||||
Performance Ratios: | ||||||||||||||||||||||||||||
Return on average assets (1) |
1.04 | % | 1.26 | % | 1.27 | % | 1.86 | % | 0.54 | % | 0.47 | % | 0.68 | % | ||||||||||||||
Return on average stockholders equity (1) |
8.6 | 11.1 | 11.1 | 17.6 | 6.6 | 5.9 | 8.2 | |||||||||||||||||||||
Net interest margin (2) |
3.83 | 3.66 | 3.68 | 3.33 | 2.89 | 3.24 | 3.40 | |||||||||||||||||||||
Net interest rate spread |
3.71 | 3.57 | 3.59 | 3.25 | 2.84 | 3.28 | 3.38 | |||||||||||||||||||||
Efficiency ratio (3) |
61.9 | 62.8 | 62.8 | 69.2 | 76.4 | 71.3 | 73.9 | |||||||||||||||||||||
Average interest-earning assets to average interest-bearing liabilities |
138.6 | 140.3 | 140.1 | 139.5 | 130.5 | 120.0 | 121.5 | |||||||||||||||||||||
Per Common Share Data: |
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Basic earnings per share |
$ | 0.60 | $ | 0.72 | $ | 0.97 | $ | 1.43 | $ | 0.46 | $ | 0.40 | $ | 0.55 | ||||||||||||||
Diluted earnings per share |
0.59 | 0.72 | 0.97 | 1.42 | 0.46 | 0.40 | 0.55 | |||||||||||||||||||||
Cash dividends paid per share (4) |
0.72 | 0.63 | 0.85 | 0.75 | 0.68 | 0.63 | 0.59 | |||||||||||||||||||||
Book value (end of period) |
9.51 | 8.95 | 9.10 | 8.52 | 7.18 | 6.77 | 6.76 | |||||||||||||||||||||
Tangible book value (end of period) |
8.77 | 8.20 | 8.35 | 7.74 | 6.37 | 5.95 | 5.92 | |||||||||||||||||||||
Total dividend pay-out ratio (4) |
52.5 | % | 38.2 | % | 38.3 | % | 22.9 | % | 63.7 | % | 67.4 | % | 49.4 | % | ||||||||||||||
Capital Ratios: |
||||||||||||||||||||||||||||
Average stockholders equity to average assets |
12.1 | 11.4 | 11.5 | 10.6 | 8.2 | 8.0 | 8.2 | |||||||||||||||||||||
Stockholders equity to total assets |
12.7 | 11.6 | 11.8 | 11.2 | 8.6 | 7.7 | 7.9 | |||||||||||||||||||||
Tangible stockholders equity to total assets |
11.7 | 10.7 | 10.8 | 10.2 | 7.6 | 6.7 | 6.9 | |||||||||||||||||||||
Regulatory Capital Ratios (5) : |
||||||||||||||||||||||||||||
Tier 1 capital |
14.7 | 14.9 | 14.8 | 14.6 | 9.9 | 9.1 | 8.8 | |||||||||||||||||||||
Leverage capital |
11.8 | 11.0 | 11.2 | 10.5 | 8.0 | 7.4 | 7.7 | |||||||||||||||||||||
Total risk-based capital |
16.2 | 17.0 | 16.4 | 16.7 | 13.1 | 12.5 | 12.3 | |||||||||||||||||||||
Asset Quality Ratios: |
||||||||||||||||||||||||||||
Non-performing loans to total loans |
0.23 | 0.23 | 0.25 | 0.35 | 0.48 | 0.52 | 0.46 | |||||||||||||||||||||
Non-performing assets to total assets |
0.22 | 0.18 | 0.20 | 0.27 | 0.29 | 0.29 | 0.26 | |||||||||||||||||||||
Non-performing assets to total loans, real estate owned and repossessed assets |
0.25 | 0.24 | 0.26 | 0.36 | 0.48 | 0.53 | 0.48 | |||||||||||||||||||||
Net loan charge-offs to average loans (2) |
0.05 | 0.05 | 0.07 | 0.15 | 0.22 | 0.42 | 0.62 | |||||||||||||||||||||
Allowance for loan losses to non-performing loans |
354.9 | 379.6 | 352.5 | 264.6 | 208.4 | 198.2 | 253.3 | |||||||||||||||||||||
Allowance for loan losses to total loans |
0.81 | 0.87 | 0.87 | 0.91 | 0.99 | 1.04 | 1.16 | |||||||||||||||||||||
Other Information: |
||||||||||||||||||||||||||||
Number of branches |
156 | 152 | 153 | 155 | 154 | 155 | 148 | |||||||||||||||||||||
Full-time equivalent employees (6) |
2,617 | 2,679 | 2,655 | 2,689 | 2,791 | 2,948 | 2,907 |
(1) | Calculated based on net income for all periods. Nine month ratios are presented on an annualized basis. |
(2) | Nine month ratios are presented on an annualized basis. |
(3) | See Non-GAAP Financial Measures and Reconciliation to GAAP for a reconciliation of the efficiency ratio to banking regulatory definitions. |
(4) | Reflects the waiver of dividends on the substantial majority of the common shares owned by Peoples Mutual Holdings. |
(5) | Calculated in accordance with Office of Thrift Supervision regulations as of September 30, 2006 and Federal Deposit Insurance Corporation regulations for all prior period ends. |
(6) | Excluded from 2003, 2002 and 2001 are the employees of Peoples Banks credit card division that was sold in March 2004. |
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The summary information presented below under Selected Financial Condition Data, Selected Operating Data, and Selected Financial Ratios and Other Data at December 31, 2005 and for the three months and year ended December 31, 2005 is derived in part from the audited consolidated financial statements of Peoples Bank. The information at December 31, 2006 and for the three months and year ended December 31, 2006 is derived from unaudited financial data. In the opinion of management, this unaudited financial data has been prepared to reflect all normal recurring accruals necessary to present fairly the financial data for the periods shown. The results for the three months and year ended December 31, 2006 are not necessarily indicative of the results that may be expected for any other interim or full-year period.
This discussion and analysis reflects Peoples Banks consolidated financial statements and other relevant statistical data and is intended to enhance your understanding of our financial condition and results of operations. The following information is only a summary and you should read it in conjunction with Peoples Banks audited consolidated financial statements and notes beginning on page F-1.
For the
Three Months Ended December 31, |
For the Year Ended December 31, |
|||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||
(In millions) | ||||||||||||||
Selected Operating Data: |
||||||||||||||
Net interest income |
$ | 96.1 | $ | 93.3 | $ | 382.4 | $ | 369.7 | ||||||
Provision for loan losses |
1.4 | 5.3 | 3.4 | 8.6 | ||||||||||
Fee-based revenues |
39.5 | 39.8 | 153.0 | 151.5 | ||||||||||
Net security losses |
| | (27.2 | ) | (0.1 | ) | ||||||||
All other non-interest income (2) |
5.8 | 12.3 | 21.6 | 21.9 | ||||||||||
Non-interest expense |
85.6 | 90.5 | 346.9 | 344.4 | ||||||||||
Income from continuing operations |
38.7 | 34.3 | 121.7 | 125.9 | ||||||||||
Income from discontinued operations (3) |
0.6 | 0.9 | 2.3 | 11.2 | ||||||||||
Net income |
39.3 | 35.2 | 124.0 | 137.1 | ||||||||||
Adjusted net income (1) |
38.7 | 29.0 | 121.7 | 122.6 |
(1) | See Non-GAAP Financial Measures and Reconciliation to GAAP for a reconciliation of deposits to core deposits, and net income to adjusted net income. |
(2) | Includes an $8.1 million gain on sale of branches for both the three months and the year ended December 31, 2005. |
(3) | Includes an after-tax gain of $6.2 million for the year ended December 31, 2005 related to the sale of the credit card business in March 2004. |
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At or For the
Three Months Ended December 31, |
At or For the
December 31, |
|||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
Selected Financial Ratios and Other Data: |
||||||||||||||||
Performance Ratios: |
||||||||||||||||
Return on average assets (1) |
1.49 | % | 1.30 | % | 1.15 | % | 1.27 | % | ||||||||
Return on average stockholders equity (1) |
11.6 | 11.1 | 9.4 | 11.1 | ||||||||||||
Net interest margin (2) |
4.01 | 3.75 | 3.87 | 3.68 | ||||||||||||
Net interest rate spread |
3.86 | 3.65 | 3.75 | 3.59 | ||||||||||||
Efficiency ratio (3) |
59.7 | 62.3 | 61.3 | 62.8 | ||||||||||||
Average interest-earning assets to average interest-bearing liabilities |
138.6 | 139.3 | 138.6 | 140.1 | ||||||||||||
Per Common Share Data: |
||||||||||||||||
Basic earnings per share |
$ | 0.28 | $ | 0.25 | $ | 0.88 | $ | 0.97 | ||||||||
Diluted earnings per share |
0.28 | 0.25 | 0.87 | 0.97 | ||||||||||||
Cash dividends paid per share (4) |
0.25 | 0.22 | 0.97 | 0.85 | ||||||||||||
Book value (end of period) |
9.42 | 9.10 | 9.42 | 9.10 | ||||||||||||
Tangible book value (end of period) |
8.68 | 8.35 | 8.68 | 8.35 | ||||||||||||
Total dividend pay-out ratio (4) |
39.3 | % | 38.6 | % | 48.3 | % | 38.3 | % | ||||||||
Capital Ratios: |
||||||||||||||||
Average stockholders equity to average assets |
12.8 | 11.8 | 12.3 | 11.5 | ||||||||||||
Stockholders equity to total assets |
12.5 | 11.8 | 12.5 | 11.8 | ||||||||||||
Tangible stockholders equity to total assets |
11.6 | 10.8 | 11.6 | 10.8 | ||||||||||||
Regulatory Capital Ratios (5) : |
||||||||||||||||
Tier 1 capital |
14.8 | 14.8 | 14.8 | 14.8 | ||||||||||||
Leverage capital |
12.0 | 11.2 | 12.0 | 11.2 | ||||||||||||
Total risk-based capital |
16.1 | 16.4 | 16.1 | 16.4 | ||||||||||||
Asset Quality Ratios: |
||||||||||||||||
Non-performing loans to total loans |
0.24 | 0.25 | 0.24 | 0.25 | ||||||||||||
Non-performing assets to total assets |
0.21 | 0.20 | 0.21 | 0.20 | ||||||||||||
Non-performing assets to total loans, real estate owned and repossessed assets |
0.24 | 0.26 | 0.24 | 0.26 | ||||||||||||
Net loan charge-offs to average loans (2) |
0.06 | 0.16 | 0.05 | 0.07 | ||||||||||||
Allowance for loan losses to non-performing loans |
327.9 | 352.5 | 327.9 | 352.5 | ||||||||||||
Allowance for loan losses to total loans |
0.79 | 0.87 | 0.79 | 0.87 | ||||||||||||
Other Information: |
||||||||||||||||
Number of branches |
158 | 153 | 158 | 153 | ||||||||||||
Full-time equivalent employees |
2,657 | 2,655 | 2,657 | 2,655 |
(1) | Calculated based on net income for all periods. Three month ratios are presented on an annualized basis. |
(2) | Three month ratios are presented on an annualized basis. |
(3) | See Non-GAAP Financial Measures and Reconciliation to GAAP for a reconciliation of the efficiency ratio to banking regulatory definitions. |
(4) | Reflects the waiver of dividends on the substantial majority of the common shares owned by Peoples Mutual Holdings. |
(5) | Calculated in accordance with Office of Thrift Supervision regulations for December 31, 2006 and Federal Deposit Insurance Corporation regulations for December 31, 2005. |
32
Comparison of Financial Condition at December 31, 2006 and December 31, 2005.
Total assets at December 31, 2006 were $10.7 billion, a decrease of $246 million, or 2%, from December 31, 2005, primarily due to a $1.3 billion decline in total securities, partially offset by increases of $799 million in total loans, $193 million in short-term investments, $58 million in bank-owned life insurance and $66 million in other assets.
Total loans increased $799 million, or 9%, from December 31, 2005 to December 31, 2006. This increase reflects growth of $456 million, or 10%, in consumer financial services and $343 million, or 9%, in commercial banking. The growth in consumer financial services was driven by increases of $392 million, or 11%, in residential mortgage loans to $3.9 billion and $64 million, or 5%, in consumer loans to $1.3 billion. The increase in residential mortgage loans reflects, in part, the purchase of $170 million of adjustable-rate residential mortgage loans towards the end of the first quarter of 2006. The increase in commercial banking reflects increases of $235 million, or 37%, in net loans originated by Peoples Capital and Leasing, our equipment financing subsidiary, $135 million, or 29%, in our national credits portfolio and $60 million, or 5%, in commercial lending. These increases were partially offset by an $87 million, or 5%, decline in commercial real estate finance loans.
The decrease in the securities portfolio reflects the sale of $266 million and $810 million of debt securities in the second and third quarters of 2006, respectively, as part of restructuring activities to better position Peoples Banks balance sheet for the prevailing interest rate environment at the time. Peoples Bank also funded an additional $50 million of bank-owned life insurance with proceeds from maturing securities in the first quarter of 2006 and contributed $91.5 million in the third quarter of 2006 to its employee retirement plan (reported in other assets) to more than fully fund its projected benefit obligation. Proceeds from sales of securities were also used to reduce total borrowings and subordinated notes by $335 million since December 31, 2005.
Non-performing assets totaled $22.7 million at December 31, 2006, a $0.7 million increase from December 31, 2005. Non-performing assets declined by $0.2 million during the fourth quarter of 2006, reflecting an increase in non-performing commercial loans to $11.9 million at December 31, 2006 as one commercial loan totaling $10.6 million was classified as non-performing, partially offset by a decrease in non-performing commercial real estate finance loans to $0.2 million resulting from the full recovery on one commercial real estate finance loan totaling $5.5 million. The allowance for loan losses decreased $1.0 million to $74 million at December 31, 2006 compared to December 31, 2005, primarily reflecting reductions in the allowance for loan losses allocated to the consumer loan portfolios, partially offset by net additions allocated to the commercial banking loan portfolios. At December 31, 2006, the allowance for loan losses as a percentage of total loans was 0.79% and as a percentage of non-performing loans was 328%, compared to 0.87% and 353%, respectively, at December 31, 2005.
At December 31, 2006, liabilities totaled $9.3 billion, a $297 million, or 3%, decrease from December 31, 2005, reflecting a $335 million reduction in total borrowings and subordinated notes. Core deposits increased $85 million, or 1%, in 2006 compared to 2005, reflecting Peoples Banks strategy to fund loan growth with proceeds from maturities and sales of securities rather than deposits.
Peoples Banks total stockholders equity was $1.34 billion at December 31, 2006, a $51 million net increase from December 31, 2005, reflecting net income of $124.0 million, partially offset by dividends paid of $60 million and a $25 million increase in accumulated other comprehensive loss. The increase in accumulated other comprehensive loss reflects a $40 million after-tax increase from the implementation of SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans, partially offset by a $19 million reduction in the after-tax net unrealized loss on securities available for sale due to the sales of securities discussed above. As a percentage of total assets, stockholders equity was 12.5% at December 31, 2006 compared to 11.8% at December 31, 2005.
Peoples Banks leverage, tier 1 and total risk-based capital ratios were 12.0%, 14.8% and 16.1%, respectively, at December 31, 2006, compared to 11.2%, 14.8% and 16.4%, respectively, at December 31, 2005. The capital ratios were calculated in accordance with Office of Thrift Supervision regulations as of December 31, 2006 and Federal Deposit Insurance Corporation regulations as of December 31, 2005.
Comparison of Results of Operations for the Year Ended December 31, 2006 and December 31, 2005
Peoples Bank reported net income of $124.0 million, or $0.87 per diluted share, for the year ended December 31, 2006, compared to $137.1 million, or $0.97 per diluted share, for the year-ago period. Income from continuing operations totaled
33
$121.7 million, or $0.85 per diluted share, for the year ended December 31, 2006, compared to $125.9 million, or $0.89 per diluted share, for the year-ago period.
Results for 2006 include net security losses totaling $27.4 million from the sale of $266 million and $810 million of debt securities in the second and third quarters of 2006, respectively. Results for 2006 also include a $2.4 million income tax benefit related to certain prior-year tax matters. The net impact of these items reduced 2006 net income by $15.8 million, or $0.11 per share.
Results for 2005 included an $8.1 million gain on the sale of three branches, a $9.7 million gain from the resolution of a significant contingency related to the sale of the credit card business in 2004 (reported in income from discontinued operations), a $2.0 million income tax benefit resulting from the completion of a routine federal tax audit, a $2.0 million goodwill impairment charge and expenses incurred in connection with the repurchase of subordinated notes ($2.7 million) and the accelerated vesting of stock options ($0.7 million). The net impact of these items increased 2005 net income by $9.3 million, or $0.07 per share.
Net interest income increased $12.7 million, or 3%, from the year ended December 31, 2005 and the net interest margin improved 19 basis points to 3.87%. The higher net interest margin reflects the asset-sensitive position of the balance sheet, including the substitution of securities with higher-yielding loans, the partial benefit from the sales of securities in the second and third quarters of 2006, and the impact of Peoples Banks deposit pricing strategy.
Compared to 2005, average earning assets decreased $173 million, or 2%, as a $934 million, or 54%, decline in average securities funded a $715 million, or 9%, increase in average loans and a $113 million, or 27%, decrease in average total borrowings and average subordinated notes. The loan growth reflects increases of $285 million, or 8%, in average commercial banking loans, $345 million, or 10%, in average residential mortgage loans, and $108 million, or 9%, in the average home equity loan portfolio, all as compared to the year-ago period. The increase in average residential mortgage loans reflects, in part, the purchase of $170 million of adjustable-rate residential mortgage loans towards the end of the first quarter of 2006. In addition, Peoples Bank invested $50 million in the first quarter of 2006 and $150 million in the second quarter of 2005 in bank-owned life insurance, and contributed $91.5 million to its employee retirement plan in September 2006.
Compared to the year ended December 31, 2005, total non-interest income, excluding net security losses, increased $1.2 million, or 1%; total non-interest expense increased $2.5 million, or 1%; and the efficiency ratio improved to 61.3% from 62.8%.
The provision for loan losses was $3.4 million compared to $8.6 million in the year-ago period. The provision for loan losses for the year ended December 31, 2006 reflects net loan charge-offs of $4.4 million, partially offset by a $1.0 million decrease in the allowance for loan losses. The provision for loan losses in 2005 reflected net loan charge-offs of $6.1 million and a $2.5 million increase in the allowance for loan losses. Net loan charge-offs decreased $1.7 million, or 28%, for 2006, compared to 2005. Net loan charge-offs as a percentage of average loans equaled 0.05%, down from 0.07% for 2005.
Comparison of Results of Operations for the Three Months Ended December 31, 2006 and December 31, 2005
Peoples Bank reported net income of $39.3 million, or $0.28 per diluted share, for the three months ended December 31, 2006, a 12% increase compared to $35.2 million, or $0.25 per diluted share, for the year-ago period. Income from continuing operations totaled $38.7 million, or $0.27 per diluted share, for the three months ended December 31, 2006, a 13% increase compared to $34.3 million, or $0.24 per diluted share, for the year-ago period.
Results for the three months ended December 31, 2006 include a $2.4 million income tax benefit related to certain prior-year tax matters. Results for the three months ended December 31, 2005 included an $8.1 million gain on the sale of three branches (included in non-interest income) and a $2.0 million income tax benefit resulting from the completion of a routine federal tax audit, as well as a $2.7 million charge related to the repurchase of subordinated notes and a $0.7 million charge for the accelerated vesting of stock options (both included in non-interest expense).
Compared to the three months ended December 31, 2005, total non-interest income, excluding the $8.1 million gain on the sale of branches from the 2005 period, increased $1.3 million, or 3%; total non-interest expense, excluding the items
34
discussed above from the 2005 period, decreased $1.5 million, or 2%; and the efficiency ratio improved to 59.7% from 62.3%.
Net interest income increased $2.8 million, or 3%, from the three months ended December 31, 2005 and the net interest margin improved 26 basis points to 4.01%. The higher net interest margin reflects the asset-sensitive position of the balance sheet, including the substitution of securities with higher-yielding loans, the full benefit from the sales of securities in the second and third quarters of 2006, and the impact of Peoples Banks deposit pricing strategy.
Compared to the three months ended December 31, 2005, average earning assets decreased $366 million, or 4%, as a $1.3 billion, or 88%, decline in average securities funded an $808 million, or 10%, increase in average loans; a $294 million reduction in average total borrowings and average subordinated notes; a $91.5 million contribution to Peoples Banks employee retirement plan (made in September 2006); and a $59 million increase in average bank-owned life insurance. Growth in loans reflects increases of $334 million, or 9%, in average commercial banking loans, $414 million, or 12%, in average residential mortgage loans, and $76 million, or 6%, in the average home equity loan portfolio, all as compared to the year-ago period. The increase in average residential mortgage loans reflects, in part, the purchase of $170 million of adjustable-rate residential mortgage loans towards the end of the first quarter of 2006.
The provision for loan losses was $1.4 million compared to $5.3 million in the year-ago period. The provision for loan losses for the three months ended December 31, 2006 reflects net loan charge-offs of $1.4 million. The provision for loan losses for the three months ended December 31, 2005 reflected net loan charge-offs of $3.3 million and a $2.0 million increase in the allowance for loan losses. Net loan charge-offs decreased $1.9 million, or 58%, for the three months ended December 31, 2006, compared to the year-ago period. Net loan charge-offs as a percentage of average loans on an annualized basis equaled 0.06%, down from 0.16% for the three months ended December 31, 2005.
35
NON-GAAP FINANCIAL MEASURES AND RECONCILIATION TO GAAP
In addition to evaluating Peoples Banks results of operations in accordance with U.S. generally accepted accounting principles (GAAP), management routinely supplements this evaluation with an analysis of certain non-GAAP financial measures, such as adjusted net income, which excludes certain significant items that are routinely excluded by banking analysts in assessing financial performance in the banking industry. Management believes this non-GAAP financial measure provides information useful to investors in understanding Peoples Banks underlying operating performance and trends, and facilitates comparisons with the performance of other banks and thrifts.
The following adjustments to net income for this financial measure are made to better indicate the ongoing operating results over a period that involved Peoples Bank reshaping itself through substantial restructuring activities, including the sale of a major business line:
|
Income (loss) from discontinued operations, net of tax, reflects results related to Peoples Banks credit card business, including the sale of the business in the first quarter of 2004. |
|
Liability restructuring costs related to the sale of the credit card business reflect significant non-recurring charges taken to prepay slightly over $1.0 billion of long-term borrowings and to cancel derivative positions with notional values of $770 million, utilizing a portion of the proceeds from the sale of Peoples Banks credit card business in the first quarter of 2004. |
|
Gains on asset sales reflect non-recurring transactions occurring in 2001 and 2005 related to branch sales and the sale of Peoples Banks investment in the NYCE ATM network. |
|
Goodwill impairment charge is a non-recurring item. |
In addition to adjusted net income, management also utilizes core deposits and purchased funds as non-GAAP financial measures to supplement its analysis of Peoples Banks business performance. Core deposits is a measure of stable funding sources and is defined as total deposits, other than brokered certificates of deposit (acquired in the wholesale market), municipal deposits (which are seasonally variable by nature) and non-interest bearing deposits utilized for the operation of Peoples Banks businesses. Purchased funds include borrowings, brokered certificates of deposit and municipal deposits.
Although management believes that the above-mentioned non-GAAP financial measures enhance investors understanding of Peoples Banks operating performance, these non-GAAP financial measures should not be considered an alternative to GAAP. The reconciliation of these non-GAAP financial measures from GAAP to non-GAAP is presented below.
The following tables provide reconciliations between GAAP and non-GAAP financial measures:
(1) | For the nine months ended September 30, 2006, includes an after-tax loss on the sale of securities of $18.2 million relating to balance sheet restructuring activities. |
36
(1) | For the year ended December 31, 2006, includes an after-tax loss on the sale of securities of $18.2 million relating to balance sheet restructuring activities. |
37
In addition to the above non-GAAP financial measures, management uses the efficiency ratio to monitor its operating efficiency compared to its peers. The efficiency ratio, which represents an approximate measure of the cost required by Peoples Bank to generate a dollar of revenue, is the ratio of total non-interest expense (excluding goodwill impairment charges, amortization of acquisition-related intangibles, losses on real estate assets and nonrecurring expenses) (the numerator) to net interest income plus total non-interest income (excluding gains and losses on sales of assets, other than residential mortgage loans, and nonrecurring income) (the denominator). Peoples Bank generally considers an income or expense to be nonrecurring if it is not similar to an income or expense of a type incurred within the last two years and is not similar to an income or expense of a type reasonably expected to be incurred within the following two years. Management considers the efficiency ratio to be more representative of Peoples Banks ongoing operating efficiency, as the excluded items are generally related to external market conditions and non-routine transactions. Since there is not a comparable GAAP financial measure related to the efficiency ratio, the following tables reconcile Peoples Banks calculation of the efficiency ratio to the efficiency ratio calculations as defined by the Office of Thrift Supervision, Peoples Banks banking regulator, for the nine months ended September 30, 2006 and the three months and year ended December 31, 2006 and by the Federal Deposit Insurance Corporation, Peoples Banks former banking regulator, for all prior periods.
The following tables summarize Peoples Banks efficiency ratio derived from amounts reported in the Thrift Financial Reports to the Office of Thrift Supervision. Differences in the numerator are primarily related to Peoples Bank excluding certain nonrecurring items as indicated in the tables below. Differences in the denominator are primarily related to the Office of Thrift Supervision excluding certain fee-based revenues, net gains on sales of residential mortgages, income from bank-owned life insurance and other non-interest income. Additionally, in calculating the denominator, Peoples Bank excludes certain nonrecurring items and adjusts bank-owned life insurance income to a fully taxable equivalent basis, as indicated in the tables below.
38
The following tables summarize Peoples Banks efficiency ratio derived from amounts reported in the Consolidated Statements of Income.
(1) | Fully taxable equivalent. |
39
(1) | Fully taxable equivalent. |
The following table summarizes Peoples Banks efficiency ratio derived from amounts reported in the Consolidated Reports of Condition and Income to the Federal Deposit Insurance Corporation. Amounts reported for the years ended December 31, 2003, 2002 and 2001 have not been adjusted to reflect the reclassification of the results of operations of the credit card business for all years prior to the sale in March 2004 to discontinued operations.
(1) | Fully taxable equivalent. |
40
The following table summarizes Peoples Banks efficiency ratio derived from amounts reported in the Consolidated Statements of Income.
(1) | Fully taxable equivalent. |
41
HOW WE INTEND TO USE THE PROCEEDS FROM THE OFFERING
The net offering proceeds will depend on the total number of shares of common stock sold in the offering, which in turn will depend on RP Financials independent appraisal, regulatory and market considerations, and the expenses incurred in connection with the offering. Although we will not be able to determine the actual net proceeds from the sale of the common stock until we complete the offering, we estimate the net proceeds to be between $2.658 billion and $3.587 billion, or $4.121 billion if the offering is increased by 15%.
We intend to distribute the net proceeds from the offering as follows:
We intend to contribute 50% of the net proceeds from the offering to Peoples Bank. We also intend to lend our employee stock ownership plan cash to enable the plan to purchase an amount of common stock equal to up to 6% of the sum of the shares sold in the offering and those issued to the charitable foundation. Our employee stock ownership plan, with prior Office of Thrift Supervision approval, expects to purchase these shares of common stock in the open market after the offering, although it may purchase common stock in the offering pursuant to the subscription right granted to our tax-qualified employee stock benefit plans. In addition, we expect to contribute $20.0 million in cash to The Peoples Community Foundation. The balance of the net proceeds will be retained by Peoples United Financial and used for general corporate purposes, which we expect to include:
|
financing acquisitions of other financial institutions or other businesses related to banking (although there is no specific agreement with any institution or business at this time); |
|
investing in short-term investments, government securities or government-sponsored agency securities; |
|
payment of cash dividends; and |
|
repurchasing shares of our common stock. |
The funds contributed to Peoples Bank will be used for general business purposes, including:
|
financing acquisitions of other financial institutions or other businesses related to banking (although there is no specific agreement with any institution or business at this time); |
|
originating and purchasing residential mortgage loans, commercial real estate loans, commercial loans, Peoples Capital and Leasing loans and home equity lines of credit; |
|
opening additional branch offices on a de novo basis; and |
|
distributions of capital to Peoples United Financial. |
Peoples Bank currently intends to open at least 15 traditional branches in Westchester County, New York over the next three years. These additional traditional branches will be evaluated and added consistent with the branch expansion strategy that Peoples Bank has followed in the past. The expected average cost to construct and equip a new 3,000 square foot traditional storefront branch located within a shopping center is $1.0 million. The expected average cost to construct and equip a new 3,000 square foot free-standing branch is $1.7 million. Factors that would affect this investment include the
42
locations of the properties, whether the properties are purchased or leased, local zoning ordinances, whether the properties are existing structures or new construction and, if existing structures, the state of repair of the structures.
In addition to expanding our core banking business through internal growth (funded by customer deposits and borrowed funds) and de novo branching, we will also consider expansion opportunities such as the acquisition of other financial institutions, businesses related to banking and branches. We do not, however, have any current understandings, agreements or arrangements for expansion by the acquisition of any branches or other financial institutions.
Due to the amount of net proceeds being raised in the offering, it may take a significant amount of time for us and Peoples Bank to deploy the net proceeds to our best advantage. We anticipate that our retained portion of the net proceeds and the net proceeds that we contribute to Peoples Bank from the offering proceeds will be invested in accordance with Peoples Banks investment policy. It is expected that the investments will include short-term investments, government securities or government-sponsored agency securities.
The net proceeds may vary because total expenses relating to the conversion and offering may be more or less than our estimates. For example, our expenses will increase if we sell a smaller amount of common stock in the subscription offering and a larger amount in the syndicated offering than is set forth in our assumptions under Pro Forma Data . The net proceeds will also vary if the number of shares to be sold in the offering is adjusted to reflect a change in the estimated pro forma market value of Peoples United Financial. Payments for shares made through withdrawals from existing deposit accounts will not result in the receipt of new funds for investment by Peoples United Financial or Peoples Bank but will result in a reduction of Peoples Banks deposits and may result in a reduction of interest expense as funds are transferred from interest-bearing deposit accounts.
43
OUR POLICY REGARDING DIVIDENDS
Peoples Bank has paid quarterly cash dividends in each quarter since the fourth quarter of 1993. On October 19, 2006, the Board of Directors of Peoples Bank declared a quarterly cash dividend of $0.25 per common share outstanding, or $1.00 per share on an annualized basis, payable on November 15, 2006 to stockholders of record as of the close of business on November 1, 2006. The amount of dividends that Peoples United Financial initially intends to pay to stockholders following the conversion is intended to approximate the per share dividend amount, adjusted to reflect the share exchange, that Peoples Banks stockholders currently receive on their shares of Peoples Bank common stock. During the three-year period following the completion of the conversion, we will not take any action to declare an extraordinary dividend to stockholders that would be treated by recipients as a tax-free return of capital for federal income tax purposes.
The following table sets forth the dividend amounts that we expect to initially pay per share at the minimum, midpoint, maximum and adjusted maximum of the offering range.
Quarterly
dividends per share |
Annual
dividends per share |
Annual
dividend yield(1) |
|||||||
Dividends on Peoples United Financial Common Stock: |
|||||||||
Minimum of offering range |
$ | 0.15 | $ | 0.60 | 3.00 | % | |||
Midpoint of offering range |
$ | 0.13 | $ | 0.52 | 2.60 | % | |||
Maximum of offering range |
$ | 0.11 | $ | 0.44 | 2.20 | % | |||
15% above the maximum of offering range |
$ | 0.10 | $ | 0.40 | 2.00 | % |
(1) | Based upon a price of $20.00 per share. |
The continued payment of dividends will be subject to the determination of the Board of Directors of Peoples Bank and Peoples United Financial, which will take into account, among other things, our debt and equity structure, earnings and financial condition, need for capital in connection with possible future acquisitions and other factors, including economic conditions, regulatory restrictions and tax considerations. We cannot guarantee that we will pay dividends in the future or, if we pay dividends, the amount and frequency of these dividends.
The only funds available for the payment of dividends on Peoples United Financial common stock will be cash and cash equivalents held by Peoples United Financial, earnings from the investment of net proceeds from the sale of common stock retained by Peoples United Financial, dividends paid by Peoples Bank to Peoples United Financial, and borrowings.
Peoples Banks ability to pay dividends will be governed by the Home Owners Loan Act and the regulations of the Office of Thrift Supervision. Under that statute and those regulations, all dividends declared by a federal savings bank must be paid out of current or retained net profits. In addition, the prior approval of the Office of Thrift Supervision is required for the payment of a dividend if the total of all dividends declared by a federal savings bank in any calendar year would exceed the total of its net profits for the year combined with its net profits for the two preceding years, less any capital distributions (including dividends) paid during that time and any required transfers to surplus or a fund for the retirement of any preferred stock. Peoples Bank will also be prohibited from paying cash dividends to Peoples United Financial to the extent that any such payment would reduce Peoples Banks capital below required capital levels or would impair the liquidation account to be established for the benefit of the Peoples Banks eligible account holders and supplemental eligible account holders at the time of the conversion and offering. See The Conversion and OfferingEffects of the ConversionEffect on Liquidation Rights . For more information regarding the capital distribution regulations of the Office of Thrift Supervision and restrictions on the ability of Peoples Bank to lend funds or make other payments to Peoples United Financial, see Regulation of Peoples Bank and Peoples United Financial .
44
Peoples Bank common stock is currently listed on the Nasdaq Global Select Market under the trading symbol PBCT. Upon completion of the offering, the new shares of Peoples United Financial common stock will replace existing shares and will continue to be traded on the Nasdaq Global Select Market. For a period of 20 trading days following completion of the offering, our trading symbol will be PBCTD. Thereafter, our trading symbol will revert to PBCT. At September 30, 2006, Peoples Bank had approximately 32 market makers, including Ryan Beck & Co., Inc. and Morgan Stanley & Co. Incorporated, which intend to remain market makers in our common stock following the offering.
At the close of business on September 29, 2006, there were 142,142,485 shares of Peoples Bank common stock outstanding. The following table sets forth for the periods indicated the high and low sales prices per share of the common stock as reported by the Nasdaq Global Select Market and dividends paid per share. The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commissions, and may not represent actual transactions.
Sales Price | Dividend Information | ||||||||||
High | Low |
Amount Per
Share |
Date of Payment |
||||||||
2004 |
|||||||||||
First Quarter |
$ | 20.91 | $ | 14.44 | $ | 0.18 | February 15, 2004 | ||||
Second Quarter |
22.49 | 18.39 | 0.19 | May 15, 2004 | |||||||
Third Quarter |
24.67 | 20.00 | 0.19 | August 15, 2004 | |||||||
Fourth Quarter |
29.65 | 23.30 | 0.19 | November 15, 2004 | |||||||
2005 |
|||||||||||
First Quarter |
$ | 28.00 | $ | 23.99 | $ | 0.19 | February 15, 2005 | ||||
Second Quarter |
30.48 | 26.27 | 0.22 | May 15, 2005 | |||||||
Third Quarter |
33.75 | 28.17 | 0.22 | August 15, 2005 | |||||||
Fourth Quarter |
33.57 | 28.85 | 0.22 | November 15, 2005 | |||||||
2006 |
|||||||||||
First Quarter |
$ | 33.83 | $ | 30.00 | $ | 0.22 | February 15, 2006 | ||||
Second Quarter |
34.50 | 30.87 | 0.25 | May 15, 2006 | |||||||
Third Quarter |
41.15 | 31.89 | 0.25 | August 15, 2006 | |||||||
Fourth Quarter |
45.40 | 39.24 | 0.25 | November 15, 2006 |
Figures in the table above have been adjusted to reflect the three-for-two stock splits effected by Peoples Bank on each of May 15, 2004 and May 15, 2005.
On September 19, 2006, the business day immediately preceding the public announcement of the conversion, the closing price of Peoples Bank common stock, as reported on the Nasdaq Global Select Market, was $37.39 per share. On [ ], 2007, the closing price of Peoples Bank common stock was $[ ] per share and there were approximately [ ] holders of record.
45
BANK REGULATORY CAPITAL COMPLIANCE
At September 30, 2006, Peoples Bank exceeded all regulatory capital requirements. Set forth below is a summary of Peoples Banks capital computed under accounting principles generally accepted in the United States of America, referred to as GAAP, and its compliance with regulatory capital standards at September 30, 2006, on a historical and pro forma basis under Office of Thrift Supervision regulations. The pro forma calculations reflect several assumptions. First, we have assumed that the indicated number of shares were sold as of September 30, 2006. Second, we have assumed that the assets of Peoples Bank increased as a result of receiving 50% of the net proceeds from the offering and receiving a deposit from Peoples United Financial for the portion of the net proceeds retained after funding the employee stock ownership plan and funding the cash portion of the charitable foundation. The change in risk weighted assets assumed Peoples Bank invested the funds in 20% risk-weighted assets. Third, we have assumed that tangible, core and total risk-based capital of Peoples Bank increased as a result of receiving 50% of the net proceeds from the offering, reduced by the contra-equity adjustment related to the employee stock ownership plan. See Pro Forma Data . For a discussion of the capital requirements applicable to Peoples Bank, see Regulation of Peoples Bank and Peoples United FinancialFederally Chartered Savings Bank RegulationCapital Requirements .
Pro Forma at September 30, 2006 Based Upon the Sale at $20.00 Per Share | |||||||||||||||||||||||||||||||
Historical at September 30, 2006 |
137,062,500 Shares (Minimum of the Range) |
161,250,000 Shares (Midpoint of the Range) |
185,437,500 Shares (Maximum of the Range) |
213,253,125 Shares
(15% Above Maximum
|
|||||||||||||||||||||||||||
Amount |
Percent of Assets (2) |
Amount |
Percent of Assets (2) |
Amount |
Percent of Assets (2) |
Amount |
Percent of Assets (2) |
Amount |
Percent of Assets (2) |
||||||||||||||||||||||
(Dollars in millions) | |||||||||||||||||||||||||||||||
Capital under generally accepted accounting principles (3) |
$ | 1,351.4 | 12.73 | % | $ | 2,513.4 | 19.19 | % | $ | 2,716.5 | 20.08 | % | $ | 2,919.8 | 20.91 | % | $ | 3,153.4 | 21.80 | % | |||||||||||
Tangible capital |
$ | 1,248.5 | 11.80 | % | $ | 2,410.5 | 18.47 | % | $ | 2,613.6 | 19.38 | % | $ | 2,816.9 | 20.24 | % | $ | 3,050.5 | 21.15 | % | |||||||||||
Requirement |
158.7 | 1.50 | % | 195.7 | 1.50 | % | 202.3 | 1.50 | % | 208.8 | 1.50 | % | 216.3 | 1.50 | % | ||||||||||||||||
Excess |
$ | 1,089.8 | 10.30 | % | $ | 2,214.8 | 16.97 | % | $ | 2,411.3 | 17.88 | % | $ | 2,608.1 | 18.74 | % | $ | 2,834.2 | 19.65 | % | |||||||||||
Core capital (4) |
$ | 1,248.5 | 11.80 | % | $ | 2,410.5 | 18.47 | % | $ | 2,613.6 | 19.38 | % | $ | 2,816.9 | 20.24 | % | $ | 3,050.5 | 21.15 | % | |||||||||||
Requirement |
423.1 | 4.00 | % | 522.0 | 4.00 | % | 539.4 | 4.00 | % | 556.8 | 4.00 | % | 576.8 | 4.00 | % | ||||||||||||||||
Excess |
$ | 825.4 | 7.80 | % | $ | 1,888.5 | 14.47 | % | $ | 2,074.2 | 15.38 | % | $ | 2,260.1 | 16.24 | % | $ | 2,473.7 | 17.15 | % | |||||||||||
Total risk-based capital |
$ | 1,374.7 | 16.19 | % | $ | 2,536.7 | 28.24 | % | $ | 2,739.8 | 30.21 | % | $ | 2,943.1 | 32.14 | % | $ | 3,176.7 | 34.31 | % | |||||||||||
Requirement |
679.2 | 8.00 | % | 718.7 | 8.00 | % | 725.7 | 8.00 | % | 732.6 | 8.00 | % | 740.7 | 8.00 | % | ||||||||||||||||
Excess |
$ | 695.5 | 8.19 | % | $ | 1,818.0 | 20.24 | % | $ | 2,014.1 | 22.21 | % | $ | 2,210.5 | 24.14 | % | $ | 2,436.0 | 26.31 | % | |||||||||||
(1) | As adjusted to give effect to an increase in the number of shares which could occur due to an increase in the offering range of up to 15% as a result of market demand, regulatory considerations or changes in financial markets following the commencement of the offering. |
(2) | Core capital levels are shown as a percentage of total assets, and risk-based capital levels are calculated on the basis of a percentage of risk-weighted assets, each as defined in the Office of Thrift Supervision regulations. |
(3) | At September 30, 2006, the $102.9 million decrease in the amount of tangible capital from the amount of capital under generally accepted accounting principles, referred to as GAAP, is due to the deduction of $105.5 million of goodwill and certain other intangible assets from GAAP capital, the addition of $2.6 million of unrealized losses on cash flow derivatives and to the inclusion in GAAP capital of an unrealized gain on Peoples Banks available for sale securities. The increase of $126.2 million in the amount of total risk-based capital is due to the addition of $52.1 million of qualifying subordinated notes and the addition of the allowance for loan losses up to 1.25% of total risk weighted assets in the total risk-based capital calculation. |
(4) | The current core capital requirement for savings banks is 3% of total adjusted assets for savings banks that receive the highest supervisory ratings for safety and soundness and that are not experiencing or anticipating significant growth. The current core capital ratio applicable to all other savings banks is 4%. |
46
The following table provides a reconciliation of Peoples Banks capital under generally accepted accounting principles to regulatory capital amounts under Office of Thrift Supervision regulations at September 30, 2006.
The following table provides a reconciliation of Peoples Banks historical regulatory capital amounts under Office of Thrift Supervision regulations to regulatory capital amounts stated on a pro forma basis at September 30, 2006.
(1) | As adjusted to give effect to an increase in the number of shares which could occur due to an increase in the offering range of up to 15% as a result of market demand, regulatory considerations or changes in financial markets following the commencement of the offering. |
(2) | Funds retained at holding company will be used to fund the loan to the employee stock ownership plan and the cash contribution to the charitable foundation. |
47
The following table presents the historical deposits and consolidated capitalization of Peoples Bank at September 30, 2006, and the pro forma consolidated capitalization of Peoples United Financial after giving effect to the conversion and offering, based upon the sale of the number of shares shown below at $20.00 per share and the other assumptions set forth under Pro Forma Data . A change in the number of shares sold in the offering may materially affect the capitalization.
Historical |
Pro Forma Capitalization at September 30, 2006 | |||||||||||||||||||
137,062,500 Shares
(Minimum of
|
161,250,000 Shares
(Midpoint of
|
185,437,500 Shares
(Maximum of
|
213,253,125
(15% Above
|
|||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||
Deposits (2) |
$ | 8,978.6 | $ | 8,978.6 | $ | 8,978.6 | $ | 8,978.6 | $ | 8,978.6 | ||||||||||
Borrowed funds |
13.6 | 13.6 | 13.6 | 13.6 | 13.6 | |||||||||||||||
Subordinated notes |
108.8 | 108.8 | 108.8 | 108.8 | 108.8 | |||||||||||||||
Total deposits and borrowings |
$ | 9,101.0 | $ | 9,101.0 | $ | 9,101.0 | $ | 9,101.0 | $ | 9,101.0 | ||||||||||
Stockholders equity: |
||||||||||||||||||||
Common stock, par value $0.01 per share, 1.95 billion shares authorized; to be issued as reflected (3) |
$ | 142.1 | $ | 2.4 | $ | 2.8 | $ | 3.2 | $ | 3.7 | ||||||||||
Additional paid-in capital |
177.8 | 3,015.2 | 3,479.2 | 3,943.2 | 4,476.8 | |||||||||||||||
Retained earnings (4) |
1,038.6 | 1,038.6 | 1,038.6 | 1,038.6 | 1,038.6 | |||||||||||||||
Accumulated other comprehensive (loss) (5) |
(7.1 | ) | (7.1 | ) | (7.1 | ) | (7.1 | ) | (7.1 | ) | ||||||||||
Add: MHC capital contribution (6) |
| 8.5 | 8.5 | 8.5 | 8.5 | |||||||||||||||
Less: |
||||||||||||||||||||
Expense of cash contribution to charitable foundation |
| (20.0 | ) | (20.0 | ) | (20.0 | ) | (20.0 | ) | |||||||||||
Expense of stock contribution to charitable foundation |
| (40.0 | ) | (40.0 | ) | (40.0 | ) | (40.0 | ) | |||||||||||
Add: Tax benefit of contribution to charitable foundation (7) |
| 20.4 | 20.4 | 20.4 | 20.4 | |||||||||||||||
Less: |
||||||||||||||||||||
Common stock acquired by employee stock ownership plan (8) |
| (166.9 | ) | (195.9 | ) | (224.9 | ) | (258.3 | ) | |||||||||||
Common stock acquired by recognition and retention plan (9) |
| (111.3 | ) | (130.6 | ) | (150.0 | ) | (172.2 | ) | |||||||||||
Total stockholders equity |
$ | 1,351.4 | $ | 3,739.8 | $ | 4,155.9 | $ | 4,571.9 | $ | 5,050.4 | ||||||||||
Stockholders equity as a percentage of total assets |
12.73 | % | 28.77 | % | 30.98 | % | 33.05 | % | 35.29 | % | ||||||||||
Tangible stockholders equity as a percentage of tangible assets |
11.86 | % | 28.19 | % | 30.43 | % | 32.54 | % | 34.81 | % |
(1) | As adjusted to give effect to an increase in the number of shares which could occur due to an increase in the offering range of up to 15% as a result of market demand, regulatory considerations or changes in financial markets following the commencement of the offering. |
(2) | Does not reflect withdrawals from deposit accounts for the purchase of common stock in the offering. Withdrawals from deposit accounts would reduce pro forma deposits by the amount of such withdrawals. |
(3) | Reflects the total shares to be outstanding after the conversion and offering: 239,554,084 shares at the minimum of the estimated valuation range, 281,475,393 shares at the midpoint, 323,396,702 shares at the maximum and 371,606,207 shares at the adjusted maximum. After the conversion and offering, we will have 50,000,000 authorized shares of preferred stock, par value $0.01 per share, all of which will be unissued. Historical common stock has no par value, but an assumed $1.00 per share value for presentation purposes. |
(4) | The retained earnings of Peoples Bank will be substantially restricted after the offering. |
(5) | Represents the net unrealized gains and losses on securities classified as available-for-sale and derivatives, net of related taxes. |
48
(6) | Reflects contribution of Peoples Mutual Holdings capital as a result of the conversion of Peoples Mutual Holdings into a federal stock savings bank and merger into Peoples Bank as part of the conversion. |
(7) | Represents the tax effect of the contribution to the charitable foundation based on an effective 34% tax rate. The realization of the deferred tax benefit is limited annually to a maximum deduction for charitable foundations equal to 10% of our annual taxable income, subject to our ability to carry forward any unused portion of the deduction for five years following the year in which the contribution is made. |
(8) | Assumes that an amount equal to 6% of the sum of the shares sold in the offering and those issued to the charitable foundation will be purchased by the employee stock ownership plan at $20.00 per share and the funds used to acquire the employee stock ownership plan shares will be borrowed from Peoples United Financial. Peoples Bank intends to contribute funds to the employee stock ownership plan to enable the plan to repay the loan from Peoples United Financial. The common stock acquired by the employee stock ownership plan is reflected as a reduction of stockholders equity. |
(9) | Assumes that, subsequent to the offering, an amount equal to 4% of the sum of the shares sold in the offering and those issued to the charitable foundation is purchased by a recognition and retention plan at $20.00 per share through open market purchases or in privately negotiated transactions. We intend to purchase the common stock for the recognition and retention plan with funds from general operating cash flows. The common stock purchased by the recognition and retention plan is reflected as a reduction of stockholders equity. |
49
We cannot determine the actual net proceeds from the sale of the common stock until the offering is completed. However, we estimate that net proceeds will be between $2.658 billion and $3.587 billion, or $4.121 billion if the offering range is increased by 15%. The following tables set forth Peoples Banks historical net income and stockholders equity prior to the offering and pro forma net income and stockholders equity giving effect to the offering. In preparing these tables and in calculating net proceeds and pro forma data, we have made the following assumptions:
|
For purposes of calculating the expenses of the offering, we assumed that we will sell approximately 60.0 million shares of common stock in the subscription offering and between 77.1 million and 125.4 million shares in the syndicated offering, or 153.2 million shares at the adjusted maximum of the offering range. We estimated that expenses of the offering, including the fees and selling commissions of Morgan Stanley & Co. Incorporated, Ryan Beck & Co., Inc. and the other syndicate members in the syndicated offering, would be approximately $83.6 million at the minimum and $122.3 million at the maximum of the offering range, or $144.5 million at the adjusted maximum of the offering range. These expenses include fixed expenses of $10.0 million exclusive of the fees and selling commissions of Morgan Stanley & Co. Incorporated, Ryan Beck & Co., Inc. and the other syndicate members. |
|
We assumed that we will loan an amount equal to the cost of purchasing an amount equal to 6% of the sum of the shares of common stock sold in the offering and those issued to the charitable foundation to our employee stock ownership plan to fund its purchase of our common stock in the open market (with prior Office of Thrift Supervision approval) upon the completion of the offering at an assumed purchase price of $20.00 per share. We assumed that Peoples Bank would make annual contributions to the plan in an amount at least equal to the principal and interest requirement of the loan. We have assumed a 30-year amortization period for the loan, with an interest rate of 8.0%. The common stock acquired by the employee stock ownership plan is reflected as a reduction of stockholders equity. |
|
We assumed that a recognition and retention plan, expected to be adopted by us no sooner than six months following the offering, had been approved by stockholders of Peoples United Financial and that the recognition and retention plan had acquired an amount equal to 4% of the sum of the shares of common stock sold in the offering and those issued to the charitable foundation at the beginning of the periods presented through open market purchases or privately negotiated transactions at a price of $20.00 per share using funds contributed to the recognition and retention plan by Peoples United Financial. We assumed that all the shares held by the plan were granted to plan participants at the beginning of the period, that the shares would vest at a rate of 20% per year and that compensation expense will be recognized on a straight-line basis over the five year vesting period. |
|
We assumed that a stock option plan expected to be adopted by us no sooner than six months following the offering had been approved by the stockholders of Peoples United Financial and that the exercise price of the stock options and the market price of the stock at the date of grant were $20.00 per share, and that the stock options had a term of ten years, vested over five years and that the stock option plan granted options to acquire an amount equal to 10% of the shares of common stock sold in the offering and issued to the charitable foundation. We applied the Black-Scholes option pricing model to estimate a grant-date fair value of $3.31 for each option. In addition to the terms of the options described above, the Black-Scholes option pricing model incorporated an estimated volatility rate of 11.3% for the common stock based on the trading activity of an index of publicly-traded thrifts, a dividend yield of 3.0%, an expected option life of ten years and a risk free interest rate of 4.64%. |
|
Pro forma earnings have been calculated assuming the common stock had been sold at the beginning of the period and the net proceeds had been invested at an average yield of 5.25% and 4.25% for the nine months ended September 30, 2006 and the year ended December 31, 2005, which approximates the federal funds rate on September 30, 2006 and December 31, 2005, respectively. The federal funds yield, rather than an arithmetic average of the average yield on interest-earning assets and the average rate paid on deposits, has been used to estimate income on net proceeds because we believe that this rate is a more accurate estimate of the rate that would be obtained on an investment of net proceeds from the offering. The pro forma after-tax yield on the net proceeds is assumed to be 3.47% and 2.81% for the nine months ended September 30, 2006 and the year ended December 31, 2005, respectively. |
|
We used an effective tax rate of 34% in calculating the pro forma net income. |
|
We did not give effect to any withdrawals from deposit accounts to purchase shares in the offering. |
50
|
Historical and pro forma per share amounts have been calculated by dividing historical and pro forma amounts by the indicated number of shares of stock, as adjusted in the pro forma net earnings per share to give effect to the purchase of shares by the employee stock ownership plan. |
|
Pro forma stockholders equity amounts have been calculated as if the stock had been sold on September 30, 2006 and December 31, 2005, respectively, and no effect has been given to the assumed earnings effect of the transaction. |
The following pro forma data relies on the assumptions outlined above, and does not represent the fair market value of the common stock, the current value of our assets or liabilities, or the amount of money that would be distributed to stockholders if Peoples United Financial were liquidated. Book value does not give effect to intangibles, bad debt reserve or the liquidation account in the event of liquidation. The pro forma data does not predict how much we will earn in the future. You should not use the following information to predict future results of operations.
51
At or for the Nine Months Ended September 30, 2006 | ||||||||||||||||
Minimum
137,062,500 Shares Sold at $20.00 Per Share |
Midpoint
Sold at
|
Maximum
185,437,500 Shares Sold at $20.00 Per Share |
Adjusted
Maximum 213,253,125 Shares Sold at $20.00 Per Share (1) |
|||||||||||||
(Dollars in millions, except per share amounts) | ||||||||||||||||
Offering price as a multiple of pro forma net income per share |
27.27x | 30.00x | 32.61x | 35.71x | ||||||||||||
Number of shares outstanding for pro forma net income per share calculations (7) |
231,418,928 | 271,925,268 | 312,431,609 | 359,013,900 | ||||||||||||
Stockholders equity: |
||||||||||||||||
Historical |
$ | 1,351.4 | $ | 1,351.4 | $ | 1,351.4 | $ | 1,351.4 | ||||||||
Estimated net proceeds |
2,657.7 | 3,122.1 | 3,586.5 | 4,120.6 | ||||||||||||
Plus: Market value of shares issued to charitable foundation |
40.0 | 40.0 | 40.0 | 40.0 | ||||||||||||
Plus: Tax benefit of contribution to charitable foundation (8) |
20.4 | 20.4 | 20.4 | 20.4 | ||||||||||||
Plus: MHC capital contribution (4) |
8.5 | 8.5 | 8.5 | 8.5 | ||||||||||||
Less: Common stock acquired by employee stock ownership plan (2) |
(166.9 | ) | (195.9 | ) | (224.9 | ) | (258.3 | ) | ||||||||
Less: Common stock acquired by recognition and retention plan (3) |
(111.3 | ) | (130.6 | ) | (150.0 | ) | (172.2 | ) | ||||||||
Less: Expense of contribution to charitable foundation |
(60.0 | ) | (60.0 | ) | (60.0 | ) | (60.0 | ) | ||||||||
Pro forma stockholders equity |
3,739.8 | 4,155.9 | 4,571.9 | 5,050.4 | ||||||||||||
Intangible assets |
(105.3 | ) | (105.3 | ) | (105.3 | ) | (105.3 | ) | ||||||||
Pro forma tangible stockholders equity |
$ | 3,634.5 | $ | 4,050.6 | $ | 4,466.6 | $ | 4,945.1 | ||||||||
Stockholders equity per share (9) : |
||||||||||||||||
Historical |
$ | 5.63 | $ | 4.80 | $ | 4.19 | $ | 3.64 | ||||||||
Estimated net proceeds |
11.09 | 11.09 | 11.09 | 11.09 | ||||||||||||
Plus: Market value of shares issued to charitable foundation |
0.17 | 0.14 | 0.12 | 0.11 | ||||||||||||
Plus: Tax benefit of contribution to charitable foundation (8) |
0.09 | 0.07 | 0.06 | 0.05 | ||||||||||||
Plus: MHC capital contribution (4) |
0.04 | 0.03 | 0.03 | 0.02 | ||||||||||||
Less: Common stock acquired by employee stock ownership plan (2) |
(0.70 | ) | (0.70 | ) | (0.70 | ) | (0.70 | ) | ||||||||
Less: Common stock acquired by recognition and retention plan (3) |
(0.46 | ) | (0.46 | ) | (0.46 | ) | (0.46 | ) | ||||||||
Less: Expense of contribution to charitable foundation |
(0.25 | ) | (0.21 | ) | (0.19 | ) | (0.16 | ) | ||||||||
Pro forma stockholders equity per share (9) |
15.61 | 14.76 | 14.14 | 13.59 | ||||||||||||
Intangible assets |
(0.44 | ) | (0.37 | ) | (0.33 | ) | (0.28 | ) | ||||||||
Pro forma tangible stockholders equity per share (9) |
$ | 15.17 | $ | 14.39 | $ | 13.81 | $ | 13.31 | ||||||||
Offering price as a percentage of stockholders equity per share |
128.12 | % | 135.50 | % | 141.44 | % | 147.17 | % | ||||||||
Offering price as a percentage of tangible equity per share |
131.84 | % | 138.99 | % | 144.82 | % | 150.26 | % | ||||||||
Shares used for pro forma stockholders equity per share (7) |
239,554,084 | 281,475,393 | 323,396,702 | 371,606,207 |
(1) | As adjusted to give effect to an increase in the number of shares which could occur due to an increase in the offering range of up to 15% as a result of market demand, regulatory considerations or changes in financial markets following the commencement of the offering. |
52
(2) | It is assumed that an amount of common stock equal to 6.0% of the sum of the shares of common stock sold in the offering and those issued to the charitable foundation will be purchased by our employee stock ownership plan. For purposes of this table, it is assumed that the funds used to acquire such shares have been borrowed by the employee stock ownership plan from Peoples United Financial. The amount to be borrowed is reflected as a reduction of stockholders equity. Employee stock ownership plan expense is based upon generally accepted accounting principles as described in Statement of Position 93-6. Generally accepted accounting principles require that as and when shares pledged as security for an employee stock ownership plan loan are committed to be released from the loan ( i.e. , as the loan is repaid), employee stock ownership plan expense is recorded based upon the fair value of the shares at the time. Peoples Bank intends to make annual contributions to the employee stock ownership plan in an amount at least equal to the principal and interest requirement of the debt. Peoples Banks total annual payment of the employee stock ownership plan debt is based upon 30 equal annual installments of principal, with an assumed interest rate of 8.0%. The pro forma net income assumes: (1) that Peoples Banks contribution to the employee stock ownership plan is equivalent to the debt service requirement for the nine months ended September 30, 2006, and was made at the end of the period; (2) that 208,594 shares at the minimum of the offering range, 244,875 shares at the midpoint of the offering range, 281,156 shares at the maximum of the offering range and 322,880 shares at the adjusted maximum of the offering range were committed to be released during the nine months ended September 30, 2006 at an average fair value of $20.00 per share in accordance with Statement of Position 93-6; and (3) that the employee stock ownership plan shares committed to be released were considered outstanding for the entire period for purposes of the net income per share calculations. |
(3) | Gives effect to the recognition and retention plan expected to be adopted by Peoples United Financial no sooner than six months following the offering and thereafter presented for approval at a meeting of stockholders. Assumes that the recognition and retention plan acquires an amount of common stock equal to 4% of the sum of the shares of common stock sold in the offering and those issued to the charitable foundation, or 5,562,500 shares at the minimum of the offering range, 6,530,000 shares at the midpoint of the offering range, 7,497,500 shares at the maximum of the offering range and 8,610,125 shares at the adjusted maximum of the offering range through open market purchases or privately negotiated transactions. We intend to purchase the common stock for the recognition and retention plan with funds from general operating cash flows. In calculating the pro forma effect of the recognition and retention plan, it is assumed that the shares were acquired by the recognition and retention plan at the beginning of the period presented in open market purchases at a purchase price of $20.00 per share and that 20% of the amount contributed was an amortized expense during such period. The issuance of authorized but previously unissued shares of common stock for the recognition and retention plan would dilute stockholders ownership and voting interests by approximately 2.27% at the maximum of the offering range. |
(4) | Reflects contribution of Peoples Mutual Holdings capital as a result of the conversion of Peoples Mutual Holdings into a federal stock savings bank and its merger into Peoples Bank as part of the conversion. |
(5) | Gives effect to the stock option plan expected to be adopted by Peoples United Financial no sooner than six months following the offering and thereafter presented for approval at a meeting of stockholders. Assumes that options to acquire an amount of common stock equal to 10% of the common stock sold in the offering and issued to the charitable foundation will be granted. In calculating the pro forma effect of the stock option expense, it is assumed that the exercise price of the stock options and trading price of the common stock at the date of grant were $20.00 per share, the estimated grant-date fair value pursuant to the application of the Black-Scholes option pricing model was $3.31 for each option, the aggregate grant-date fair value of the stock options was amortized to expense on a straight-line basis over a five year vesting period of the options and that option expense was tax effected with an assumed effective tax rate of 34%. Under the above assumptions, the adoption of the stock option plan will result in no additional shares under the treasury stock method for purposes of calculating earnings per share. There can be no assurance that the actual exercise price of the stock options will be equal to the $20.00 per share price. If a portion of the shares to satisfy the exercise of options under stock option plan are obtained from the issuance of authorized but unissued shares, our net income per share and stockholders equity per share will decrease. This will also have a dilutive effect of up to 5.48% at the maximum of the offering range on the ownership interests of persons who purchase common stock in the offering. |
(6) | Per share figures include publicly held shares of Peoples Bank common stock that will be exchanged for share of Peoples United Financial. See The Conversion and OfferingThe Share Exchange of Peoples Bank Common Stock for Peoples United Common Stock. Net income per share computations are determined by taking the number of shares assumed to be sold in the offering, the number of shares expected to be issued in exchange for publicly held shares and the number of shares expected to be contributed to the charitable foundation and, in accordance with Statement of Position 93-6, subtracting the employee stock ownership plan shares which have not been committed for release during the respective periods. See footnote 2. The number of shares of common stock actually sold and the corresponding number of exchange shares may be more or less than the assumed amounts. |
53
(7) | The number of shares used to calculate the pro forma net income per share is equal to the total number of shares to be outstanding upon completion of the conversion and offering, less the number of shares purchased by the employee stock ownership plan not committed to be released during the respective periods. The number of shares used to calculate pro forma stockholders equity per share is equal to the total number of shares to be outstanding upon completion of the conversion and offering. |
(8) | Represents the tax effect of the contribution to the charitable foundation based on an effective 34% tax rate. The realization of the deferred tax benefit is limited annually to a maximum deduction for charitable foundations equal to 10% of our annual taxable income, subject to our ability to carry forward any unused portion of the deduction for five years following the year in which the contribution is made. |
(9) | Per share figures include shares of Peoples Bank common stock that will be issued in the share exchange that is part of the conversion and offering. The additional shares reflect an exchange ratio of 1.6712, 1.9662, 2.2611 and 2.6003 at the minimum, midpoint, maximum and adjusted maximum of the offering range, respectively. The number of shares of common stock actually sold and the corresponding number of shares issued in the share exchange may be more or less than the assumed amounts. |
54
At or for the Year Ended December 31, 2005 | ||||||||||||||||
Minimum 137,062,500 Shares
Sold at $20.00
|
Midpoint 161,250,000
Shares Sold at
|
Maximum
Shares Sold at
|
Adjusted Maximum
Shares Sold at $20.00 Per Share (1) |
|||||||||||||
(Dollars in millions, except per share amounts) | ||||||||||||||||
Offering price as a multiple of pro forma net income per share |
25.97x | 28.99x | 32.26x | 35.71x | ||||||||||||
Number of shares outstanding for pro forma net income per share calculations (7) |
231,488,459 | 272,006,893 | 312,525,327 | 359,121,527 | ||||||||||||
Stockholders equity: |
||||||||||||||||
Historical |
$ | 1,288.6 | $ | 1,288.6 | $ | 1,288.6 | $ | 1,288.6 | ||||||||
Estimated net proceeds |
2,657.7 | 3,122.1 | 3,586.5 | 4,120.6 | ||||||||||||
Plus: Market value of shares issued to charitable foundation |
40.0 | 40.0 | 40.0 | 40.0 | ||||||||||||
Plus: Tax benefit of contribution to charitable foundation (8) |
20.4 | 20.4 | 20.4 | 20.4 | ||||||||||||
Plus: MHC capital contribution (4) |
8.5 | 8.5 | 8.5 | 8.5 | ||||||||||||
Less: Common stock acquired by employee stock ownership plan (2) |
(166.9 | ) | (195.9 | ) | (224.9 | ) | (258.3 | ) | ||||||||
Less: Common stock acquired by recognition and retention plan (3) |
(111.3 | ) | (130.6 | ) | (150.0 | ) | (172.2 | ) | ||||||||
Less: Expense of contribution to charitable foundation |
(60.0 | ) | (60.0 | ) | (60.0 | ) | (60.0 | ) | ||||||||
Pro forma stockholders equity |
3,677.0 | 4,093.1 | 4,509.1 | 4,987.6 | ||||||||||||
Intangible assets |
(106.1 | ) | (106.1 | ) | (106.1 | ) | (106.1 | ) | ||||||||
Pro forma tangible stockholders equity |
$ | 3,570.9 | $ | 3,987.0 | $ | 4,403.0 | $ | 4,881.5 | ||||||||
Stockholders equity per share (9) : |
||||||||||||||||
Historical |
$ | 5.37 | $ | 4.58 | $ | 3.99 | $ | 3.47 | ||||||||
Estimated net proceeds |
11.09 | 11.09 | 11.09 | 11.09 | ||||||||||||
Plus: Market value of shares issued to charitable foundation |
0.17 | 0.14 | 0.12 | 0.11 | ||||||||||||
Plus: Tax benefit of contribution to charitable foundation (8) |
0.09 | 0.07 | 0.06 | 0.05 | ||||||||||||
Plus: MHC capital contribution (4) |
0.04 | 0.03 | 0.03 | 0.02 | ||||||||||||
Less: Common stock acquired by employee stock ownership plan (2) |
(0.70 | ) | (0.70 | ) | (0.70 | ) | (0.70 | ) | ||||||||
Less: Common stock acquired by recognition and retention plan (3) |
(0.46 | ) | (0.46 | ) | (0.46 | ) | (0.46 | ) | ||||||||
Less: Expense of contribution to charitable foundation |
(0.25 | ) | (0.21 | ) | (0.19 | ) | (0.16 | ) | ||||||||
Pro forma stockholders equity per share (9) |
15.35 | 14.54 | 13.94 | 13.42 | ||||||||||||
Intangible assets |
(0.44 | ) | (0.38 | ) | (0.33 | ) | (0.29 | ) | ||||||||
Pro forma tangible stockholders equity
|
$ | 14.91 | $ | 14.16 | $ | 13.61 | $ | 13.13 | ||||||||
Offering price as a percentage of equity per share |
130.29 | % | 137.55 | % | 143.47 | % | 149.03 | % | ||||||||
Offering price as a percentage of tangible equity share |
134.14 | % | 141.24 | % | 146.95 | % | 152.32 | % | ||||||||
Shares used to pro forma stockholders equity
|
239,554,084 | 281,475,393 | 323,396,702 | 371,606,207 |
(1) | As adjusted to give effect to an increase in the number of shares which could occur due to an increase in the offering range of up to 15% as a result of market demand, regulatory considerations or changes in financial markets following the commencement of the offering. |
55
(2) | It is assumed that an amount of common stock equal to 6.0% of the sum of the shares of common stock sold in the offering and those issued to the charitable foundation will be purchased by our employee stock ownership plan. For purposes of this table, it is assumed that the funds used to acquire such shares have been borrowed by the employee stock ownership plan from Peoples United Financial. The amount to be borrowed is reflected as a reduction of stockholders equity. Employee stock ownership plan expense is based upon generally accepted accounting principles as described in Statement of Position 93-6. Generally accepted accounting principles require that as and when shares pledged as security for an employee stock ownership plan loan are committed to be released from the loan ( i.e. , as the loan is repaid), employee stock ownership plan expense is recorded based upon the fair value of the shares at the time. Peoples Bank intends to make annual contributions to the employee stock ownership plan in an amount at least equal to the principal and interest requirement of the debt. Peoples Banks total annual payment of the employee stock ownership plan debt is based upon 30 equal annual installments of principal, with an assumed interest rate of 8.0%. The pro forma net income assumes: (1) that Peoples Banks contribution to the employee stock ownership plan is equivalent to the debt service requirement for the twelve months ended December 31, 2005, and was made at the end of the period; (2) that 278,125 shares at the minimum of the offering range, 326,500 shares at the midpoint of the offering range, 374,875 shares at the maximum of the offering range and 430,506 shares at the adjusted maximum of the offering range were committed to be released during the twelve months ended December 31, 2005 at an average fair value of $20.00 per share in accordance with Statement of Position 93-6; and (3) that the employee stock ownership plan shares committed to be released were considered outstanding for the entire period for purposes of the net income per share calculations. |
(3) | Gives effect to the recognition and retention plan expected to be adopted by Peoples United Financial no sooner than six months following the offering and thereafter presented for approval at a meeting of stockholders. Assumes that the recognition and retention plan acquires an amount of common stock equal to 4% of the sum of the shares of common stock sold in the offering and those issued to the charitable foundation, or 5,562,500 shares at the minimum of the offering range, 6,530,000 shares at the midpoint of the offering range, 7,497,500 shares at the maximum of the offering range and 8,610,125 shares at the adjusted maximum of the offering range through open market purchases or privately negotiated transactions. We intend to purchase the common stock for the recognition and retention plan with funds from general operating cash flows. In calculating the pro forma effect of the recognition and retention plan, it is assumed that the shares were acquired by the recognition and retention plan at the beginning of the period presented in open market purchases at a purchase price of $20.00 per share and that 20% of the amount contributed was an amortized expense during such period. The issuance of authorized but previously unissued shares of common stock for the recognition and retention plan would dilute stockholders ownership and voting interests by approximately 2.27% at the maximum of the offering range. |
(4) | Reflects contribution of Peoples Mutual Holdings capital as a result of the conversion of Peoples Mutual Holdings into a federal stock savings bank and its merger into Peoples Bank as part of the conversion. |
(5) | Gives effect to the stock option plan expected to be adopted by Peoples United Financial no sooner than six months following the offering and thereafter presented for approval at a meeting of stockholders. Assumes that options to acquire an amount of common stock equal to 10% of the common stock sold in the offering and issued to the charitable foundation will be granted. In calculating the pro forma effect of the stock option expense, it is assumed that the exercise price of the stock options and trading price of the common stock at the date of grant were $20.00 per share, the estimated grant-date fair value pursuant to the application of the Black-Scholes option pricing model was $3.31 for each option, the aggregate grant-date fair value of the stock options was amortized to expense on a straight-line basis over a five year vesting period of the options and that option expense was tax effected with an assumed effective tax rate of 34%. Under the above assumptions, the adoption of the stock option plan will result in no additional shares under the treasury stock method for purposes of calculating earnings per share. There can be no assurance that the actual exercise price of the stock options will be equal to the $20.00 per share price. If a portion of the shares to satisfy the exercise of options under stock option plan are obtained from the issuance of authorized but unissued shares, our net income per share and stockholders equity per share will decrease. This will also have a dilutive effect of up to 5.48% at the maximum of the offering range on the ownership interests of persons who purchase common stock in the offering. |
(6) | Per share figures include publicly held shares of Peoples Bank common stock that will be exchanged for share of Peoples United Financial. See The Conversion and OfferingThe Share Exchange of Peoples Bank Common Stock for Peoples United Common Stock. Net income per share computations are determined by taking the number of shares assumed to be sold in the offering, the number of shares expected to be issued in exchange for publicly held shares and the number of shares expected to be contributed to the charitable foundation and, in accordance with Statement of Position 93-6, subtracting the employee stock ownership plan shares which have not been committed for release during the respective periods. See footnote 2. The number of shares of common stock actually sold and the corresponding number of exchange shares may be more or less than the assumed amounts. |
56
(7) | The number of shares used to calculate the pro forma net income per share is equal to the total number of shares to be outstanding upon completion of the conversion and offering, less the number of shares purchased by the employee stock ownership plan not committed to be released during the respective periods. The number of shares used to calculate pro forma stockholders equity per share is equal to the total number of shares to be outstanding upon completion of the conversion and offering. |
(8) | Represents the tax effect of the contribution to the charitable foundation based on an effective 34% tax rate. The realization of the deferred tax benefit is limited annually to a maximum deduction for charitable foundations equal to 10% of our annual taxable income, subject to our ability to carry forward any unused portion of the deduction for five years following the year in which the contribution is made. |
(9) | Per share figures include shares of Peoples Bank common stock that will be issued in the share exchange that is part of the conversion and offering. The additional shares reflect an exchange ratio of 1.6712, 1.9662, 2.2611 and 2.6003 at the minimum, midpoint, maximum and adjusted maximum of the offering range, respectively. The number of shares of common stock actually sold and the corresponding number of shares issued in the share exchange may be more or less than the assumed amounts. |
57
COMPARISON OF VALUATION AND PRO FORMA INFORMATION
WITH AND WITHOUT THE CHARITABLE FOUNDATION
As set forth in the following table, if we did not make a contribution to The Peoples Community Foundation as part of the offering, RP Financial estimates that our pro forma valuation would be greater, which would increase the amount of common stock offered for sale. Without the charitable foundation, the amount of common stock offered for sale at the midpoint of the offering would be $3.265 billion. If The Peoples Community Foundation were not established, there is no assurance that the updated appraisal that RP Financial will prepare at the closing of the conversion would conclude that our pro forma market value would be the same as the estimate set forth in the table below. The updated appraisal will be based on the facts and circumstances existing at closing time, including, among other things, market and economic conditions. The offering amounts referred to in the table below relate to the value of the shares sold to the public.
At the Minimum of the
Offering Range |
At the Midpoint of the
Offering Range |
At the Maximum of the
Offering Range |
At the Maximum,
As Adjusted, of the
|
|||||||||||||||||||||||||||||
With Foundation |
Without Foundation |
With
Foundation |
Without Foundation |
With Foundation |
Without Foundation |
With Foundation |
Without Foundation |
|||||||||||||||||||||||||
(Dollars in millions, except per share amounts) | ||||||||||||||||||||||||||||||||
Estimated offering amount |
$ | 2,741.3 | $ | 2,775.3 | $ | 3,225.0 | $ | 3,265.0 | $ | 3,708.8 | $ | 3,754.8 | $ | 4,265.1 | $ | 4,318.0 | ||||||||||||||||
Pro forma market capitalization |
$ | 4,791.1 | $ | 4,810.0 | $ | 5,629.5 | $ | 5,658.8 | $ | 6,467.9 | $ | 6,507.7 | $ | 7,432.1 | $ | 7,483.8 | ||||||||||||||||
Total assets |
$ | 13,000.5 | $ | 13,013.5 | $ | 13,416.6 | $ | 13,434.6 | $ | 13,832.6 | $ | 13,855.8 | $ | 14,311.1 | $ | 14,340.2 | ||||||||||||||||
Total liabilities |
$ | 9,260.7 | $ | 9,260.7 | $ | 9,260.7 | $ | 9,260.7 | $ | 9,260.7 | $ | 9,260.7 | $ | 9,260.7 | $ | 9,260.7 | ||||||||||||||||
Pro forma stockholders equity |
$ | 3,739.8 | $ | 3,752.8 | $ | 4,155.9 | $ | 4,173.9 | $ | 4,571.9 | $ | 4,595.1 | $ | 5,050.4 | $ | 5,079.5 | ||||||||||||||||
Pro forma net income (nine months ended September 30, 2006) |
$ | 127.8 | $ | 128.9 | $ | 135.7 | $ | 136.6 | $ | 143.2 | $ | 144.2 | $ | 151.9 | $ | 153.1 | ||||||||||||||||
Pro forma stockholders equity per share |
$ | 15.61 | $ | 15.60 | $ | 14.76 | $ | 14.75 | $ | 14.14 | $ | 14.12 | $ | 13.59 | $ | 13.57 | ||||||||||||||||
Pro forma tangible stockholders equity per share |
$ | 15.17 | $ | 15.16 | $ | 14.39 | $ | 14.38 | $ | 13.81 | $ | 13.80 | $ | 13.31 | $ | 13.29 | ||||||||||||||||
Pro forma net income per share (nine months ended September 30, 2006) |
$ | 0.55 | $ | 0.55 | $ | 0.50 | $ | 0.50 | $ | 0.46 | $ | 0.46 | $ | 0.42 | $ | 0.42 | ||||||||||||||||
Pro Forma Pricing Ratios |
||||||||||||||||||||||||||||||||
Offering price as a percentage of pro forma stockholders equity per share |
128.12 | % | 128.21 | % | 135.50 | % | 135.59 | % | 141.44 | % | 141.64 | % | 147.17 | % | 147.38 | % | ||||||||||||||||
Offering price as a percent of pro forma tangible stockholders equity per share |
131.84 | % | 131.93 | % | 138.99 | % | 139.08 | % | 144.82 | % | 144.93 | % | 150.26 | % | 150.49 | % | ||||||||||||||||
Offering price to pro forma net income per share |
27.27x | 27.27x | 30.00x | 30.00x | 32.61x | 32.61x | 35.71x | 35.71x | ||||||||||||||||||||||||
Pro Forma Financial Ratios |
||||||||||||||||||||||||||||||||
Return on assets (annualized) |
1.31 | % | 1.32 | % | 1.35 | % | 1.36 | % | 1.38 | % | 1.39 | % | 1.42 | % | 1.42 | % | ||||||||||||||||
Return on equity (annualized) |
4.56 | % | 4.58 | % | 4.35 | % | 4.36 | % | 4.18 | % | 4.18 | % | 4.01 | % | 4.02 | % | ||||||||||||||||
Equity/assets |
28.77 | % | 28.84 | % | 30.98 | % | 31.07 | % | 33.05 | % | 33.16 | % | 35.29 | % | 35.42 | % | ||||||||||||||||
Tangible equity ratio |
28.19 | % | 28.26 | % | 30.43 | % | 30.52 | % | 32.54 | % | 32.65 | % | 34.81 | % | 34.94 | % |
58
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis reflects Peoples Banks consolidated financial statements and other relevant statistical data and is intended to enhance your understanding of our financial condition and results of operations. You should read the information in this section in conjunction with Peoples Banks consolidated financial statements and accompanying notes to the consolidated financial statements beginning on page F-1 of this prospectus, and the other statistical data provided elsewhere in this prospectus. The results of operations for the nine months ended September 30, 2006 are not necessarily indicative of the results of operations that may be expected for the entire year or any other interim period. Unless otherwise indicated, the financial information presented in this section reflects the consolidated financial condition and operations of Peoples Bank . |
General
Peoples Bank is a federally-chartered stock savings bank headquartered in Bridgeport, Connecticut with $10.6 billion in total assets as of September 30, 2006. Peoples Bank was organized in 1842 as a mutual savings bank and converted to stock form in 1988. In August 2006, Peoples Bank converted from a Connecticut-chartered stock savings bank to a federally-chartered stock savings bank.
Peoples Bank offers a full range of financial services to individual, corporate and municipal customers. Traditional banking activities are conducted primarily within the state of Connecticut 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, Peoples Bank provides specialized services tailored to specific markets including: personal, institutional and employee benefit trust; cash management; and municipal banking and finance. Through its subsidiaries, Peoples Bank offers: brokerage, financial advisory services, investment management services and life insurance through Peoples Securities, Inc.; equipment financing through Peoples Capital and Leasing Corp.; and other insurance services through R.C. Knox and Company, Inc.
This full range of financial services is delivered through a network of 75 traditional branches, 73 Stop & Shop supermarket branches, eight limited-service branches, 23 investment and brokerage offices (22 of which are located within branch offices), five wealth management and trust offices, nine Peoples Capital and Leasing offices and seven commercial banking offices. Peoples Banks distribution network also includes fully integrated online banking and investment trading, a 24-hour telephone banking service and participation in a worldwide ATM network.
Peoples Bank has expanded its residential mortgage and home equity lending activities in the contiguous markets of New York and Massachusetts. In addition, Peoples Bank maintains a loan production office in Massachusetts and Peoples Capital and Leasing offices in six states in addition to Connecticut to support commercial real estate lending and equipment financing initiatives, respectively, outside of Connecticut. Within the Commercial banking division, Peoples Bank maintains a national credits group, which seeks to participate in commercial loans and commercial real estate finance loans to borrowers in various industries across the country.
Peoples Banks 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 Peoples Banks two primary business segments representing its core businesses, commercial banking and consumer financial services, and to a lesser extent, treasury. Peoples Banks results of operations are also significantly affected by the provision for loan losses and the level of non-interest expense. In addition, Peoples Banks 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.
Financial Overview
Comparison of Financial Condition at September 30, 2006 and December 31, 2005. Total assets at September 30, 2006 were $10.6 billion, a decrease of $320 million, or 3%, from December 31, 2005, primarily due to a $1.2 billion decline in total securities, partially offset by increases of $612 million in total loans, $148 million in short-term investments and $57 million in bank-owned life insurance. Additionally, Peoples Bank contributed $91.5 million in the third quarter of 2006 to its employee retirement plan (reported in other assets) to more than fully fund its projected benefit obligation.
59
Total loans increased $612 million, or 10% on an annualized basis, from December 31, 2005 to September 30, 2006. This increase reflects growth of $423 million, or 12% annualized, in consumer financial services and $189 million, or 7% annualized, in commercial banking. The increase in total loans from year-end 2005 was largely attributable to increases of $370 million in residential mortgage loans, $117 million in Peoples Capital and Leasing loans and $78 million in shared national credits. The increase in residential mortgage loans reflects, in part, the purchase of $170 million of adjustable-rate mortgages towards the end of the first quarter of 2006.
The decrease in the securities portfolio reflects the sale of $810 million and $266 million of debt securities in the third and second quarters of 2006, respectively, as part of restructuring activities to better position Peoples Banks balance sheet for the then current interest rate environment. Peoples Bank also funded an additional $50 million of bank-owned life insurance with proceeds from maturing securities in the first quarter of 2006.
Non-performing assets totaled $22.9 million at September 30, 2006, a $0.9 million increase from year-end 2005. The allowance for loan losses decreased $1.0 million to $74 million at September 30, 2006 compared to December 31, 2005, primarily reflecting reductions in the allowance for loan losses allocated to the consumer loan portfolios, partially offset by net additions allocated to the commercial banking loan portfolios. At September 30, 2006, the allowance for loan losses as a percentage of total loans was 0.81% and as a percentage of non-performing loans was 355%, compared to 0.87% and 353%, respectively, at December 31, 2005.
At September 30, 2006, liabilities totaled $9.3 billion, a $383 million decrease from December 31, 2005, reflecting a $281 million reduction in total borrowings and a $104 million decrease in total deposits. Core deposits decreased $30 million since December 31, 2005, reflecting Peoples Banks strategy to fund loan growth with proceeds from maturities and sales of securities rather than deposits.
Peoples Banks total stockholders equity was $1.35 billion at September 30, 2006, a $63 million increase from December 31, 2005, reflecting net income of $84.7 million and a $16.3 million decrease in accumulated other comprehensive loss, partially offset by dividends paid of $44.5 million. As a percentage of total assets, stockholders equity was 12.7% at September 30, 2006, compared to 11.8% at December 31, 2005. Peoples Banks leverage capital ratio, and tier 1 and total risk-based capital ratios were 11.8%, 14.7% and 16.2%, respectively, at September 30, 2006, compared to 11.2%, 14.8% and 16.4%, respectively, at December 31, 2005. The capital ratios were calculated in accordance with Office of Thrift Supervision regulations as of September 30, 2006 and Federal Deposit Insurance Corporation regulations as of December 31, 2005.
Comparison of Financial Condition at December 31, 2005 and December 31, 2004. Total assets at December 31, 2005 were $10.9 billion, an increase of $215 million, or 2%, from December 31, 2004, primarily due to increases of $640 million in total loans and $154 million in bank-owned life insurance, partially offset by a $708 million decline in total securities.
At December 31, 2005, liabilities totaled $9.6 billion, a $126 million increase from December 31, 2004, reflecting a $221 million increase in total deposits, partially offset by a $46 million reduction in total borrowings.
The increase in total loans from year-end 2004 was largely attributable to increases of $340 million in commercial banking loans and $242 million in residential mortgage loans. The decrease in the securities portfolio reflects the substitution of higher-yielding loans for securities and the funding of a $150 million investment in bank-owned life insurance with proceeds from maturing securities.
Non-performing assets totaled $22.0 million at December 31, 2005, a $6.6 million decrease from year-end 2004. The allowance for loan losses increased $2.5 million to $75 million at December 31, 2005 compared to December 31, 2004, primarily reflecting increases in the allowance for loan losses allocated to commercial loans of $2.0 million and Peoples Capital and Leasing loans of $2.5 million, partially offset by a $2.0 million reduction in the allowance for loan losses allocated to the consumer loan portfolio. At December 31, 2005, the allowance for loan losses as a percent of total loans was 0.87% and as a percent of non-performing loans was 353%, compared to 0.91% and 265%, respectively, at December 31, 2004.
Peoples Banks total stockholders equity was $1.29 billion at December 31, 2005, an $89 million increase from December 31, 2004, reflecting net income of $137.1 million, partially offset by dividends paid of $52.4 million. As a percentage of total assets, stockholders equity was 11.8% at December 31, 2005, compared to 11.2% at December 31, 2004.
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Peoples Banks leverage capital ratio, and tier 1 and total risk-based capital ratios were 11.2%, 14.8% and 16.4%, respectively, at December 31, 2005, compared to 10.5%, 14.6% and 16.7%, respectively, at December 31, 2004. The capital ratios were calculated in accordance with Federal Deposit Insurance Corporation regulations.
Comparison of Results of Operations for the Nine Months Ended September 30, 2006 and 2005. Peoples Bank reported net income of $84.7 million, or $0.59 per diluted share, for the nine months ended September 30, 2006, compared to $101.9 million, or $0.72 per diluted share, for the year-ago period. Income from continuing operations totaled $83.0 million, or $0.58 per diluted share, for the first nine months of 2006, compared to $91.6 million, or $0.65 per diluted share, for the year-ago period.
Results for the first nine months of 2006 included net security losses of $27.4 million on the sale of $810 million and $266 million of debt securities in the third and second quarters of 2006, respectively. These transactions were undertaken to better position Peoples Banks balance sheet for the then current interest rate environment. Results for the first nine months of 2005 included a $2.0 million goodwill impairment charge and after-tax income of $6.2 million from the resolution of a significant contingency related to the sale of the credit card business (reported in income from discontinued operations). The net impact of these items reduced 2006 net income by $18.2 million, or $0.13 per share and increased 2005 net income by $4.2 million, or $0.03 per share.
Net interest income increased $9.9 million, or 4%, from the year-ago period and the net interest margin improved 17 basis points to 3.83%. The higher net interest margin reflects the asset sensitive position of the balance sheet, the substitution of securities with higher-yielding loans, and the use of a portion of the proceeds from security sales discussed above to pay down borrowings. Compared to the first nine months of 2005, average earning assets decreased 1%, as a $684 million, or 8%, increase in average loans was more than offset by an $820 million, or 45%, decline in average securities. In addition to funding loan growth with proceeds from maturing securities, Peoples Bank invested $50 million in the first quarter of 2006 and $150 million in the second quarter of 2005 in bank-owned life insurance. Average core deposits increased $51 million, or 1%, compared to the first nine months of 2005, reflecting Peoples Banks current decision to fund loan growth with proceeds from maturing securities.
Compared to the first nine months of 2005, total non-interest income, excluding net security losses, increased $8.1 million, or 7%; non-interest expense increased $7.5 million, or 3%; and the efficiency ratio improved to 61.9%, from 62.8%.
The provision for loan losses in the first nine months of 2006 was $2.0 million compared to $3.3 million in the year-ago period. The provision for loan losses in the 2006 period reflected net loan charge-offs of $3.0 million, partially offset by a $1.0 million decrease in the allowance for loan losses. The 2005 period reflected net loan charge-offs of $2.8 million and a $0.5 million increase in the allowance for loan losses. Net loan charge-offs increased $0.2 million, or 7%, for the first nine months of 2006, compared to the year-ago period. The allowance for loan losses as a percentage of total loans was 0.81% at September 30, 2006, compared to 0.87% at September 30, 2005. Net loan charge-offs as a percentage of average total loans equaled 0.05% on an annualized basis, unchanged from the year-ago period.
Comparison of Results of Operations for 2005 and 2004. Peoples Bank reported net income in 2005 of $137.1 million, or $0.97 per diluted share, compared to $199.7 million, or $1.42 per diluted share in 2004. Per share data has been restated to give retroactive effect to the three-for-two stock split completed in 2005. Included in the 2005 results were a gain on the sale of three branches, a gain from the resolution of a significant contingency related to the sale of Peoples Banks credit card portfolio in 2004, an income tax benefit, a goodwill impairment charge and expenses incurred in connection with the repurchase of subordinated notes and the accelerated vesting of stock options. The 2004 results included the net gain on the sale of Peoples Banks credit card business, liability restructuring charges, other nonrecurring expenses and an income tax benefit. Peoples Banks return on average assets was 1.27% and return on average stockholders equity was 11.1% in 2005.
The net interest margin improved 35 basis points from 2004, reflecting a combination of Peoples Banks asset-sensitive position and the ongoing shift of its asset mix from investment securities to higher-yielding loans. Other important factors that affected the financial results in 2005 were:
| strong loan growth in Peoples Banks commercial banking and home equity lending portfolios; |
| a 35% reduction in the provision for loan losses; |
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| growth in fee-based revenues; and |
| continued expense control. |
On March 5, 2004, Peoples Bank completed the sale of its credit card business, which included $2.0 billion of credit card receivables, as well as the transfer of its related credit card operations and 420 employees, to The Royal Bank of Scotland Group. The net pre-tax gain on sale of $305.4 million is included in income from discontinued operations for 2004 in the consolidated statements of income.
Peoples Bank utilized a portion of the proceeds from the sale of its credit card business to prepay slightly over $1.0 billion of long-term borrowings. In addition, derivative positions with notional values of $770 million, including positions on certain of these borrowings, were canceled. Liability restructuring costs totaling $133.4 million are included in total non-interest expense for 2004 in the Consolidated Statements of Income.
Critical Accounting Policies
In preparing the consolidated financial statements, Peoples Bank is required to make significant estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, including the classification of revenues and expenses to discontinued operations. Actual results could differ from Peoples Banks current estimates, as a result of changing conditions and future events. Several 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 including other than temporary declines in the value of securities and the recoverability of goodwill and other intangible assets. Peoples Banks significant accounting policies and critical estimates are summarized in Note 1 to the consolidated financial statements.
Allowance for Loan Losses. 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 when realized.
Management maintains the allowance for loan losses at a level that is believed to be adequate to absorb probable losses inherent in the existing loan portfolio, based on a quarterly evaluation of a variety of factors. These factors include, but are not limited to: Peoples Banks historical loan loss experience and recent trends in that experience; risk ratings assigned by lending personnel to commercial real estate finance, commercial and Peoples Capital and Leasing loans, and the results of ongoing reviews of those ratings by Peoples Banks independent loan review function; an evaluation of 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 management seeks to use the best available information to make these evaluations, future adjustments 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, the identification of additional problem loans and other factors.
The allowance for loan losses consists of amounts determined in accordance with Statement of Financial Accounting Standards (SFAS) No. 5, Accounting for Contingencies, and SFAS No. 114, Accounting by Creditors for Impairment of a Loan. In applying SFAS No. 5, management considers the factors listed in the preceding paragraph in order to estimate a loss allowance for (1) each homogeneous pool of smaller balance loans (residential mortgage and consumer loans) that are evaluated on a collective basis, and (2) commercial real estate finance, commercial and Peoples Capital and Leasing loans that are not considered impaired under SFAS No. 114. A loan is considered impaired when, based on current information and events, it is probable that Peoples Bank will be unable to collect all principal and interest due according to the contractual terms of the loan. Peoples Bank applies SFAS No. 114 to loans that are individually evaluated for collectibility in accordance with its normal loan review procedures. Under SFAS No. 114, impaired loans are reported based on one of three measures: the present value of expected future cash flows discounted at the loans effective interest rate; the loans observable market price; or the fair value of the collateral if the loan is collateral dependent. If the measure is less than an impaired loans recorded investment, an impairment loss is recognized as part of the allowance for loan losses.
Valuation of Derivative Financial Instruments. Peoples Bank uses derivatives for market risk management purposes (principally interest rate risk) and not for trading or speculation purposes.
All derivatives are recognized as either assets or liabilities and are measured at fair value. Favorable changes in fair values result in unrealized gains that are recognized as assets, while unfavorable changes result in unrealized losses that are
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recognized as liabilities. Peoples Banks hedge accounting methods vary depending on whether the derivative instrument is classified as a fair value hedge or a cash flow hedge. Hedge accounting is permitted only if specific criteria are met, including a requirement that a highly effective relationship exist between the derivative instrument and the hedged item, both at inception of the hedge and on an ongoing basis. Results of effective hedges are recognized in current earnings for fair value hedges. Changes in the fair value of effective cash flow hedges are recognized in other comprehensive income until earnings are affected by the variability in cash flows of the designated hedged item. Ineffective portions of hedge results are recognized in current earnings.
Peoples Bank formally documents all relationships between the derivative instruments and the hedged items, as well as its risk management objectives and strategies for undertaking the hedge transactions. This process includes linking all derivatives that are designated as hedges to specific assets and liabilities, or to specific firm commitments or forecasted transactions. Peoples Bank also formally assesses, both at inception of the hedge and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in the fair values or cash flows of the hedged items. If it is determined that a derivative is not highly effective or has ceased to be a highly effective hedge, Peoples Bank would discontinue hedge accounting prospectively.
Interest rate-lock commitments extended to borrowers relate to the origination of residential mortgage loans. To mitigate the interest rate risk inherent in these commitments, Peoples Bank enters into mandatory delivery and best efforts contracts to sell fixed-rate residential mortgage loans. Forward commitments to sell and interest rate-lock commitments on residential mortgage loans are considered derivatives and their respective estimated fair values are adjusted based on changes in interest rates and exclude the value of mortgage servicing rights.
Asset Impairment Judgments
Goodwill and Other Intangible Assets. SFAS No. 141, Business Combinations, requires, among other things, use of the purchase method to account for all business combinations and specifies criteria that acquired intangible assets must meet in order to be recognized and reported separately from goodwill. The assets and liabilities of an acquired company are recorded at fair value at the date of acquisition. Intangible assets are recognized in an amount equal to the excess of the acquisition cost over the fair value of the net assets acquired. Other acquisition-related intangibles are separately identified, where appropriate, for the estimated value of acquired customer relationships and are amortized on a straight-line basis over the estimated remaining average life of those relationships (ranging from 7 to 12 years from the respective acquisition dates). The remaining intangible asset is classified as goodwill.
SFAS No. 142, Goodwill and Other Intangible Assets, requires that goodwill be reviewed for impairment at least annually, with impairment losses charged to expense when they occur. Acquisition-related intangible assets other than goodwill are amortized to expense over their estimated useful lives and are periodically reviewed by management to assess recoverability. Impairment losses are recognized as a charge to expense if carrying amounts exceed fair values.
SFAS No. 142 requires that goodwill be tested for impairment using a two-step approach that involves the identification of reporting units and the estimation of fair values. Goodwill shall also be tested for impairment when events occur that would more likely than not reduce the implied fair value of goodwill below its carrying value. An impairment loss is recognized as a charge to expense for any excess of the goodwill carrying amount over implied fair value.
Securities. Marketable equity and debt securities (other than those reported as short-term investments) are classified as either trading account securities, held to maturity securities (applicable only to debt securities) or available for sale securities. Management determines the classification of a security at the time of its purchase.
Securities purchased for sale in the near term and those held by Peoples Securities in accordance with the requirements for a broker-dealer are classified as trading account securities and reported at fair value. Unrealized gains and losses are reported in non-interest income. Debt securities that Peoples Bank has the positive intent and ability to hold to maturity are classified as held to maturity securities and reported at amortized cost. All other securities are classified as available for sale and reported at fair value. Unrealized gains and losses on securities available for sale are reported on an after-tax basis in stockholders equity as accumulated other comprehensive income or loss. Premiums are amortized and discounts are accreted to interest income for debt securities, using the interest method over the remaining period to contractual maturity, adjusted for the effect of actual prepayments in the case of mortgage-backed securities, collateralized mortgage obligations and other asset-backed securities. Federal Home Loan Bank stock is a non-marketable equity security reported at cost.
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Security transactions are generally recorded on the trade date. Realized gains and losses are determined using the specific identification method and reported in non-interest income.
Management conducts a periodic review and evaluation of the securities portfolio to determine if the decline in fair value of any security appears to be other than temporary. If the decline is deemed to be other than temporary, the security is written down to a new cost basis and the resulting loss is reported in non-interest income. The factors considered by management in its periodic review include, but are not limited to: the length of time and extent to which the fair value has been less than cost; the financial condition and near-term prospects of the issuer; the ratings of the security; whether the decline in fair value appears to be issuer specific or, alternatively, a reflection of general market or industry conditions; and Peoples Banks intent and ability to hold the security for a period of time sufficient to allow for a recovery in fair value.
Economic Environment
Peoples Banks results are subject to fluctuations based on economic conditions. Economic activity in the United States showed continued signs of expanding in 2005. Real gross domestic product increased at a rate of 3.5%, a level that represents the countrys long-term historical average growth rate, and the national unemployment rate was 4.9% as of December 31, 2005, down from 5.4% at the end of 2004. The national economy continued to grow despite widening federal budget and trade deficits, rising energy costs, the negative impact from the hurricanes in 2005 and geopolitical uncertainties. In response to continuing signs that the U.S. economy was expanding, the Federal Reserve Board increased the targeted federal funds rate eight times in 2005 by a total of 200 basis points, after five interest rate increases in the second half of 2004 totaling 125 basis points, bringing the rate to 4.25% as of December 31, 2005 from 1.00% at the end of 2003.
The national economy continues to grow in 2006, albeit at a slower pace than in 2005. Real gross domestic product increased at a rate of 2.6% for the second quarter of 2006 and the unemployment rate at June 30, 2006 was 4.6%. The Federal Reserve raised interest rates an additional 100 basis points bringing the Federal Funds rate to 5.25% as of June 30, 2006.
Peoples Banks primary market area, Connecticut, continues to enjoy the second highest median household income in the country. The states unemployment rate, which decreased to 4.1% as of June 30, 2006, compared to 4.6% at the end of 2005, was below the national rate of 4.6%. The Connecticut economy experienced moderate job growth in 2005, with total employment in 2005 increasing by 12,500 jobs, or approximately 0.8% since December 31, 2004. As of June 30, 2006, Connecticuts total employment increased by 7,700 or 0.5%, over June 30, 2005.
Business Segment Results
Peoples Banks operations are divided into two primary business segments that represent its core businesses, commercial banking and consumer financial services. In addition, the treasury area is responsible
for managing Peoples Banks securities portfolio, short-term investments and wholesale funding activities, such as borrowings and the funding center, which includes the impact of derivative financial instruments used for risk management
purposes. The funding center refers to Peoples Banks funds transfer pricing model, which is used in the calculation of the respective business segments net interest income, and measures the value of funds used in and provided by
Business Segment Performance Summary Net Income
For the Nine Months Ended September 30, |
For the Year Ended
December 31, |
|||||||||||||||||||
2006 | 2005 | 2005 | 2004 | 2003 | ||||||||||||||||
(In millions) | ||||||||||||||||||||
Commercial banking |
$ | 30.1 | $ | 35.3 | $ | 45.7 | $ | 45.1 | $ | 50.4 | ||||||||||
Consumer financial services |
65.1 | 65.1 | 94.2 | 90.0 | 92.6 | |||||||||||||||
Treasury |
(25.5 | ) | (21.8 | ) | (25.0 | ) | (60.5 | ) | (73.8 | ) | ||||||||||
Total reportable segments |
69.7 | 78.6 | 114.9 | 74.6 | 69.2 | |||||||||||||||
Other |
15.0 | 23.3 | 22.2 | 125.1 | (5.4 | ) | ||||||||||||||
Total consolidated |
$ | 84.7 | $ | 101.9 | $ | 137.1 | $ | 199.7 | $ | 63.8 | ||||||||||
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Peoples Bank uses an internal profitability reporting system to generate information by business segment, which is based on a series of management estimates and allocations regarding funds transfer pricing, the provision for loan losses, non-interest expense and income taxes. These estimates and allocations, some of which can be subjective in nature, are continually being reviewed and refined. Any changes in estimates and allocations that may affect the reported results of any business segment will not affect the consolidated financial position or results of operations of Peoples Bank as a whole.
Funds transfer pricing is used in the calculation of the respective business segments net interest income, and measures the value of funds used in and provided by a business segment. The difference between the interest income on earning assets and the interest expense on funding liabilities and the corresponding funds transfer pricing charge for interest income or credit for interest expense results in net spread income. The provision for loan losses for the commercial banking and consumer financial services segments is generally based on a five-year rolling average net charge-off rate for the respective segment. The provision for loan losses for the national consumer loan portfolio is based on the actual loan loss provision for the period. Peoples Bank allocates a majority of non-interest expenses to each business segment using a full-absorption costing process. Direct and indirect costs are analyzed and pooled by process and assigned to the appropriate business segment. Corporate overhead costs are assigned to the business segments using a standard allocation process. Income tax expense is allocated to each business segment using a constant rate, based on an estimate of the consolidated effective income tax rate for the period.
In the second quarter of 2006, the results of the funding center, previously included in other, were reclassified to treasury. In the first quarter of 2006, Peoples Bank revised its funds transfer pricing methodology assumptions relating to those deposit products with indeterminate maturities, based on a comprehensive historical analysis of the implied maturities and repricing characteristics of those deposits. As a result, the duration for most of those deposits was lengthened, which in turn increased their value and corresponding funds transfer pricing credit. Segment information for all periods presented has been restated to reflect the changes resulting from the reclassification of the funding center to treasury and the revised funds transfer pricing methodology assumptions.
For a more detailed description of the estimates and allocations used to measure business segment performance, see Note 20 to the consolidated financial statements.
Commercial Banking . Commercial banking consists principally of commercial lending, commercial real estate finance lending and commercial deposit gathering activities. This segment also includes the equipment financing operations of Peoples Capital and Leasing, as well as cash management, correspondent banking and municipal banking.
Commercial banking income from continuing operations declined $5.2 million, or 15%, for the nine months ended September 30, 2006 compared to the nine months ended September 30, 2005, primarily reflecting lower fee-based revenues and an increase in non-interest expense, partially offset by an increase in other non-interest income. Net interest income
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decreased $0.8 million, or 1%, as a $266 million, or 7%, increase in average earning assets was essentially offset by narrower net spreads. The $5.2 million decrease in fee-based revenues reflects lower lending-related charges and fees, primarily lower commercial real estate finance loan prepayment penalties. The increase in other non-interest income primarily reflects a $1.8 million increase in rental income on leased equipment. The $3.0 million, or 5%, increase in non-interest expense reflects an increase in direct expenses due to the continued growth in this business, including a $1.3 million increase in the amortization expense of leased equipment to Peoples Capital and Leasing customers.
The increase in average earning assets compared to the nine months ended September 30, 2005 reflects increases of $182 million, or 37%, in Peoples Capital and Leasing loans, and $134 million, or 10%, in commercial loans, partially offset by a $48 million, or 3%, decrease in commercial real estate finance loans. Average commercial non-interest-bearing deposits totaled $942 million for the nine months ended September 30, 2006, a $34 million, or 3%, decrease compared to the year-ago period, reflecting the current interest rate environment.
Commercial banking income from continuing operations increased $0.6 million, or 1%, in 2005 compared to 2004, reflecting increases in net interest income and fee-based revenues, partially offset by increases in non-interest expense and the provision for loan losses. Net interest income increased $3.9 million, or 3%, reflecting a $417 million, or 13%, increase in average earning assets, partially offset by narrower net spreads. The $3.3 million increase in fee-based revenues reflects higher lending-related charges and fees, primarily higher commercial real estate loan prepayment penalties. The $6.3 million, or 9%, increase in non-interest expense reflects a $5.3 million increase in allocated expenses, due to the continued growth in this business during 2005 and a higher level of charges related to loan repayments.
The increase in average earning assets compared to 2004 reflects increases of $224 million, or 21%, in commercial loans, $164 million, or 46%, in Peoples Capital and Leasing loans and $30 million, or 2%, in commercial real estate finance loans. Average commercial non-interest-bearing deposits grew $43 million, or 5%, on a year-over-year basis.
Commercial banking income from continuing operations declined $5.3 million, or 11%, in 2004 compared to 2003, as an increase in net interest income was more than offset by a reduction in fee-based revenues and increases in non-interest expense and the provision for loan losses. Net interest income increased $5.5 million, or 5% in 2004 compared to 2003 reflecting a $296 million, or 10%, increase in average earning assets, partially offset by narrower net spreads. The $7.3 million, or 12%, increase in non-interest expense reflects increases in compensation and benefits, and a $2.3 million increase in allocated expenses, largely related to portfolio growth in 2004. The $2.9 million decrease in fee-based revenues reflects lower lending-related charges and fees, including loan prepayment penalties.
Consumer Financial Services . Consumer financial services includes, as its principal business lines, consumer deposit gathering activities, residential mortgage, home equity and other consumer lending (excluding the national consumer loan portfolio, which is reported in other). In addition to trust services, this segment also includes brokerage, financial advisory services, investment management services and life insurance provided by Peoples Securities, and other insurance services provided through R.C. Knox.
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Consumer financial services income from continuing operations was unchanged for the nine months ended September 30, 2006 compared to the nine months ended September 30, 2005, primarily reflecting a $6.3 million decrease in net interest income and a $2.5 million increase in non-interest expense, partially offset by a $7.3 million increase in fee-based revenues. The decrease in net interest income primarily reflects the reduction in net spread interest income for residential mortgage loans and the decline in net interest spread from the shift in deposits, partially offset by the benefit of an increase in average loan balances. The shift in deposit mix reflects an increase in higher-rate time deposits, partially offset by a decline in savings and money market deposits. During the nine months ended September 30, 2006, average earning assets increased $439 million, or 10%, including increases of $322 million, or 10%, in average residential mortgage loans and $117 million, or 10%, in average home equity loans. Peoples Bank purchased $170 million of adjustable-rate residential mortgage loans towards the end of the first quarter of 2006. Average consumer deposits totaled $7.8 billion, a 1% increase compared to the nine months ended September 30, 2005.
The increase in fee-based revenues compared to the nine months ended September 30, 2005 primarily reflects an increase in service charges on deposit accounts, reflecting changes in Peoples Banks fee structure. The increase in non-interest income reflects a $0.7 million net gain from the sale of a corporate insurance account by R.C. Knox. The increase in non-interest expense reflects a $5.4 million increase in allocated expenses in 2006 and a $2.0 million goodwill impairment charge in the 2005 period.
Consumer financial services income from continuing operations increased $4.2 million, or 5%, in 2005 compared to 2004. Fee-based revenues increased $5.3 million compared to 2004, reflecting increases in service charges on deposit accounts and insurance revenue. Included in non-interest income in 2005 was an $8.1 million gain on the sale of three branches. The increase in non-interest expense reflects a $7.6 million increase in allocated expenses and a $2.0 million goodwill impairment charge in 2005 resulting from the decision to combine Olson Mobeck Investment Advisors, Inc., previously a separate operating subsidiary, with one of Peoples Banks other businesses within the consumer financial services segment (see Note 1 to the consolidated financial statements).
In 2005, average earning assets increased $487 million, or 12%, including increases of $250 million, or 8%, in average residential mortgage loans and $228 million, or 25%, in average home equity loans. Average consumer deposits increased $90 million, or 1%, compared to 2004.
Income from continuing operations for this segment decreased $2.6 million, or 3%, in 2004 compared to 2003. The $3.7 million increase in net interest income reflects increases in residential mortgage loans and consumer loans. Fee-based revenues increased $2.8 million compared to 2003 reflecting an increase in insurance revenue, partially offset by slightly lower brokerage commissions. The $11.1 million decrease in net gains on sales of residential mortgage loans reflects a substantial decline in fixed-rate residential mortgage origination volume (down 69% compared to 2003) and the resulting reduced level of loan sales. The $6.0 million decrease in non-interest expense reflects reductions in compensation and commission expenses related to lower mortgage origination volume in 2004 and lower allocated expenses.
In 2004, average home equity loans increased $230 million, or 34%, average residential mortgage loans increased $101 million, or 3%, and average consumer deposits increased $152 million, or 2%, all compared to 2003.
Treasury . Treasury encompasses the securities portfolio, short-term investments and wholesale funding activities, such as borrowings and the funding center, which includes the impact of derivative financial instruments used for risk management purposes. The funding center refers to Peoples Banks funds transfer pricing model, which is used in the calculation of the respective business segments net interest income, and measures the value of funds used in and provided by a business segment. Under this process, a money desk (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 Peoples Banks treasury group and is based on the wholesale cost to Peoples Bank of assets and liabilities with similar maturities. Liability-generating businesses sell newly originated liabilities to the money desk and recognize a funding credit, while asset-generating businesses buy funding for newly originated assets from the money desk and recognize a funding charge. Once funding for an asset is purchased from or a liability is sold to the money desk, 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 interest rate risk to the treasury group.
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Treasurys loss from continuing operations for the nine months ended September 30, 2006 compared to the 2005 period reflects $27.4 million of net security losses, partially offset by a $13.1 million improvement in net interest income and the income from Peoples Banks investment in bank-owned life insurance of $6.3 million ($9.5 million on a taxable-equivalent basis).
The improvement in net interest income reflects the funding centers net spread loss declining by $22.3 million, partially offset by a $9.2 million decline in treasurys net spread income. The reduction in treasury net interest income reflects an $827 million decline in average securities and an increase in the funds transfer pricing charge for funding the bank-owned life insurance investment (with no offsetting interest income as bank-owned life insurance income is recorded in non-interest income). The improvement in the funding centers net spread loss reflects the rising interest rate environment and the asset sensitive position of Peoples Banks balance sheet.
Average earning assets decreased $789 million, or 42%, reflecting an $827 million, or 45%, decline in average securities from the year-ago period given Peoples Banks sale of its debt securities portfolio during 2006 as part of restructuring activities to better position Peoples Banks balance sheet for the then current interest rate environment. The debt securities portfolio totaled $145 million at September 30, 2006, compared to $1.3 billion at December 31, 2005 and $1.4 billion at September 30, 2005. During the nine months ended September 30, 2006, the debt securities portfolio decreased $1.2 billion, reflecting the sale of approximately $1.1 billion of securities and the substitution of securities with higher-yielding loans.
Average securities comprised 10% of average earning assets for the nine months ended September 30, 2006, compared to 18% in the year-ago period.
The improvement in treasurys loss from continuing operations in 2005 compared to 2004 reflects an increase in non-interest income (attributable to bank-owned life insurance income of $3.3 million in 2005 and $4.5 million of net security losses in 2004) and an improvement in net interest income of $45.4 million.
The improvement in net interest income reflects the funding centers net spread loss declining by $49.7 million, partially offset by a $4.3 million decline in treasurys net spread income. The reduction in treasury net interest income reflects a $510 million decline in average securities. The improvement in the funding centers net spread loss reflects the rising interest rate environment and the asset sensitive position of Peoples Banks balance sheet.
Peoples Bank invested $150 million in a bank-owned life insurance program in the second quarter of 2005 with proceeds from maturing securities. Increases in the cash surrender value of bank-owned life insurance are included in non-interest income and totaled $3.3 million in 2005. Peoples Bank invested an additional $50 million in bank-owned life insurance in February 2006 with proceeds from maturing securities.
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Average securities comprised 17% of average earning assets in 2005, compared to 23% in 2004 and 27% in 2003.
Treasurys loss from continuing operations improved $13.3 million in 2004 compared to 2003 primarily due to an improvement in net interest income, partially offset by a $4.2 million increase in net security losses. The improvement in net interest income reflects the funding centers net spread loss declining by $22.3 million, partially offset by a $0.5 million decline in treasurys net spread income. The improvement in the funding centers net spread loss reflects the rising interest rate environment and the asset sensitive position of Peoples Banks balance sheet.
Other . Other includes the residual financial impact from the allocation of revenues and expenses and certain revenues and expenses not attributable to a particular segment. This category also includes: revenues and expenses relating to the national consumer loan portfolio; liability restructuring costs; certain nonrecurring items; income from discontinued operations, including the gain on the sale of the credit card business; and benefits from completed Internal Revenue Service audits in each of the three full years presented. Included in period-end assets are cash, national consumer loans, premises and equipment, assets of discontinued operations in 2003, and other assets.
Results of Operations
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 earning assets and interest-bearing liabilities; non-interest-bearing sources of funds; hedging activities; and asset quality.
In response to signs of an expanding U.S. economy, since June 2004 the Federal Reserve Board increased the targeted federal funds rate 17 times by a total of 425 basis points, bringing the rate to 5.25% as of September 30, 2006. Given the asset sensitive position of the balance sheet, the net interest margin has generally benefited from these interest rate increases.
Net interest income increased $10 million, or 4%, and the net interest margin improved 17 basis points to 3.83% for the first nine months of 2006 compared to the first nine months of 2005. The increase in net interest income reflects a $57 million increase in total interest and dividend income, partially offset by a $47 million increase in total interest expense.
Average earning assets totaled $10.0 billion for the first nine months of 2006, a $108 million, or 1%, decrease from the 2005 period, while the asset mix continued to shift. The ongoing shift in asset mix from securities to higher yielding loans continues to benefit the net interest margin. Average loans increased $684 million, or 8%, while average securities declined $820 million, or 45%, for the first nine months of 2006 compared to the year-ago period. As a result, average loans and
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average securities comprised 89% and 10%, respectively, of average earning assets for the first nine months of 2006 compared to 81% and 18%, respectively, for the year-ago period. The yield earned on the total loan portfolio was 6.03% for the first nine months of 2006 while the yield earned on securities was 3.64%, compared to 5.31% and 3.45%, respectively, for the year-ago period.
Growth in loans reflects increases of $323 million, or 10%, in average residential mortgage loans, $268 million, or 7%, in average commercial banking loans and $93 million, or 8%, in average consumer loans for the first nine months of 2006 compared to the year-ago period. The increase in average residential mortgage loans reflects, in part, the purchase of $170 million of adjustable rate mortgage loans towards the end of the first quarter of 2006.
The growth in average commercial banking loans for the first nine months of 2006 compared to the year-ago period reflects a $182 million, or 37%, increase in average Peoples Capital and Leasing loans and a $134 million, or 10%, increase in average commercial loans, partially offset by a $48 million, or 3%, decrease in average commercial real estate finance loans. Included in average commercial loans and average commercial real estate finance loans were increases of $47 million, or 17%, and $38 million, or 25%, in the respective national credits portfolios.
The growth in average consumer loans for the first nine months of 2006 compared to the year-ago period continues to reflect a shift in mix as an increase of $119 million, or 11%, in home equity loans was partially offset by a $24 million, or 80%, reduction in higher-yielding unsecured national personal installment loans, which continue to run off as a result of a management decision to discontinue this type of lending. Given the upward movement in market interest rates, future growth in both residential mortgage and home equity lending may not continue at recent levels in the future.
The significant decrease in the average securities portfolio for the first nine months of 2006 compared to the year-ago period reflects the substitution of securities with higher-yielding loans as securities pay down and mature, as well as the partial impact of security sales during 2006 as part of restructuring activities to better position Peoples Banks balance sheet for the then current interest rate environment. Peoples Bank sold $810 million and $266 million of debt securities in the third and second quarters of 2006, respectively, and used the proceeds to fund loan growth and pay down borrowings. The duration of the securities portfolio was approximately 0.09 years at September 30, 2006. In addition to funding loan growth, Peoples Bank invested $50 million in the first quarter of 2006 and $150 million in the second quarter of 2005 in a bank-owned life insurance program with proceeds from maturing securities. The earnings from bank-owned life insurance are reported in non-interest income in the Consolidated Statements of Income.
The overall 82 basis point improvement in the yield on average earning assets for the first nine months of 2006 compared to the year-ago period primarily reflects increases in market interest rates since June 2004 and the ongoing shift in asset mix. The interest rate increases initiated by the Federal Reserve continue to have a beneficial effect on the earning asset yield as approximately 29% of the loan portfolio at September 30, 2006 has floating interest rates.
Average funding liabilities totaled $9.4 billion for the first nine months of 2006, essentially flat with 2005. Average core deposits increased $51 million, or 1%, to $8.9 billion and comprised 95% of average funding liabilities, compared to 94% in 2005. Average interest-bearing core deposits increased $86 million, or 1%, and average non-interest-bearing core deposits decreased $35 million, or 2%, reflective of Peoples Banks current strategy of funding loan growth with proceeds from the repayment of securities.
The 68 basis point increase to 2.06% from 1.38% in the rate paid on average funding liabilities for the first nine months of 2006 compared to the 2005 period primarily reflects increases in market interest rates since June 2004 and the ongoing shift in deposit mix. The rates paid on average core deposits increased 66 basis points in the first nine months of 2006, reflecting increases of 109 basis points in time deposits and 38 basis points in savings and money market deposits in response to rising market interest rates. The change in the mix of average interest-bearing core deposits reflects a $632 million, or 24%, increase in higher-rate time deposits, partially offset by a $546 million, or 13%, decline in savings and money market deposits, reflecting customers preferences for deposit products with higher interest rates given the prevailing interest rate environment. Average time deposits comprised 36% of average total core deposits, compared to 29% for the year-ago period. Further shifts in deposit mix to higher-rate deposits are likely to raise Peoples Banks overall cost of funding.
Net interest income increased $43 million, or 13%, and the net interest margin improved 35 basis points to 3.68% in 2005 compared to 2004. The increase in net interest income reflects a $71 million increase in total interest and dividend income, partially offset by a $28 million increase in total interest expense.
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Average earning assets totaled $10.0 billion in 2005, a $205 million, or 2%, increase from 2004, while the asset mix continued to shift. Average loans increased $836 million, or 11%, while average securities and average short-term investments declined a combined $631 million, or 26%. As a result, average loans and average securities comprised 82% and 17%, respectively, of average earning assets, compared to 75% and 23%, respectively, in 2004. The yield earned on the total loan portfolio was 5.41% in 2005 while the yield earned on securities and short-term investments was 3.45%.
The total average commercial banking loan portfolio increased $418 million, or 13%, in 2005 compared to 2004, reflecting increases of $224 million, or 21%, in commercial loans, $164 million, or 46%, in Peoples Capital and Leasing loans and $30 million, or 2%, in commercial real estate finance loans. Included in average commercial loans and average commercial real estate finance loans were increases of $83 million, or 41%, and $8 million, or 5%, in the respective national credits portfolios.
Average residential mortgage loans increased $250 million, or 8%, in 2005 compared to 2004, while average consumer loans increased $168 million, or 16%. Consumer loans continued to reflect a shift in mix as growth of $228 million, or 25%, in home equity loans generated by the Connecticut franchise was partially offset by a $60 million, or 70%, reduction in higher-yielding unsecured national personal installment loans, which continued to run off as a result of a management decision to discontinue this type of lending. The growth in home equity lending reflected a combination of the emphasis placed on this line of business by Peoples Bank, as well as nationwide trends.
The $510 million, or 23%, decrease in the average securities portfolio in 2005 compared to 2004 reflected the substitution of securities with higher-yielding loans as securities paid down and matured. The duration of the securities portfolio was approximately 1.7 years at December 31, 2005. In addition, Peoples Bank invested $150 million in a bank-owned life insurance program with proceeds from maturing securities in 2005.
The overall 61 basis point improvement in the yield on average earning assets in 2005 compared to 2004 primarily reflected the increase in market interest rates since June 2004 and the ongoing shift in asset mix. The interest rate increases initiated by the Federal Reserve had a beneficial effect on the earning asset yield as approximately 30% of the loan portfolio had floating interest rates.
In 2005, average funding liabilities totaled $9.4 billion, essentially flat with 2004 before the allocation of funding liabilities to discontinued operations. Average core deposits increased $224 million, or 3%, and comprised 94% of average funding liabilities in 2005 compared to 91% in 2004 before the allocation of funding liabilities to discontinued operations. Average non-interest-bearing core deposits increased $98 million, or 5%, and average interest-bearing core deposits increased $126 million, or 2%, due in part to Peoples Banks focus on growing core deposits during 2005.
The 27 basis point increase to 1.47% from 1.20% in the rate paid on average funding liabilities in 2005 compared to 2004 primarily reflected the increase in market interest rates throughout 2005 and the shift in deposit mix. The rates paid on average core deposits increased 32 basis points in 2005, reflecting increases of 50 basis points in time deposits and 25 basis points in savings and money market deposits in response to rising market interest rates, partially offset by growth in non-interest-bearing core deposits. The change in the mix of average interest-bearing core deposits reflected a $377 million, or 17%, increase in higher-rate time deposits, partially offset by a $251 million, or 6%, decline in savings and money market deposits, reflecting customers preferences for deposit products with higher interest rates. Average time deposits comprised 29% of average total deposits in 2005, compared to 26% in 2004.
Average purchased funds decreased $186 million, or 33%, and average subordinated notes decreased $25 million, or 17%, in 2005 compared to 2004. In December 2005, Peoples Bank repurchased $13.5 million of its 9.875% subordinated notes due 2010.
In the first quarter of 2004, Peoples Bank used a portion of the proceeds from the sale of its credit card business to pay down interest-bearing liabilities. The repayment of over $1 billion in high-cost wholesale liabilities and the cancellation of derivative positions relating to a portion of these liabilities had a net beneficial impact on the net interest margin in 2004.
Net interest income increased $43 million, or 15%, and the net interest margin improved 44 basis points to 3.33%, in 2004 compared to 2003. The increase in net interest income reflects a $62 million reduction in total interest expense, partially offset by a $19 million decrease in total interest and dividend income.
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Average earning assets totaled $9.8 billion in 2004, essentially flat with 2003, while the asset mix continued to shift. Average loans increased $484 million, or 7%, while average securities and average short-term investments declined a combined $475 million, or 16%. As a result, average loans comprised 75% of average earning assets and average securities and average short-term investments comprised 25% of average earning assets, compared to 70% and 30%, respectively, in 2003. The decrease in the average securities portfolio reflects the decision to substitute, over time, securities with higher-yielding loans.
Average commercial loans increased $178 million, or 14%, and included a $104 million, or 42%, increase in average Peoples Capital and Leasing loans in 2004 compared to 2003. Average commercial real estate finance loans increased $114 million, or 7%. Average consumer loans increased $92 million, or 10%, and continued to reflect a shift in mix as growth of $230 million, or 34%, in home equity loans generated by the Connecticut franchise was partially offset by a $134 million, or 61%, reduction in higher-yielding unsecured national personal installment loans. The growth in home equity lending reflected the combination of increased focus placed on this line of business by Peoples Bank and nationwide trends.
The overall low level of interest rates adversely affected the yields on Peoples Banks earning assets, as seen in the 20 basis point reduction in the yield on average earning assets in 2004 compared to 2003. The yield on average residential mortgage loans declined 28 basis points, reflecting refinancings and new originations at relatively low market interest rates that existed in 2003 and 2004. The 133 basis point decline in the yield on the consumer loan portfolio reflects a change in portfolio mix from higher-yielding national unsecured consumer loans to home equity loans originated at lower market and promotional interest rates.
In 2004, average funding liabilities before the allocation of funding liabilities to discontinued operations totaled $9.4 billion, a $1.3 billion, or 12%, decline from 2003, reflecting the impact of the balance sheet restructuring in 2004 and growth of $258 million, or 3%, in average core deposits. Average non-interest-bearing core deposits increased $175 million, or 9%, and average interest-bearing core deposits increased $83 million, or 1%, due in part to Peoples Banks focus on growing core deposits during 2004. Average core deposits comprised 91% of average funding liabilities before the allocation of funding liabilities to discontinued operations, compared to 78% in 2003, reflecting the balance sheet restructuring in 2004.
Average rates paid on total deposits declined 20 basis points in 2004 compared to 2003, reflecting the continued strong growth in non-interest-bearing core deposits and the overall low level of interest rates. The rates paid by Peoples Bank on certain interest-bearing deposit products began to increase by the end of 2004 from the historically low interest rate levels experienced in 2003, reflective of the increases in interest rates initiated by the Federal Reserve Board.
Average purchased funds decreased $1.3 billion, or 71%, and average subordinated notes decreased $106 million, or 42%, in 2004 compared to 2003, reflecting the results of the balance sheet restructuring in 2004. The 61 basis point improvement to 1.20% from 1.81% in the average rate paid on total funding liabilities primarily reflected the benefits from the balance sheet restructuring in 2004.
Average Balance, Interest and Yield/Rate Analysis . The tables on the following pages present average balance sheets, interest income, interest expense and the corresponding average yields earned and rates paid for the nine month periods ended September 30, 2006 and 2005 and for the years ended December 31, 2005, 2004 and 2003. 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 Peoples Bank has ceased to accrue interest. The impact of Peoples Banks use of derivative instruments in managing interest rate risk is also reflected in the table, classified according to the instrument hedged and the risk management objective.
For 2004 and 2003, the net interest margin, net interest income and average funding liabilities reflect a reduction in funding liabilities and interest expense relating to the earning assets of the credit card business that were reclassified to discontinued operations for the periods prior to the sale in the first quarter of 2004. Interest expense was allocated to discontinued operations for those years by applying the weighted-average cost of funds previously used for credit card segment reporting purposes to the average earning assets of the discontinued operations for the respective year, with a corresponding reduction in total interest expense.
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(1) | Average yields earned and rates paid are annualized. |
(2) | Average balances and yields for securities available for sale are based on amortized cost. |
(3) | Includes $79.7 million and $91.5 million of non-interest-bearing deposits for the nine months ended September 30, 2006 and 2005, respectively. |
(4) | The fully-taxable equivalent adjustment for 2005 was $0.3 million. There was no adjustment for 2006. |
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The following table provides the weighted average yields earned and rates paid for each major category of earning assets and funding liabilities as of September 30, 2006.
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(1) | Average balances and yields for securities available for sale are based on amortized cost. |
(2) | Includes $89.7 million, $94.6 million and $125.1 million of non-interest-bearing deposits in 2005, 2004 and 2003, respectively. |
(3) | Represents an allocation of funding liabilities and interest expense to discontinued operations. |
(4) | The fully-taxable equivalent adjustment for 2005, 2004 and 2003 was $0.3 million, $0.3 million and $2.7 million, respectively. |
Volume and Rate Analysis . The following tables show the extent to which changes in interest rates and changes in the volume of average earning assets and average interest-bearing liabilities have affected Peoples Banks net interest income. For each category of earning assets and interest-bearing liabilities, information is provided relating to: changes in volume (changes in average balances multiplied by the prior years average interest rate); changes in rates (changes in average interest rates multiplied by the prior years average balance); and the total change. Changes attributable to both volume and rate have been allocated proportionately.
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Provision for Loan Losses and Net Charge-offs. The provision for loan losses in the first nine months of 2006 totaled $2.0 million, a $1.3 million, or 39%, reduction compared to the year-ago period. The 2006 period reflects $3.0 million in net loan charge-offs, partially offset by a $1.0 million reduction in the allowance for loan losses. The 2005 period reflected net loan charge-offs of $2.8 million and a $0.5 million increase in the allowance for loan losses. Net loan charge-offs increased $0.2 million, or 7%, for the first nine months of 2006, compared to the year-ago period. The allowance for loan losses as a percentage of total loans was 0.81% at September 30, 2006 and 0.87% at September 30, 2005.
Commercial loan net charge-offs reflect a $4.0 million charge-off in the third quarter of 2006 relating to one commercial banking loan that was placed on non-accrual status in the second quarter of 2006 as previously disclosed. Commercial real estate finance net recoveries reflect a $2.3 million cash recovery in the first quarter of 2006 on one non-performing loan that was favorably resolved.
Consumer loan net charge-offs decreased $0.8 million, or 40%, reflecting a $1.6 million decrease in national consumer loan net charge-offs, partially offset by a $0.6 million increase in charge-offs related to consumer overdrafts that were previously reported in non-interest expense through the second quarter of 2005. The average national consumer loan portfolio decreased $24 million, or 80%, on a year-over-year basis.
Net loan charge-offs as a percentage of average total loans equaled 0.05% on an annualized basis for the first nine months of 2006, unchanged from the year-ago period. The impact of the slight increase in net loan charge-offs on the net loan charge-off ratio was offset by a $684 million, or 8%, increase in average loans from the first nine months of 2005. The very low level of net loan charge-offs in terms of absolute dollars and as a percentage of average loans is unlikely to be sustainable in the future.
Net loan charge-offs in 2005 declined $5.2 million, or 46%, compared to 2004. Consumer loan net charge-offs decreased $4.0 million, or 58%, reflecting a 72% decrease in the dollar amount of national consumer loan net charge-offs given a $60 million, or 70%, reduction in this portfolios average balances during 2005. The increase in Peoples Capital and Leasing loan net charge-offs in 2005 reflected a $2.3 million charge-off related to one loan. Commercial real estate finance loan net charge-offs in 2004 reflected a $3.2 million charge-off related to one shared national credit that had been classified as non-performing since 2002. The provision for loan losses decreased $4.7 million in 2005 compared to 2004, reflecting lower net loan charge-offs in 2005, partially offset by a $2.5 million increase in the allowance for loan losses in 2005, compared to a $2.0 million increase in the allowance for loan losses in 2004.
Net loan charge-offs as a percentage of average total loans decreased 8 basis points to 0.07% in 2005 compared to 0.15% in 2004. In addition to the $5.2 million decrease in net loan charge-offs, the improvement in the net loan charge-off ratio reflected an $836 million, or 11%, increase in average total loans.
Net loan charge-offs in 2004 declined $4.1 million, or 27%, compared to 2003, reflecting a $7.0 million, or 50%, reduction in consumer loan net charge-offs, partially offset by the commercial real estate loan charge-off discussed above. The provision for loan losses decreased $3.4 million in 2004 compared to 2003, reflecting lower consumer loan net charge-offs in 2004.
Non-Interest Income. Non-interest income (especially fee-based revenues) is an important revenue source for Peoples Bank that can mitigate the impact of interest rate volatility on net interest income. Peoples Bank has focused on enhancing these revenue streams by leveraging its commercial banking relationships, growing existing fee-based revenue generating businesses, and strengthening its retail delivery network and products.
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The following table sets forth the components of non-interest income for the periods indicated.
Total non-interest income decreased $19.0 million in the first nine months of 2006, compared to the 2005 period, reflecting net security losses of $27.4 million as part of balance sheet restructuring activities in 2006. Excluding net security losses from both periods, total non-interest income would have increased $8.1 million, or 7%, reflecting higher fee-based revenues, higher bank-owned life insurance income and higher other non-interest income, partially offset by lower net gains on sales of residential mortgage loans.
Revenue from service charges on deposit accounts increased $5.8 million, or 11%, compared to the first nine months of 2005, reflecting changes in Peoples Banks fee structure implemented in both the second quarter of 2006 and the third quarter of 2005 to close the gap between Peoples Banks pricing practices and those of the competition.
Insurance revenue declined $0.2 million in the first nine months of 2006, reflecting industry-wide trends for this business, characterized as a soft market with lower pricing for renewals.
Other banking service charges and fees increased $0.3 million in the first nine months of 2006, primarily due to growth in retail banking fees associated with higher levels of Personal Identification Number (PIN) debit interchange fees resulting from customer preferences for debit card-related transactions. PIN debit interchange refers to the revenue generated when a customer uses their PIN to make a purchase with their debit card. Peoples Bank earns a portion of the purchase amount whenever its customers use their debit card at a retail merchant. This interchange is paid by the retail merchant. Other fees decreased $4.4 million, reflecting lower lending-related charges and fees, primarily lower commercial real estate loan prepayment penalties.
As previously discussed, $810 million and $266 million of debt securities were sold in the third and second quarters of 2006, respectively, resulting in net security losses of $23.4 million and $4.0 million for the respective periods. Peoples Bank also sold $25 million in securities purchased under agreements to resell in the third quarter of 2006 at a loss of $0.3 million, which is reported in other non-interest expense. These transactions were undertaken to better position Peoples Banks balance sheet for the then current interest rate environment.
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Peoples Bank invested an additional $50 million in the first quarter of 2006 in bank-owned life insurance, after an initial investment of $150 million in the second quarter of 2005 to help defray the rising costs of employee benefits. Increases in the cash surrender value of bank-owned life insurance are included in non-interest income and totaled $6.3 million in the first nine months of 2006 ($9.5 million on a taxable-equivalent basis), compared to $1.7 million ($2.6 million on a taxable-equivalent basis) for the year-ago period.
Net gains on sales of residential mortgage loans decreased $1.6 million in the first nine months of 2006, reflecting lower residential mortgage loan origination volume and subsequent lower levels of fixed-rate loan sales. Sales volume of fixed-rate residential mortgage loans decreased approximately 42% in the 2006 period, which is consistent with the 41% decrease in fixed-rate residential mortgage originations compared to the first nine months of 2005. Residential mortgage originations, including refinancings, totaled $807 million in the first nine months of 2006, compared to $1.0 billion in the year-ago period.
The increase in other non-interest income compared to the first nine months of 2005 reflects a $1.8 million increase in rental income resulting from the higher level of equipment leased to Peoples Capital and Leasing customers. In addition, other non-interest income for the 2006 period includes a $0.7 million net gain from the sale of a corporate insurance account by R.C. Knox (recorded in the third quarter of 2006), a $0.7 million gain from the redemption of common stock received in conjunction with the MasterCard Incorporated initial public offering given Peoples Banks debit card business (recorded in the second quarter of 2006) and $0.6 million of interest related to the completion of a federal tax audit (recorded in the first quarter of 2006).
Total non-interest income increased $21.6 million in 2005 compared to 2004, reflecting an $8.1 million gain on the sale of three branches, higher fee-based revenues, higher bank-owned life insurance income and higher net security losses in 2004, partially offset by a reduction in other non-interest income in 2005 due to the elimination of servicing income from The Royal Bank of Scotland Group, which purchased Peoples Banks credit card business in 2004.
Service charges on deposit accounts increased $3.2 million compared to 2004, reflecting changes in Peoples Banks fee structure implemented in the third quarter of 2005 to close the gap between Peoples Banks pricing practices and those of the competition, partially offset by the impact of promotional campaigns on certain commercial and retail checking fees that began in the third quarter of 2004.
Insurance revenue reflects higher commissions earned by R.C. Knox in a soft insurance market, offset by lower contingent commission revenue and lower fee-based revenues from the sale of life insurance products offered in Peoples Banks branch network. The decrease in brokerage commissions primarily reflects lower fees received from sales of annuity products.
Other banking service charges and fees increased primarily due to growth in retail banking fees associated with higher levels of PIN debit interchange fees resulting from customer preferences for debit card-related transactions. The increase in other fees reflects higher lending-related charges and fees, including higher commercial real estate loan prepayment penalties received as a result of the low interest rate environment in 2005.
Net gains on sales of residential mortgage loans increased $0.3 million compared to 2004. Sales volume of fixed-rate residential mortgage loans increased approximately 6% in 2005, which is consistent with the 6% increase in fixed-rate residential mortgage originations compared to 2004.
Peoples Bank invested $150 million in the second quarter of 2005 in a bank-owned life insurance program to help defray the rising costs of employee benefits. Increases in the cash surrender value of bank-owned life insurance are included in non-interest income and totaled $3.3 million in 2005.
Included in other non-interest income in 2004 was $4.8 million of servicing income related to the interim servicing agreement with The Royal Bank of Scotland Group following the credit card sale. Included in other non-interest income in 2003 was $4.3 million of interest received related to the completion of a routine federal tax audit.
Total non-interest income decreased $14.6 million in 2004 compared to 2003, reflecting a decrease in net gains on sales of residential mortgage loans, higher net security losses in 2004 and essentially flat fee-based revenues. Net gains on sales of residential mortgage loans decreased $11.1 million, which is consistent with the 69% reduction in fixed-rate residential mortgage originations compared to 2003 and subsequent reduced levels of sales of these loans.
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In 2004, Peoples Bank sold its remaining preferred and common stock portfolios after substantially reducing the preferred stock portfolio and selling virtually the entire common stock portfolio in 2003. Net security losses in 2003 included $1.4 million in write-downs in the carrying amount of certain equity securities due to declines in value deemed to be other than temporary, reflecting the equity markets at the time.
Non-Interest Expense. The following table sets forth the components of non-interest expense for the periods indicated.
Total non-interest expense in the first nine months of 2006 increased $7.5 million, or 3%, compared to the year-ago period, primarily reflecting higher compensation and benefits and lower professional and outside service fees.
The first nine months of 2006 included the following items: severance-related expenses totaling $0.4 million and $1.2 million in the second and first quarters of 2006, respectively (recorded to compensation and benefits); a $0.3 million charge related to the sale of $25 million of securities purchased under agreements to resell as part of balance sheet restructuring activities (recorded to other non-interest expense in the third quarter of 2006); and a $0.9 million charge related to an R.C. Knox contingency that was resolved in the second quarter of 2006 (recorded to other non-interest expense in the first quarter of 2006). The first nine months of 2005 included a $2.0 million goodwill impairment charge (recorded in the second quarter of 2005). Excluding these expenses from the respective periods, total non-interest expense in the first nine months of 2006 would have increased $6.7 million, or 3%, compared to the year-ago period.
Compensation and benefits increased $6.1 million, or 4%, compared to the 2005 period, after excluding severance expense. The increase reflects the combination of normal merit increases, higher accruals for incentive compensation, and increased pension and health care-related costs. On September 29, 2006, Peoples Bank contributed $91.5 million to the employee retirement plan, representing the maximum deductible contribution per Internal Revenue Service rules. Earnings on these contributions are expected to significantly reduce Peoples Banks pension expense beginning in 2007.
Professional and outside service fees decreased $1.4 million, or 7%, compared to the 2005 period, reflecting lower utilization of information technology contractors and lower costs for Peoples Banks declining national consumer loan portfolio, partially offset by higher legal costs related to Peoples Banks conversion to a federal charter.
The increase in other non-interest expense compared to the first nine months of 2005 primarily reflects a $1.3 million increase in the amortization of equipment leased to Peoples Capital and Leasing customers and increased spending levels for advertising campaigns, partially offset by lower operational charge-offs and state assessment fees.
The $2.0 million goodwill impairment charge in 2005 related to the decision to combine Olson Mobeck Investment Advisors, Inc. with one of Peoples Banks other businesses in the consumer financial services business segment.
Included in total non-interest expense for 2005 and 2004 were liability restructuring costs and certain nonrecurring expenses totaling $0.7 million in 2005 and $9.3 million in 2004, as well as a $2.0 million goodwill impairment charge in
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2005. Excluding these expenses from the respective years, total non-interest expense would have increased $2.0 million, or 1%, in 2005 compared to 2004. The improvement in Peoples Banks efficiency ratio in 2005 primarily reflects a $53.1 million, or 11%, increase in revenue.
Included in compensation and benefits was a $0.7 million nonrecurring charge related to the accelerated vesting of stock options in 2005 (discussed below) and $6.7 million of nonrecurring expenses in 2004. Compensation and benefits increased $7.2 million, or 4%, compared to 2004, after excluding these nonrecurring expenses from both years. The increase reflects the combination of normal merit increases, higher accruals for incentives tied to overall bank performance, higher incentive compensation for revenue-generating businesses and increased health care costs.
Occupancy and equipment decreased $6.9 million in 2005 compared to 2004, reflecting a $3.2 million, or 14%, reduction in depreciation expense and a substantially higher level of costs incurred in 2004 to upgrade personal computers throughout Peoples Bank.
Professional and outside service fees increased $0.7 million in 2005, after excluding $0.4 million of nonrecurring expenses in 2004. Other non-interest expense included $2.2 million of nonrecurring expenses in 2004.
In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 123-R, Share-Based Payment, which replaced SFAS No. 123 and superseded APB Opinion No. 25 and its related interpretations. Among other things, SFAS No. 123-R requires that costs resulting from all share-based payment transactions with employees be recognized in the financial statements.
On December 22, 2005, Peoples Bank accelerated the vesting of all outstanding unvested stock options that had been previously awarded to employees. Shares of common stock acquired pursuant to the exercise of an accelerated option may not be sold or otherwise transferred until the earlier of (1) the date the option would have vested under the terms on which it was initially awarded, or (2) termination of the option holders employment with Peoples Bank. The purpose of the acceleration was to eliminate compensation expense associated with these options in future years upon the adoption of SFAS No. 123-R in the first quarter of 2006. As a result of the acceleration, options to purchase 0.9 million shares of common stock became immediately exercisable. Substantially all of these options were in-the-money at the time of acceleration. The accelerated vesting of these options eliminated potential pre-tax compensation expense through 2008 of approximately $1.7 million, including approximately $0.8 million in 2006. Peoples Bank recorded a one-time charge of $0.7 million in 2005 as a result of the accelerated vesting, which is included in compensation and benefits in the Consolidated Statements of Income. See Note 1 to the consolidated financial statements.
Included in total non-interest expense was $133.4 million and $1.2 million of liability restructuring costs in 2004 and 2003, respectively, and certain nonrecurring expenses totaling $9.3 million in 2004. Excluding these expenses, total non-interest expense would have decreased $7.8 million in 2004 compared to 2003.
Included in compensation and benefits was $6.7 million of nonrecurring expenses in 2004. Compensation and benefits increased $0.4 million compared to 2003, after excluding the nonrecurring expenses in 2004, reflecting a $3.8 million increase in pension-related expenses and normal salary increases, essentially offset by an approximate 4% reduction in the number of full-time equivalent employees in 2004, and lower salary and commission expense related to the substantial reduction in mortgage origination volume in 2004.
In 2004, occupancy and equipment decreased $5.5 million compared to 2003, reflecting a $6.6 million, or 22%, reduction in depreciation expense in 2004, primarily due to lower levels of capital spending.
After excluding $0.4 million of nonrecurring expenses in 2004, professional and outside service fees decreased $0.6 million in 2004 compared to 2003.
Advertising and promotion decreased $3.0 million in 2004 compared to 2003, reflecting lower spending on bank-wide advertising campaigns during 2004 and higher amortization of deferred consumer loan marketing expenses in 2003.
Discontinued Operations. Income from discontinued operations, net of income taxes, totaled $1.7 million for the first nine months of 2006 compared to $10.3 million for the year-ago period. Included in income from discontinued operations was an after-tax charge of $0.5 million (recorded in the third quarter of 2006) from the resolution of a contingency related to
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the sale of Peoples Banks credit card business in 2004 and after-tax income of $6.2 million (recorded in the second quarter of 2005) from the resolution of a significant contingency related to the credit card sale.
Following the sale of its credit card business in 2004, Peoples Bank continues to generate recoveries from collection efforts on previously charged-off credit card accounts that were not included in the sale. These recoveries are included in income from discontinued operations in the Consolidated Statements of Income for periods subsequent to the sale. Recoveries, net of collection costs, totaled $3.4 million for the first nine months of 2006, compared to $6.2 million for the comparable period in 2005. The level of recoveries is expected to continue to decline due to the aging and diminishing pool of charged-off accounts.
Income from discontinued operations, net of income taxes, totaled $11.2 million in 2005 and $205.3 million in 2004. Recoveries, net of collection costs, totaled $7.7 million in 2005 and $11.2 million in 2004.
Included in income from discontinued operations in 2005 was after-tax income of $6.2 million resulting from the resolution of a significant contingency relating to the credit card sale. Included in 2004 was an after-tax gain of $198.5 million on the sale of the credit card business. See Note 21 to the consolidated financial statements.
Income Taxes. Income tax expense from continuing operations totaled $42.1 million in the first nine months of 2006 compared to $48.8 million in the 2005 period. The effective income tax rate from continuing operations was 33.7% and 34.8% for the first nine months of 2006 and 2005, respectively. The lower effective rate for 2006 primarily reflects the higher level of tax-exempt bank-owned life insurance income compared to the year-ago period.
Income tax expense (benefit) from continuing operations totaled $64.1 million in 2005 compared to $(8.6) million in 2004. Income tax benefits of $2.0 million and $4.0 million resulting from the completion of federal tax audits are included in income tax expense (benefit) from continuing operations in 2005 and 2004, respectively. Excluding these benefits from the respective years, Peoples Banks effective income tax rate from continuing operations would have been 34.8% in 2005 and 32.4% in 2004.
Income tax expense (benefit) from continuing operations totaled $(8.6) million in 2004 and $22.5 million in 2003. Income tax benefits of $4.0 million and $6.0 million resulting from the completion of federal tax audits are included in income tax expense (benefit) from continuing operations in 2004 and 2003, respectively. Excluding these benefits from the respective years, Peoples Banks effective income tax rate from continuing operations would have been 32.4% in 2004 and 33.4% in 2003.
Income tax expense (benefit) for the nine months ended September 30, 2006 and 2005 and the years ended December 31, 2005, 2004 and 2003 reflects the state tax benefit resulting from the formation of Peoples Mortgage Investment Company, a wholly owned subsidiary. 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.
Liquidity
Liquidity is defined as the ability to generate sufficient cash flows to meet all present and future funding requirements at reasonable costs. Liquidity management addresses Peoples Banks ability to fund new loans and investments as opportunities arise, to meet customer deposit withdrawals and to repay borrowings and subordinated notes as they mature. Peoples Banks liquidity position is monitored daily by management. The Asset and Liability Management Committee is responsible for setting guidelines to ensure maintenance of prudent levels of liquidity.
Asset liquidity is provided by: cash; short-term investments; proceeds from security sales, maturities and principal repayments; and proceeds from scheduled principal collections, prepayments and sales of loans. In addition, certain securities may be used to collateralize borrowings under repurchase agreements. The Consolidated Statements of Cash Flows present data on cash provided by and used in Peoples Banks operating, investing and financing activities. At September 30, 2006, Peoples Banks liquid assets included $30 million in trading account securities, $535 million in cash and cash equivalents, and $171 million in debt securities available for sale. At September 30, 2006, Peoples Bank had pledged securities available
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for sale with a total fair value of $140 million as collateral for public deposits, for derivatives transactions and for other purposes.
Liability liquidity is measured by Peoples Banks ability to obtain core deposits and purchased funds at cost-effective rates that are diversified with respect to markets and maturities. Core deposits, which are considered the most stable source of liability liquidity, totaled $8.8 billion, $8.9 billion and $8.7 billion at September 30, 2006, December 31, 2005, and December 31, 2004, respectively, (representing 85%, 82% and 82% of total funding at the respective dates). Purchased funds are used from time to time to diversify Peoples Banks funding mix and to support asset growth. Peoples Banks purchased funds totaled $0.1 billion, $0.4 billion and $0.4 billion at September 30, 2006, December 31, 2005 and December 31, 2004 (representing 1%, 4% and 4% of total funding at the respective dates).
Peoples Banks sources of purchased funds include: municipal deposits, brokered certificates of deposit, federal funds purchased, advances from the Federal Home Loan Bank of Boston and the Federal Reserve Bank of New York, and repurchase agreements. At September 30, 2006, Peoples Banks borrowing limit from Federal Home Loan Bank and Federal Reserve Bank advances and repurchase agreements was $2.8 billion, based on the level of qualifying collateral available for these borrowing sources and Peoples Bank had unsecured borrowing capacity of $825 million.
At September 30, 2006 and December 31, 2005, Peoples Bank had outstanding commitments to originate loans totaling $1.1 billion and $766 million, respectively, and approved, but unused, lines of credit extended to customers totaling $2.2 billion at both dates. See Note 17 to the consolidated financial statements.
The sources of liquidity discussed above are deemed by management to be sufficient to fund outstanding loan commitments and to meet Peoples Banks other obligations.
Capital
Peoples Banks total stockholders equity was $1.4 billion at September 30, 2006, a $63 million net increase from December 31, 2005. This increase primarily reflects net income of $85 million and a $16 million decrease in accumulated other comprehensive loss, partially offset by dividends paid of $44 million. The decrease in accumulated other comprehensive loss primarily reflects a $19 million reduction in the after-tax net unrealized loss on securities available for sale as a result of the previously mentioned sale of debt securities in the second and third quarters of 2006.
Peoples Banks total stockholders equity was $1.3 billion at December 31, 2005, an $89 million net increase compared to $1.2 billion at December 31, 2004. This increase primarily reflects net income of $137 million and net stock option-related activity totaling $15 million, partially offset by dividends paid of $52 million and an $11 million increase in accumulated other comprehensive loss since December 31, 2004. The increase in accumulated other comprehensive loss primarily reflects a $10 million increase in the after-tax net unrealized loss on securities available for sale in response to rising interest rates.
Dividends declared and paid per common share (other than shares on which Peoples Mutual Holdings waived receipt of dividends) were $0.72, $0.85, $0.75 and $0.68 in the first nine months of 2006 and for the full years of 2005, 2004 and 2003, respectively. Stockholders equity equaled 12.7%, 11.8% and 11.2% of total assets at September 30, 2006, December 31, 2005 and December 31, 2004, respectively.
Peoples Banks tangible capital ratio was 11.8% at September 30, 2006, compared to the minimum ratio of 1.5% generally required by Office of Thrift Supervision regulations. Peoples Bank is also subject to the Office of Thrift Supervisions risk-based capital regulations, which require minimum ratios of leverage (core) and total risk-based capital of 4.0% and 8.0%, respectively. Peoples Bank satisfied these requirements at September 30, 2006 with ratios of 11.80% and 16.19%, respectively, compared to 11.20% and 16.41%, respectively, at December 31, 2005. Peoples Bank converted to a federal savings bank in August 2006. Prior to the conversion, Peoples Bank was regulated by the Federal Deposit Insurance Corporation. Regulatory capital information for all dates prior to August 2006 were calculated in accordance with the capital regulations of the Federal Deposit Insurance Corporation rather than those of the Office of Thrift Supervision. While the capital regulations of these two agencies are substantially similar, they are not identical.
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The following summary compares Peoples Banks risk-based capital amounts and ratios as of September 30, 2006 to the Office of Thrift Supervision requirements for minimum capital adequacy. Peoples Banks risk-adjusted total assets, as defined, totaled $8.5 billion at September 30, 2006.
Office of Thrift Supervision Requirements | ||||||||||||||||||
Peoples Bank
Actual |
Minimum Capital
Adequacy |
For Classification as
Well-Capitalized |
||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||
(Dollars in millions) | ||||||||||||||||||
As of September 30, 2006 |
||||||||||||||||||
Tangible capital |
$ | 1,248.5 | 11.80 | % | $ | 158.7 | 1.50 | % | n/a | n/a | ||||||||
Leverage (core) capital |
1,248.5 | 11.80 | 423.1 | 4.00 | $ | 528.9 | 5.00 | % | ||||||||||
Total-risk-based capital |
1,374.7 | 16.19 | 679.2 | 8.00 | 849.0 | 10.00 |
Peoples Banks regulatory capital ratios at September 30, 2006 exceeded the Office of Thrift Supervisions numeric criteria for classification as a well-capitalized institution. See Note 11 to the consolidated financial statements for additional information concerning Peoples Banks regulatory capital amounts and ratios.
Market Risk Management
Market risk is the risk of loss to earnings, capital and the fair market values of certain assets and liabilities resulting from changes in interest rates, equity prices and foreign currency exchange rates.
Interest Rate Risk . For Peoples Bank, the only relevant market risk at this time is interest rate risk, which is the potential exposure to earnings or capital that may result from changes in interest rates. Peoples Bank actively manages its interest rate risk to achieve a balance between risk, earnings volatility and capital preservation. The Asset and Liability Management Committee has primary responsibility for managing Peoples Banks interest rate risk and reports to the Treasury and Finance Committee of the Board of Directors. To evaluate Peoples Banks interest rate risk profile, the Asset and Liability Management Committee monitors economic conditions, interest rate trends, liquidity levels and capital ratios. Management also reviews assumptions periodically for projected customer and competitor behavior, in addition to the expected repricing characteristics and cash flow projections for assets, liabilities and off-balance-sheet financial instruments. Actual conditions may vary significantly from Peoples Banks assumptions.
Management evaluates the impact of interest rate risk on Income at Risk using an earnings simulation model to project earnings under multiple interest rate environments over a one-year time horizon resulting in a quantification of interest rate risk. Income at Risk includes significant interest rate sensitive income sources, such as net interest income, gains on sales of residential mortgage loans and bank-owned life insurance income.
The earnings projections are based on a static balance sheet and estimates of pricing levels for Peoples Banks products under multiple scenarios intended to reflect instantaneous yield curve shocks. Peoples Bank estimates its base case Income at Risk using current interest rates. Internal guidelines regarding interest rate risk simulation specify that for instantaneous parallel shifts of the yield curve, estimated Income at Risk for the subsequent one-year period should not decline by more than: 10% for a 100 basis point shift; 15% for a 200 basis point shift; and 20% for a 300 basis point shift.
The following table shows the estimated percentage increase (decrease) in Peoples Banks Income at Risk over a one-year simulation period beginning September 30, 2006.
Rate Change (basis points) |
Percent Change in Income at Risk |
|
+300 |
10.07 % | |
+200 |
7.10 | |
+100 |
3.70 | |
-100 |
(4.14) | |
-200 |
(10.03) | |
-300 |
(18.07) |
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While Income at Risk simulation identifies earnings exposure over a relatively short time horizon, Market Value of Equity takes a long-term economic perspective when quantifying interest rate risk. Market Value of Equity identifies possible margin behavior over a longer time horizon and is therefore a valuable complement of interest rate risk management. Base case Market Value of Equity is calculated by estimating the net present value of all future cash flows from existing assets and liabilities using current interest rates. The base case scenario assumes that future interest rates remain unchanged.
Internal guidelines limit the exposure of a decrease in Market Value of Equity resulting from instantaneous parallel shifts of the yield curve in the following manner: for 100 basis points 10% of base case Market Value of Equity; for 200 basis points 15% of base case Market Value of Equity; and for 300 basis points 20% of base case Market Value of Equity.
The following table shows the estimated percentage decrease in Peoples Banks Market Value of Equity, assuming various shifts in interest rates.
Rate Change (basis points) |
Percent Change in Market Value of Equity |
|
+300 |
(5.72)% | |
+200 |
(3.28) | |
+100 |
(1.19) | |
-100 |
(0.54) | |
-200 |
(2.80) | |
-300 |
(5.52) |
Management believes Peoples Banks interest rate risk position at September 30, 2006 represented an acceptable level of risk. However, given the uncertainty of the magnitude, timing and direction of future interest rate movements and the shape of the yield curve, actual results may vary from those predicted by Peoples Banks models.
Peoples Bank uses derivative financial instruments, including interest rate swaps and interest rate floors as components of its interest rate risk management. Peoples Bank has written guidelines that have been approved by the Board of Directors and the Asset and Liability Management Committee governing the use of these financial instruments, including approved counterparties and risk limits, and controls the credit risk of these instruments through collateral, credit approvals and monitoring procedures. At September 30, 2006, each of Peoples Banks counterparties had an investment grade credit rating from the major rating agencies and is specifically approved up to a maximum credit exposure. Derivative financial instruments have been used for market risk management purposes (principally interest rate risk) and not for trading or speculative purposes.
Peoples Bank is currently using interest rate swaps and interest rate floors to manage interest rate risk associated with certain interest-earning assets and interest-bearing liabilities. Interest rate swaps, which are accounted for as fair value hedges, are used to match more closely the repricing of certain commercial real estate finance loans and the funding associated with these loans. The interest rate swaps effectively convert the funding liabilities from a variable interest rate into a fixed interest rate and consequently reduce Peoples Banks exposure to increases in interest rates and their effect on interest income and interest expense.
Peoples Bank purchased interest rate floors to partially manage its exposure to a decrease in interest income resulting from declines in certain interest rates. These interest rate floors, which are accounted for as cash flow hedges, offer protection against a decline in interest income if the one-month LIBOR-index rate used to reprice certain floating-rate commercial loans declines below the strike rate on the interest rate floors. If the one-month LIBOR-index rate falls below the specified strike rate, Peoples Bank would receive an interest payment on the interest rate floor equal to the difference between the one-month LIBOR-index rate on the reset date and the strike rate, which in effect, would offset the decline in interest income earned on the hedged floating rate commercial loans from the decline in interest rates.
Foreign Currency Risk . Foreign exchange forward contracts are commitments to buy or sell foreign currency on a future date at a contractual price. Peoples Bank uses these instruments on a limited basis to eliminate its exposure to fluctuations in currency exchange rates on certain of its commercial loans that are denominated in foreign currencies. Gains and losses on foreign exchange contracts substantially offset the translation gains and losses.
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Derivative Financial Instruments . The following tables summarize certain information concerning the derivative financial instruments utilized by Peoples Bank in its management of interest rate risk. Also see Note 17 to the consolidated financial statements.
As of and for the nine months ended September 30, 2006 |
|||||||||||
Interest Rate Floors |
Interest Rate Swaps |
Foreign Exchange Contracts |
|||||||||
(Dollars in millions) | |||||||||||
Notional amount at period end |
$ | 700.0 | $ | 9.3 | $ | 13.3 | |||||
Weighted average remaining term to maturity (in months) |
52 | 76 | 2 | ||||||||
Decrease in pre-tax income |
$ | (0.4 | ) | $ | | $ | | ||||
Fair Value: |
|||||||||||
Recognized as an asset |
13.8 | | 0.1 | ||||||||
Recognized as a liability |
| 0.2 | | ||||||||
As of and for the year ended December 31, 2005 | |||||||||||
Interest Rate Floors |
Interest Rate Swaps |
Foreign Exchange Contracts |
|||||||||
(Dollars in millions) | |||||||||||
Notional amount at year end |
$ | 400.0 | $ | 9.6 | $ | 17.4 | |||||
Weighted average remaining term to maturity (in months) |
60 | 85 | 3 | ||||||||
Decrease in pre-tax income |
$ | | $ | (0.7 | ) | $ | | ||||
Fair Value: |
|||||||||||
Recognized as an asset |
5.9 | | | ||||||||
Recognized as a liability |
| 0.4 | |
As of and for the year ended
December 31, 2004 |
||||||||
Interest Rate
Swaps |
Interest Rate Corridors |
|||||||
(Dollars in millions) | ||||||||
Notional amount at year end |
$ | 26.2 | $ | | ||||
Weighted average remaining term to maturity (in months) |
86 | | ||||||
Decrease in pre-tax income |
$ | (3.0 | ) | $ | (0.9 | ) | ||
Fair value recognized as a liability |
1.3 | |
Off-Balance Sheet Arrangements and Contractual Obligations
Detailed discussions pertaining to Peoples Banks off-balance sheet arrangements are included in the following sections: Managements Discussion and Analysis of Financial Condition and Results of Operations Liquidity , Managements Discussion and Analysis of Financial Condition and Results of Operations Capital , Managements Discussion and Analysis of Financial Condition and Results of Operations Market Risk Management and Business of Peoples Bank and Peoples United Financial Sources of Funds .
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The following table summarizes Peoples Banks contractual cash obligations, other than deposit liabilities, including operating leases at December 31, 2005. Additional information concerning these contractual cash obligations is included in Notes 8, 9 and 18 to the consolidated financial statements. Purchase obligations included in the table represent those agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the appropriate timing of the transactions. A substantial majority of Peoples Banks purchase obligations are renewable on a year-to-year basis. As such, the purchase obligations included in this table only reflect the contractual commitment.
Recent Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board (the FASB) issued FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprises financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. Peoples Bank is currently evaluating FIN 48 to determine if it will have a material effect on its Consolidated Financial Statements.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which establishes a definition and measurement date for fair value and expands the disclosures regarding fair-value measurement. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. Peoples Bank is currently evaluating SFAS No. 157 to determine if it will have a material effect on its Consolidated Financial Statements.
In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans. Among other things, SFAS No. 158 will require an employer to recognize the funded status of its pension and other postretirement benefit plans in the statement of financial position effective for fiscal years ending after December 15, 2006. SFAS No. 158 will also require the measurement of plan assets and benefit obligations as of the date of the employers fiscal year-end (eliminating the use of earlier measurement dates currently permissible), effective for fiscal years ending after December 15, 2008. As of September 30, 2006, Peoples Bank was evaluating SFAS No. 158 to determine if it will have a material effect on its consolidated financial statements. See Recent Developments .
In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) Topic IN, Financial StatementsConsidering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements (SAB No. 108), in order to address diversity in practice in quantifying financial statement misstatements. The techniques most commonly used in practice to accumulate and quantify misstatements are generally referred to as the rollover and iron curtain approaches. SAB No. 108 requires that errors be quantified under both the rollover and iron curtain approaches. Financial statements would require adjustment when either approach results in quantifying a misstatement that is material, after considering all relevant quantitative and qualitative factors. SAB No. 108 is effective for annual financial statements for the first fiscal year ending after November 15, 2006. SAB No. 108 is not expected to have a material impact on Peoples Banks Consolidated Financial Statements.
Impact of Inflation and Changing Prices
Our consolidated financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States of America, commonly referred as GAAP. GAAP generally requires the measurement of financial position and operating results in terms of historical dollars without consideration for changes in the
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relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of our operations. Unlike industrial companies, our assets and liabilities are primarily monetary in nature. As a result, changes in market interest rates have a greater impact on performance than do the effects of inflation.
Statement of Managements Responsibility
Management is responsible for the preparation, content and integrity of the consolidated financial statements. The consolidated financial statements and related footnotes are prepared in conformity with accounting principles generally accepted in the United States of America. Management is also responsible for compliance with laws and regulations relating to safety and soundness as designated by the Federal Deposit Insurance Corporation.
The consolidated financial statements as identified in the accompanying Report of Independent Registered Public Accounting Firm have been audited by KPMG LLP, an independent registered public accounting firm. These audits were conducted in accordance with auditing standards generally accepted in the United States of America, and included tests of the accounting records and other auditing procedures considered necessary to formulate an opinion on the consolidated financial statements.
The Board of Directors of Peoples Bank has an Audit Committee composed of five outside directors, each of whom meets the criteria for independence as set forth in applicable listing standards. The Audit Committee meets regularly with the independent auditors, the internal auditors and management to ensure that the system of internal control over financial reporting is being properly administered and that financial data is being properly reported. The Audit Committee reviews the scope and timing of internal audits, including recommendations made with respect to the system of internal control over financial reporting. The independent auditors and the internal auditors have free access to the Audit Committee.
Managements Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining effective internal control over financial reporting for Peoples Bank. Management maintains a system of internal control over financial reporting, including an internal audit function, which is designed to provide reasonable assurance that assets are safeguarded against loss from unauthorized use or disposition, transactions are properly authorized, and that accounting records are reliable for the preparation of financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that internal control over financial reporting may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In order to evaluate the effectiveness of internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act, management has conducted an assessment, including testing, using the criteria in Internal Control Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on its assessment, management has concluded that Peoples Bank maintained effective internal control over financial reporting as of December 31, 2005, based on criteria in Internal Control Integrated Framework issued by the COSO. Managements assessment of the effectiveness of Peoples Banks internal control over financial reporting as of December 31, 2005 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report that is included herein.
/s/ John A. Klein |
/s/ Philip R. Sherringham |
|||
John A. Klein | Philip R. Sherringham | |||
Chairman, Chief Executive Officer and President |
Executive Vice President and Chief Financial Officer |
|||
March 3, 2006 |
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Peoples Bank is a federally-chartered stock savings bank headquartered in Bridgeport, Connecticut with $10.6 billion in total assets as of September 30, 2006. Peoples Bank was organized in 1842 as a mutual savings bank and converted to stock form in 1988. In August 2006, Peoples Bank converted from a Connecticut-chartered stock savings bank to a federally-chartered stock savings bank.
Peoples Bank offers a full range of financial services to individual, corporate and municipal customers. Traditional banking activities are conducted primarily within the state of Connecticut 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, Peoples Bank provides specialized services tailored to specific markets including: personal, institutional and employee benefit trust; cash management; and municipal banking and finance. Through its subsidiaries, Peoples Bank offers: brokerage, financial advisory services, investment management services and life insurance through Peoples Securities, Inc.; equipment financing through Peoples Capital and Leasing Corp. and other insurance services through R.C. Knox and Company, Inc.
This full range of financial services is delivered through a network of 75 traditional branches, 73 supermarket branches, eight limited-service branches, 23 investment and brokerage offices (22 of which are located within branch offices), five wealth management and trust offices, nine Peoples Capital and Leasing offices, seven commercial banking offices and over 250 ATMs. Peoples Banks distribution network also includes fully integrated online banking and investment trading, a 24-hour telephone banking service and participation in a worldwide ATM network.
Peoples Banks operations are divided into two primary business segments that represent its core businesses, commercial banking and consumer financial services. Commercial banking consists principally of commercial lending, commercial real estate finance lending and commercial deposit gathering activities. This segment also includes the equipment financing operations of Peoples Capital and Leasing, cash management, correspondent banking and municipal banking. Consumer financial services includes, as its principal business lines, consumer deposit gathering activities, residential mortgage lending and home equity and other consumer lending. In addition to trust services, this segment also includes brokerage, financial advisory services, investment management services and life insurance provided by Peoples Securities and other insurance services provided through R.C. Knox. In addition, treasury is responsible for managing Peoples Banks securities portfolio and wholesale funding activities.
Market Area and Competition
Peoples Banks primary market area is the state of Connecticut. However, substantially all of the equipment financing activities of Peoples Capital and Leasing involve customers outside of Connecticut. Peoples Capital and Leasing provides equipment financing for customers in 48 states. In addition, Peoples Bank also participates in certain loans that aggregate $20 million or more and are shared by three or more supervised financial institutions. These loans are generally referred to as shared national credits. Approximately 90% of the shared national credits portfolio is to borrowers located outside of Connecticut as of September 30, 2006. Peoples Bank 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.
Connecticut is one of the most attractive banking markets in the United States with a total population of approximately 3.5 million and a median household income of $66,018 as of June 30, 2006, ranking second in the United States and well above the U.S. median household income of $51,546, according to estimates from SNL Securities. The southern Connecticut market includes Fairfield, Middlesex, New Haven and New London Counties, while the northern Connecticut market includes Hartford, Litchfield, Tolland and Windham Counties. Fairfield County, where Peoples Bank is headquartered, is the wealthiest county in Connecticut, with a June 30, 2006 median household income of $81,678 according to estimates from SNL Securities.
Median household income has increased in all of the Connecticut counties since 2000, with Fairfield, Middlesex and New Haven Counties recording the strongest growth in median household income. For the 2000 to 2006 period, Windham County had the lowest growth rate in median household income among the primary market area counties. Household income growth rates are generally projected to increase at comparable rates over the next five years as experienced during the 2000-2006 period.
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The southern Connecticut market contains more than half of Connecticuts population and a similar percentage of households. The southern Connecticut market also represents the greatest concentration of Peoples Banks retail operations. All of the Connecticut counties experienced increases in population and households from 2000 through 2006, with the strongest growth occurring in the less populated counties of Middlesex, Tolland and Windham. However, only Tolland Countys 1.5% annual population growth rate exceeded the comparable U.S. growth rate of 1.3%. Household growth measures parallel trends in population growth. The stronger growth occurring in Tolland County (in north-central Connecticut) has been supported by the presence of the University of Connecticut. Projected population and household growth rates for Connecticut are not expected to vary materially from recent historical trends. The southern Connecticut market is expected to remain a slower growth market because it is more densely populated with greater physical limitations to growth.
The principal basis of competition for deposits is the interest rate paid for those deposits and related fees, convenient 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 by developing 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 Peoples Bank, to compete in markets outside their traditional geographic boundaries.
Lending Activities
Peoples Bank conducts its lending activities through its two major business segments that constitute its core businesses: consumer financial services and commercial banking. Peoples Banks lending activities consist of originating loans secured by residential and commercial properties, and extending secured and unsecured loans to consumers and businesses.
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The following table presents the composition of the loan portfolio in dollar amounts and in percentages of the total portfolio at the dates indicated. Amounts represent gross loans before deducting the allowance for loan losses.
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Loan Maturity . The following table presents the contractual maturity of loans at December 31, 2005. The table does not include the effect of prepayments or scheduled principal amortization. Prepayments and scheduled principal amortization on first mortgage loans totaled $0.7 billion for 2005.
The following table presents, as of December 31, 2005, the dollar amount of all loans, including deferred loan fees, due after December 31, 2006, and whether these loans have fixed interest rates or adjustable interest rates.
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The following table presents loan originations, purchases, sales and principal payments for the periods indicated.
Consumer Financial Services.
Residential Mortgage Lending . Peoples Bank offers its customers a wide range of residential mortgage loan products. These include conventional fixed rate loans, jumbo fixed rate loans (loans with principal balances greater than established Freddie Mac and Fannie Mae limits), adjustable rate loans, sometimes referred to as ARM loans, interest-only loans (loans where payments made by the borrower consist of only interest for a set period of time, before the payments change to principal and interest), as well as Federal Housing Authority insured loans and Connecticut Housing Finance Authority loans.
Peoples Bank originates these loans through its network of branches and calling officers, as well as in the wholesale market, which accounted for approximately 66%, 59% and 57% of Peoples Banks mortgage loan originations for the first nine months of 2006 and the full years of 2005 and 2004, respectively.
At September 30, 2006 and December 31, 2005, 93% and 97%, respectively, of the residential mortgage portfolio was secured by properties located in Connecticut. Included in residential mortgage loans are construction loans totaling $185 million, $197 million and $161 million at September 30, 2006, December 31, 2005 and 2004, respectively. For the first nine months of 2006, Peoples Banks level of residential mortgage originations declined to $800 million, compared to $1.0 billion for the first nine months of 2005. In 2005, Peoples Banks level of residential mortgage originations declined to $1.4 billion, compared to $1.6 billion in 2004 and $3.2 billion in 2003, consistent with industry-wide trends attributable to rising interest rates.
The mix and volume of residential mortgage loan originations vary in response to changes in market interest rates and customer preferences. Adjustable rate loans accounted for 83% of total residential mortgage originations in the first nine months of 2006, and 73%, 72% and 65% for the full years of 2005, 2004 and 2003, respectively. Overall, the volume of refinancings (approximately 40% and 46% of year-to-date 2006 and full-year 2005 originations, respectively) was less than the volume of purchase mortgages as the upward movement in interest rates continues to make the refinancing market relatively less attractive for consumers.
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At September 30, 2006, the adjustable rate loan portfolio included $1.7 billion, or 44%, of interest-only loans, compared to $1.6 billion, or 47%, at December 31, 2005. See Regulation of Peoples Bank and Peoples United FinancialFederally Chartered Savings Bank RegulationNontraditional Mortgage Products . Peoples Banks underwriting practices and credit review standards for such loans are consistent with those applied to other types of residential mortgage products. Peoples Bank began originating interest-only residential mortgage loans in March 2003. The underwriting guidelines and requirements are more restrictive for interest-only loans than for amortizing adjustable rate mortgages. Properties must be a single-family and owner-occupied primary residence, loan-to-value ratios are lower, higher credit scores are required, post closing reserves requirements are greater, and there are limits on cash-out refinances as compared to amortizing adjustable rate mortgages. Amortization of an interest-only loan begins after the initial interest rate change (e.g., after 5 years for a 5/1 adjustable rate mortgage).
Adjustable rate residential loans at September 30, 2006 increased $376 million compared to year-end 2005, while fixed-rate mortgage loans decreased $7 million. Total adjustable rate residential loans increased $254 million in 2005 compared to year-end 2004, while fixed-rate mortgage loans decreased $13 million. Peoples Bank may purchase or sell adjustable rate residential loans in the secondary market from time to time as conditions warrant. The continued growth and performance of the residential mortgage loan portfolio in 2006 and 2007 may be adversely impacted by the level and direction of interest rates, consumer preferences and the regional economy.
Historically, Peoples Bank has held virtually all of the adjustable-rate residential mortgage loans that it originates on its balance sheet and has sold virtually all of the fixed-rate residential mortgage loans that it originates into the secondary market.
Peoples Bank has recently reassessed its pricing with respect to adjustable-rate residential mortgage loans in light of the current interest rate environment. As a result, Peoples Bank believes the level of adjustable-rate residential mortgage loans it originates will be reduced significantly in the near term. Peoples Bank intends to continue to actively offer residential mortgage loans of all types through its extensive distribution system. However, if a reduction in originations occurs and continues for an extended period, the balance of Peoples Banks residential mortgage loan portfolio will decline.
Consumer Lending. The following table summarizes Peoples Banks consumer lending portfolio by product at the dates indicated.
Peoples Bank offers Connecticut-based customers a full range of competitive products, such as home equity credit lines, second mortgage loans, and other forms of installment and revolving credit loans. In the first quarter of 2006, Peoples Bank began offering home equity credit lines and loans in Massachusetts and New York. Consumer loans also include unsecured personal installment loans that had been originated nationally in prior years and totaled $2 million at September 30, 2006, compared to $12 million and $46 million at December 31, 2005 and 2004, respectively. Future growth of Peoples Banks consumer loan portfolio is highly dependent upon economic conditions and competitors strategies, as well as the success of Peoples Banks marketing programs and information-based strategies.
At September 30, 2006 and December 31, 2005, approximately 99% and 98%, respectively, of the consumer loan portfolio was to customers located in Connecticut. The increase in consumer loans reflects growth in home equity lending, partially offset by continued declines in national unsecured personal installment loans, which continue to run off as a result of a management decision to discontinue this type of lending. Home equity credit lines decreased $18 million, or 2% on an annualized basis, since year-end 2005, and increased $114 million, or 12%, during 2005. The slower rate of portfolio growth in a rising interest rate environment reflects nationwide trends.
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Commercial Banking. The Commercial banking lending businesses include commercial real estate finance, commercial lending and equipment financing by Peoples Capital and Leasing. Shared national credits are included in the commercial real estate finance and commercial lending portfolios.
Commercial Real Estate Finance. Peoples Bank manages the commercial real estate finance portfolio by limiting the concentration in any loan type, term, industry, or to any individual borrower. Peoples Banks primary strategy is to focus on lending in the state of Connecticut and adjacent states that represent its home market. In addition, Peoples Bank will purchase interests in out-of-state loan participations. Included in commercial real estate finance loans are shared national credits totaling $204 million, $143 million and $105 million at September 30, 2006, December 31, 2005 and December 31, 2004, respectively. Peoples Banks highest loan concentration was in the residential sector, which represented 29% of this loan portfolio at September 30, 2006, compared to 25% at December 31, 2005 and 17% at year-end 2004. Much of the growth in the residential sector was due to increases in shared national credits totaling $78 million, or 97%, for the first nine months of 2006 and $70 million, or 52% for 2005.
At September 30, 2006, approximately 68% of Peoples Banks commercial real estate finance portfolio was secured by properties located in Connecticut, compared to approximately 74% and 76% at December 31, 2005 and 2004, respectively. Included in this portfolio are construction loans totaling $567 million, $512 million and $429 million at September 30, 2006, December 31, 2005 and December 31, 2004, respectively.
Commercial real estate finance is dependent on the successful operation of the related income-producing real estate. Accordingly, the income streams generated by this portfolio can be impacted by changes in the real estate market and, to a large extent, Connecticuts economy. The commercial real estate finance portfolio increased 2% annualized in the first nine months of 2006 and decreased 3% in 2005 after growing 8% in 2004. The decrease in 2005 and slow growth in 2006 reflects the high level of loan prepayments and Peoples Banks focus on maintaining strong asset quality standards in a competitive market generally characterized by aggressive pricing and less attractive underwriting terms. The growth and performance of this portfolio is largely dependent on the economic environment in Connecticut and may be adversely impacted if the economy slows in 2006 and 2007.
Commercial Lending. Peoples Bank provides diversified products and services to its commercial customers, including short-term working capital credit facilities, term financing, asset-based loans, letters of credit, Internet-based cash management services and commercial deposit accounts.
Commercial products are generally packaged together to create a financing solution specifically tailored to the needs of the customer. Taking a total relationship-focused approach with commercial customers to meet their financing needs has resulted in substantial growth in non-interest-bearing deposits over time, as well as in opportunities to provide other banking services to principals and employees of these commercial customers.
The borrowers ability to repay a commercial loan is closely tied to the ongoing profitability and cash flow of the borrowers business. Consequently, a commercial loan tends to be more directly impacted by changes in economic cycles
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that affect businesses generally and the borrowers business specifically. The availability of adequate collateral is a factor in commercial loan decisions, and loans are generally collateralized and/or guaranteed by third parties.
In the first nine months of 2006, the commercial lending portfolio increased $51 million, or 5% on an annualized basis, compared to increases of $159 million, or 13%, in 2005 and $201 million or 19% in 2004. The increase in the first nine months of 2006 includes a $17 million, or 7% annualized, increase in shared national credits, compared to an increase of $61 million, or 24%, for the full year of 2005. Included in commercial lending are shared national credits totaling $338 million, $321 million and $260 million at September 30, 2006, December 31, 2005 and December 31, 2004, respectively. At September 30, 2006, approximately 67% of the commercial loan portfolio consisted of loans to Connecticut-based businesses, compared to approximately 69% and 72% at December 31, 2005 and 2004, respectively. The manufacturing sector remains Peoples Banks highest commercial loan concentration. Growth in the finance, insurance and real estate sector in 2005 reflects an increase of $88 million in loans to real estate investment trusts. While Peoples Bank continues to focus on asset quality, the performance of the commercial lending portfolio may be adversely impacted if the economy slows in 2006 or 2007.
Shared National Credits . At September 30, 2006, the shared national credits loan portfolio totaled $542 million, compared to $464 million and $365 million at December 31, 2005 and 2004, respectively, and represented 14%, 12% and 10% of the total commercial banking loan portfolio at the respective dates. As discussed above, included in the shared national credits portfolio at September 30, 2006, December 31, 2005 and 2004 were commercial loans totaling $338 million, $321 million and $260 million, respectively, and commercial real estate finance loans totaling $204 million, $143 million and $105 million, respectively.
Peoples Bank will purchase, and to a lesser extent sell, interests in shared national credits from and to other financial institutions having comparable asset quality standards. At September 30, 2006, the shared national credits loan portfolio included $524 million in loans purchased from other financial institutions and $18 million in loans originated by Peoples Bank.
At September 30, 2006, approximately $56 million, or 10%, of the shared national credits loan portfolio is to borrowers who are headquartered in Connecticut, while approximately $232 million, or 43%, is to borrowers located in California, Florida and New York. Over time, Peoples Bank may grow this portfolio to represent approximately 15% of the overall commercial banking loan portfolio.
Peoples Capital and Leasing Corp. Peoples Capital and Leasing provides equipment financing for customers in 48 states, specializing in financing for the printing, transportation/utility, general manufacturing, and packaging industries. Peoples Capital and Leasing will buy or sell portions of financing transactions in the secondary market to manage the concentration risk of the overall portfolio. At September 30, 2006, approximately 3% of the portfolio consisted of Connecticut-based businesses, while approximately 40% were to customers located in California, Texas, Illinois and Florida. The Peoples Capital and Leasing portfolio grew $117 million, or 25% on an annualized basis, in the first nine months of 2006, and grew $182 million, or 40%, in 2005 and $153 million, or 51%, in 2004, reflecting managements decision to grow this portfolio through higher loan originations. Operating on a national scale, Peoples Capital and Leasing represented 19%
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of the commercial banking loan portfolio at September 30, 2006, compared to 17% and 13% at year-end 2005 and 2004, respectively. Portfolio growth in 2007 may not continue at recent levels.
Loan Approval Procedures and Authority . Peoples Bank has different loan approval procedures depending on the type of loan.
Commercial Loan Approval Procedures and Authority. Commercial loan approval authority is granted to Peoples Banks loan officers by department (commercial loan, commercial real estate finance, small business lending, shared national credits and classified assets) and Peoples Banks twelve lending authority levels.
No lending officer, regardless of lending classification, may approve a credit request on a single-signature basis. The management-level Credit Policy Committee approves commercial lending and commercial real estate finance credits rated watch or better up to and including $10.0 million in total exposure (outstanding credit facilities plus new extensions of credit), and up to and including $5.0 million for credits rated special mention or worse. Commercial lending and commercial real estate finance credits in excess of these amounts are submitted to the Loan Review Committee of the Board of Directors for approval.
The Credit Policy Committee may approve shared national credits of up to $20.0 million which are rated satisfactory or better. In addition, each year the Credit Policy Committee may approve six new shared national credits commercial and industrial transactions and real estate investment trust transactions that exceed $20.0 million but do not exceed $25.0 million in total exposure and are rated satisfactory or better. Shared national credits in excess of these amounts must be submitted to the Loan Review Committee for approval. Any shared national credits approvals in excess of $10.0 million must be reported to the Loan Review Committee at a subsequent meeting.
The in-house lending limit to one borrower, currently $50.0 million, is set jointly by the Credit Policy Committee and the Loan Review Committee. The Loan Review Committee may increase this limit on a case-by-case basis based on the overall creditworthiness of the borrower, as well as geographic, property type and industry concentration criteria within a particular lending relationship.
The commercial loan origination and underwriting process begins when a borrower or prospect expresses an interest in a commercial loan product to a commercial loan officer. The loan officer is responsible for managing the underwriting process in conjunction with the region manager, market manager and department head, as appropriate. Each loan officer is responsible for developing, documenting and making loans in accordance with policy. The loan officer is also required to conform to applicable line of business procedural guidelines with respect to debt coverage ratios, loan-to-value ratios, completion of loan submissions and to ensure compliance with applicable laws and regulations. Peoples Bank also requires borrowers to obtain flood insurance, prior to closing, for all loans secured by real estate within a designated flood zone.
Real estate appraisers are engaged by the commercial appraisal department, and are generally selected from an approved appraiser list. All third-party appraisals of commercial properties where transactions are greater than $250,000 are submitted in writing and are reviewed by the commercial appraisal department prior to closing to verify that the methods, assumptions and conclusions used in the appraisal are reasonable and appropriate for the transaction and the property.
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Residential and Consumer Loan Approval Procedures and Authority. Residential mortgage loan and consumer loan approval authority is delegated to individuals based on loan type, loan size, and where appropriate, occupancy of property securing the loan. Residential and consumer lending policies and delegation of lending authorities are reviewed and approved annually by the Loan Review Committee of the Board of Directors. Dual authorization is required for larger credits, as discussed in the following paragraph. Levels of approval authority, which include lending limit increases (recommended by senior department management), are reviewed quarterly and approved by the Executive Vice President for Consumer Financial Services. Peoples Bank has no in-house limit on loans to one borrower for residential and consumer loans, but is subject to such limitations under the Home Owners Loan Act. See Regulation of Peoples Bank and Peoples United FinancialFederally Chartered Savings Bank RegulationLoans to One Borrower .
Peoples Banks Senior Vice President of residential lending is authorized to approve residential mortgage loans up to and including $2.0 million and home equity loans up to and including $1.0 million. First Vice Presidents of residential lending may approve residential mortgage loans up to and including $1.5 million, and two such officers may jointly approve loans up to and including $1.75 million. First Vice Presidents may also approve home equity loans up to and including $750,000.
All residential mortgage loans greater than $2.0 million, up to and including $5.0 million, and home equity loans greater than $1.0 million, up to and including $2.0 million, may be approved by Peoples Banks Executive Vice President for Consumer Financial Services, acting alone; by the Senior Vice President of residential lending and one Executive Vice President other than the Executive Vice President for Consumer Financial Services; or by any two Executive Vice Presidents other than the Executive Vice President for Consumer Financial Services. All loans over $3.0 million must be reported to the Loan Review Committee at the next meeting of the committee following approval of the loan. The Loan Review Committee must approve residential mortgage loans in excess of $5.0 million and home equity loans in excess of $2.0 million.
Authorized residential lenders are responsible for determining the total direct, indirect and contingent liabilities of borrowers and assuring compliance with Peoples Banks residential and consumer lending underwriting policies.
The following describes Peoples Banks residential and consumer lending procedures:
Residential Lending. Peoples Bank utilizes an automated underwriting system as a tool when making the loan decision. The automated underwriting system allows for the streamlining of document and appraisal requirements for certain loan products.
Retail loan processors obtain credit reports on all retail loan applications prior to loan approval. Wholesale loan application files contain a credit report when they are submitted by the broker. If a credit report is not available, industry standard alternative credit references are provided. The documentation required to support income and assets is based on information from the automated underwriting system, or a specific secondary market investor requirement. If necessary, direct verification of information such as employment data and deposits with institutions is performed by loan processors for retail loans, and provided by brokers for wholesale loans.
Standard FNMA/FHLMC appraisals are performed by appropriately licensed appraisers, and are obtained for all residential mortgages. Life-of-loan flood certifications are ordered from an outside vendor at the time the appraisal is ordered (for retail loans), or when the loan is approved (for wholesale loans). The type of appraisal report is dependent upon the automated underwriting systems response for the loan. The appraisal report is reviewed by the loan processor and/or underwriter. The appraisal department staff is consulted for property value questions.
Consumer Lending. The consumer loan credit department reviews and processes consumer loan applications. The authorized consumer lender is responsible for making the credit decision. Credit decisions are based on the applicants ability, stability and willingness to pay as demonstrated by income, job stability and credit history. Credit reports, containing credit scores, are obtained on all loan applications. Approval by an authorized consumer lender is documented on the underwriters summary contained in the loan file.
Asset Quality
Peoples Bank actively manages asset quality through its underwriting practices and collection operations. Underwriting practices tend to focus on optimizing the return of a given risk classification while collection operations focus on minimizing losses once an account becomes delinquent.
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A loan is classified as non-accrual generally when it becomes 90 days past due as to interest or principal payments. All previously accrued but unpaid interest on non-accrual loans is reversed from interest income in the current period. Interest payments received on non-accrual loans (including impaired loans) are generally recognized as income, although such interest payments may be applied as a reduction of principal if future collections are doubtful. A loan remains on non-accrual status until the factors that indicated doubtful collectibility no longer exist or until a loan is determined to be uncollectible and is charged off against the allowance for loan losses. The classification of a loan as non-performing does not necessarily indicate that loan principal and interest ultimately will not be collected.
Peoples Banks historical experience suggests that a portion of these assets will eventually be recovered. All non-performing loans are in various stages of collection, workout, settlement or foreclosure. When loan workout efforts are exhausted and it is determined that the borrower is unable to repay the obligation, Peoples Bank will complete foreclosure procedures, if applicable. Restructured commercial and commercial real estate finance loans are those for which concessions to below market terms, such as below market interest rates or deferral of interest, have been granted due to the borrowers financial condition.
At September 30, 2006 and December 31, 2005, 2004 and 2003, loans delinquent 60 days to 89 days and 90 days or more were as follows:
At September 30, 2006 | ||||||||||||
60-89 Days | 90 Days or More | |||||||||||
No. of
Loans |
Principal
Balance of Loans |
No. of
Loans |
Principal
Balance of Loans |
|||||||||
(Dollars in millions) | ||||||||||||
Consumer Financial Services |
128 | $ | 4.9 | 173 | $ | 9.0 | ||||||
Commercial Banking |
36 | 14.3 | 98 | 10.1 | ||||||||
Total delinquent loans (60 days and over) |
164 | $ | 19.2 | 271 | $ | 19.1 | ||||||
Delinquent loans (60 days and over) to total loans |
0.21 | % | 0.21 | % |
At December 31, | ||||||||||||||||||||||||||||||||||||
2005 | 2004 | 2003 | ||||||||||||||||||||||||||||||||||
60-89 Days | 90 Days or More | 60-89 Days | 90 Days or More | 60-89 Days | 90 Days or More | |||||||||||||||||||||||||||||||
No. of
Loans |
Principal
Balance of Loans |
No. of
Loans |
Principal
Balance of Loans |
No. of
Loans |
Principal
Balance of Loans |
No. of
Loans |
Principal
Balance of Loans |
No. of
Loans |
Principal
Balance of Loans |
No. of
Loans |
Principal
Balance of Loans |
|||||||||||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||||||||||||||||||
Consumer Financial Services |
213 | $ | 4.0 | 202 | $ | 7.9 | 232 | $ | 5.6 | 245 | $ | 8.0 | 397 | $ | 9.9 | 614 | $ | 13.6 | ||||||||||||||||||
Commercial Banking |
23 | 6.2 | 101 | 10.1 | 24 | 5.4 | 79 | 12.3 | 32 | 2.5 | 68 | 15.8 | ||||||||||||||||||||||||
Total delinquent loans (60 days and over) |
236 | $ | 10.2 | 303 | $ | 18.0 | 256 | $ | 11.0 | 324 | $ | 20.3 | 429 | $ | 12.4 | 682 | $ | 29.4 | ||||||||||||||||||
Delinquent loans (60 days and over) to total loans |
0.12 | % | 0.21 | % | 0.14 | % | 0.26 | % | 0.17 | % | 0.41 | % | ||||||||||||||||||||||||
Non-Performing Assets. Non-performing assets totaled $22.9 million at September 30, 2006, an increase of $0.9 million, or 4%, compared to December 31, 2005 and improved 1 basis point to 0.25% of total loans, real estate owned and repossessed assets at September 30, 2006. Total non-performing assets at December 31, 2005 represented a decrease of $6.6 million, or 23%, from December 31, 2004 and an improvement of 10 basis points to 0.26% of total loans, real estate owned and repossessed assets at December 31, 2005. For the September 30, 2006 to year-end 2005 comparison, the slight increase in non-performing assets reflects increases in non-performing commercial loans, non-performing residential mortgage loans and non-performing commercial real estate finance loans of $1.7 million, $1.1 million and $0.8 million, respectively, and a $1.4 million increase in repossessed equipment financed by Peoples Capital and Leasing, partially offset by a $4.1 million reduction in Peoples Capital and Leasing non-performing loans. The net change in non-performing commercial real estate finance loans since December 31, 2005 reflects one loan totaling $12.1 million that was classified as non-performing in the first quarter of 2006, a $5.5 million partial payment on that loan received in the third quarter of 2006, and one
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non-performing loan totaling $5.5 million that was favorably resolved in the first quarter of 2006 and generated a $2.3 million cash recovery. For the year-end 2005 to year-end 2004 comparison, reductions of $3.9 million and $2.9 million in non-performing commercial and commercial real estate finance loans, respectively, were partially offset by an increase of $1.1 million in non-performing Peoples Capital and Leasing loans.
The level of non-performing assets is expected to fluctuate in response to changing economic and market conditions, and the relative sizes of the respective loan portfolios, along with managements degree of success in resolving problem assets.
The following table presents information regarding non-accrual loans, restructured loans, real estate owned and repossessed assets as of the dates indicated.
At
2006 |
At December 31, | |||||||||||||||||||||||
2005 | 2004 | 2003 | 2002 | 2001 | ||||||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||||||
Non-accrual loans: |
||||||||||||||||||||||||
Residential mortgage |
$ | 7.8 | $ | 6.7 | $ | 7.5 | $ | 11.4 | $ | 13.2 | $ | 14.7 | ||||||||||||
Peoples Capital and Leasing |
2.1 | 6.2 | 5.1 | 4.2 | 3.3 | 1.7 | ||||||||||||||||||
Commercial real estate finance |
6.6 | 5.8 | 8.7 | 11.4 | 10.2 | 5.9 | ||||||||||||||||||
Commercial |
3.0 | 1.3 | 5.2 | 3.3 | 4.8 | 2.8 | ||||||||||||||||||
Consumer |
1.3 | 1.3 | 0.9 | 2.5 | 3.4 | 4.0 | ||||||||||||||||||
Total non-accrual loans |
20.8 | 21.3 | 27.4 | 32.8 | 34.9 | 29.1 | ||||||||||||||||||
Restructured loans |
| | | 1.0 | | | ||||||||||||||||||
Total non-performing loans |
20.8 | 21.3 | 27.4 | 33.8 | 34.9 | 29.1 | ||||||||||||||||||
Real estate owned and repossessed assets, net |
2.1 | 0.7 | 1.2 | 0.5 | 0.7 | 1.4 | ||||||||||||||||||
Total non-performing assets |
$ | 22.9 | $ | 22.0 | $ | 28.6 | $ | 34.3 | $ | 35.6 | $ | 30.5 | ||||||||||||
Non-performing loans as a percentage of total loans |
0.23 | % | 0.25 | % | 0.35 | % | 0.48 | % | 0.52 | % | 0.46 | % | ||||||||||||
Non-performing assets as a percentage of total loans, real estate owned and repossessed assets |
0.25 | 0.26 | 0.36 | 0.48 | 0.53 | 0.48 | ||||||||||||||||||
Non-performing assets as a percentage of stockholders equity and allowance for loan losses |
1.61 | 1.62 | 2.25 | 3.20 | 3.53 | 3.02 |
At September 30, 2006 and at December 31, 2005, 2004, 2003, 2002 and 2001, Peoples Banks portfolio did not include any loans, not included in the table above, which are troubled debt restructurings as defined in Statement of Financial Accounting Standards No. 15, Accounting by Debtors and Creditors for Troubled Debt Restructurings.
As of September 30, 2006, if all non-accruing loans had been current in accordance with their terms and had been outstanding throughout the nine month period ended September 30, 2006, or since origination if held for part of the period, the gross interest income that would have been recorded in that period on such loans would have amounted to approximately $2.4 million. The amount of interest income on the non-accruing loans included in net income for the nine month period ended September 30, 2006 was $0.9 million.
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Allowance for Loan Losses . The following table presents the activity in the allowance for loan losses and other ratios at or for the periods indicated.
At or for
the Nine Months Ended September 30, 2006 |
At or for the Year Ended December 31, | |||||||||||||||||||||||
2005 | 2004 | 2003 | 2002 | 2001 | ||||||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||||||
Beginning allowance for loan losses |
$ | 75.0 | $ | 72.5 | $ | 70.5 | $ | 69.2 | $ | 73.7 | $ | 66.7 | ||||||||||||
Charge-offs: |
||||||||||||||||||||||||
Consumer Financial Services: |
||||||||||||||||||||||||
Residential mortgage |
(0.1 | ) | (0.1 | ) | (0.2 | ) | (0.1 | ) | | (0.9 | ) | |||||||||||||
Consumer |
(2.4 | ) | (4.9 | ) | (9.7 | ) | (16.8 | ) | (25.3 | ) | (29.4 | ) | ||||||||||||
Commercial Banking: |
||||||||||||||||||||||||
Commercial real estate finance |
| (0.1 | ) | (3.2 | ) | | | (0.1 | ) | |||||||||||||||
Commercial lending |
(4.4 | ) | (0.9 | ) | (0.6 | ) | (1.2 | ) | (3.4 | ) | (11.2 | ) | ||||||||||||
Peoples Capital and Leasing |
(0.4 | ) | (3.1 | ) | (1.5 | ) | (2.0 | ) | (2.4 | ) | (0.9 | ) | ||||||||||||
Total charge-offs |
(7.3 | ) | (9.1 | ) | (15.2 | ) | (20.1 | ) | (31.1 | ) | (42.5 | ) | ||||||||||||
Recoveries: |
||||||||||||||||||||||||
Consumer Financial Services: |
||||||||||||||||||||||||
Residential mortgage |
0.1 | 0.2 | 0.2 | 0.1 | 0.4 | 0.4 | ||||||||||||||||||
Consumer |
1.2 | 2.0 | 2.8 | 2.9 | 2.6 | 1.8 | ||||||||||||||||||
Commercial Banking: |
||||||||||||||||||||||||
Commercial real estate finance |
2.5 | 0.1 | 0.1 | 0.2 | 0.6 | 1.6 | ||||||||||||||||||
Commercial lending |
0.3 | 0.4 | 0.3 | 1.4 | 0.7 | 0.4 | ||||||||||||||||||
Peoples Capital and Leasing. |
0.2 | 0.3 | 0.5 | 0.1 | 0.1 | | ||||||||||||||||||
Total recoveries |
4.3 | 3.0 | 3.9 | 4.7 | 4.4 | 4.2 | ||||||||||||||||||
Net loan charge-offs |
(3.0 | ) | (6.1 | ) | (11.3 | ) | (15.4 | ) | (26.7 | ) | (38.3 | ) | ||||||||||||
Provision for loan losses |
2.0 | 8.6 | 13.3 | 16.7 | 22.2 | 45.3 | ||||||||||||||||||
Ending allowance for loan losses |
$ | 74.0 | $ | 75.0 | $ | 72.5 | $ | 70.5 | $ | 69.2 | $ | 73.7 | ||||||||||||
Allowance for loan losses as a percentage of total loans |
0.81 | % | 0.87 | % | 0.91 | % | 0.99 | % | 1.04 | % | 1.16 | % | ||||||||||||
Allowance for loan losses as a percentage of non-performing loans |
354.9 | 352.5 | 264.6 | 208.4 | 198.2 | 253.3 | ||||||||||||||||||
Net loan charge-offs as a percentage of average loans outstanding (annualized for September 30, 2006) |
0.05 | 0.07 | 0.15 | 0.22 | 0.42 | 0.62 |
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. Peoples Bank maintains the allowance for loan losses at a level that is believed to be adequate to absorb probable losses inherent in the existing loan portfolio, based on a quarterly evaluation of a variety of factors. These factors include, but are not limited to: Peoples Banks historical loan loss experience and recent trends in that experience; risk ratings assigned by lending personnel to commercial real estate finance, commercial and Peoples Capital and Leasing loans, and the results of ongoing reviews of those ratings by Peoples Banks independent loan review function; an evaluation of 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 Peoples Bank seeks to use the best available information to make these evaluations, future adjustments 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, the identification of additional problem loans and other factors.
Allowance for Loan Losses Allocated by Type of Loan. Based on a review of trends in key factors used in determining the adequacy of the allowance for loan losses allocated by type of loan, including portfolio growth and changes in risk classifications, Peoples Bank increased the allowance for loan losses and the provision for loan losses by $2.0 million for the commercial loan portfolio and by $1.0 million for the Peoples Capital and Leasing loan portfolio in the first nine months of
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2006. These increases were offset by a reduction to the allowance for loan losses and a corresponding reduction to the provision for loan losses for the commercial real estate finance loan portfolio totaling $2.0 million, the consumer loan portfolio totaling $1.0 million and the residential mortgage loan portfolio totaling $1.0 million. In 2005, Peoples Bank increased the allowance for loan losses and the provision for loan losses by $2.5 million for the Peoples Capital and Leasing loan portfolio and by $2.0 million in the commercial loan portfolio. These increases were partially offset by a reduction to the allowance for loan losses and a corresponding reduction to the provision for loan losses in the consumer loan portfolio totaling $2.0 million, reflecting a $34 million, or 74%, decline in the national consumer loan portfolio since December 31, 2004. As a result of these changes, the total allowance for loan losses declined $1.0 million in the first nine months of 2006 and increased $2.5 million for the full-year of 2005.
See Managements Discussion and Analysis of Financial Condition and Results of OperationsResults of OperationsNet Charge-Offs and Provision for Loan Losses.
The following tables present our allocation of the allowance for loan losses by loan category and the percentage of loans in each category to total loans at September 30, 2006 and at December 31, 2005, 2004, 2003, 2002 and 2001.
At December 31, | ||||||||||||||||||||||||||||||
2005 | 2004 | 2003 | 2002 | 2001 | ||||||||||||||||||||||||||
Amount |
Percent of
Loans to Total Loans |
Amount |
Percent of
Loans to Total Loans |
Amount |
Percent of
Loans to Total Loans |
Amount |
Percent of
Loans to Total Loans |
Amount |
Percent of
Loans to Total Loans |
|||||||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||||||||||||
Consumer Financial Services: |
||||||||||||||||||||||||||||||
Residential mortgage |
$ | 3.0 | 40.9 | % | $ | 3.0 | 41.2 | % | $ | 3.0 | 43.5 | % | $ | 3.0 | 43.0 | % | $ | 8.0 | 42.8 | % | ||||||||||
Consumer |
3.0 | 14.7 | 5.0 | 14.4 | 9.5 | 13.8 | 11.5 | 14.5 | 14.0 | 14.6 | ||||||||||||||||||||
Commercial Banking: |
||||||||||||||||||||||||||||||
Commercial real estate finance |
30.5 | 20.7 | 30.5 | 23.1 | 28.0 | 23.9 | 28.2 | 24.1 | 26.4 | 24.2 | ||||||||||||||||||||
Commercial lending |
25.5 | 16.3 | 23.5 | 15.6 | 21.5 | 14.6 | 21.7 | 15.0 | 22.0 | 14.9 | ||||||||||||||||||||
Peoples Capital and Leasing |
13.0 | 7.4 | 10.5 | 5.7 | 8.5 | 4.2 | 4.8 | 3.4 | 3.3 | 3.5 | ||||||||||||||||||||
Total allowance for loan losses |
$ | 75.0 | 100.0 | % | $ | 72.5 | 100.0 | % | $ | 70.5 | 100.0 | % | $ | 69.2 | 100.0 | % | $ | 73.7 | 100.0 | % | ||||||||||
102
Investment Activities
Peoples Bank has historically utilized the securities portfolio for earnings generation (in the form of interest and dividend income), liquidity, interest rate risk management, asset diversification and tax planning. Securities available for sale are used as part of Peoples Banks 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. Peoples Bank primarily invests in debt securities rated in the four highest categories assigned by a nationally recognized statistical ratings organization. Management has internal guidelines for the credit quality and duration of Peoples Banks debt securities portfolio and monitors these on a regular basis.
Peoples Bank strives to maintain an appropriate balance between loan portfolio growth and core deposit funding. Peoples Banks management currently believes that, other than for transitional deployment of excess core deposits or excess equity, a large securities portfolio funded with wholesale borrowings provides limited economic value. As part of this focus, Peoples Bank has reduced its securities portfolio by $3.0 billion since December 31, 2002 and increased its loans by $2.5 billion over the same period. Peoples Bank has also reduced borrowings by $2.4 billion since year-end 2002. During the third quarter of 2006, Peoples Bank sold $810 million of debt securities as part of restructuring activities to better position its balance sheet for the then current interest rate environment. At September 30, 2006, Peoples Bank had a securities portfolio of $202 million, or 2% of total assets, and wholesale borrowings of $14 million, or less than 1% of total assets, which represent ratios well below industry averages.
At December 31, 2005, Peoples Banks securities portfolio totaled $1.4 billion, a $708 million, or 34%, decline from year-end 2004. In addition, the securities portfolio declined $334 million, or 14%, in 2004 compared to year-end 2003. The reduction in the securities portfolio reflects the substitution of higher-yielding loans for lower-yielding securities as securities pay down and mature. The securities portfolio represented 14% of earning assets at December 31, 2005, compared to 21% at year-end 2004 and 25% at year-end 2003, consistent with managements goal of reducing the percentage of securities to earning assets.
In 2005, Peoples Bank decreased and continued realigning the types of securities within the debt securities portfolio. Of the securities that remained in the portfolio at December 31, 2005, the mortgage-backed securities and collateralized mortgage obligations (CMOs) portfolio represented 78% of the debt securities portfolio at December 31, 2005, compared to 75% at year-end 2004 and 62% at December 31, 2003. In addition, the U.S. Treasury and Agency portfolio was further reduced in 2005 and represented 22% of the debt securities portfolio at year end, compared to 24% and 29% at December 31, 2004 and 2003, respectively.
At September 30, 2006, the book value and the market value of the securities available for sale portfolio were approximately equivalent compared to net unrealized losses of $28.9 million, $14.1 million and $14.3 million at year-end 2005, 2004 and 2003, respectively. The significant improvement in the unrealized loss in 2006 is due to the sale of securities during 2006 and the resulting significantly smaller securities portfolio. All unrealized gains and those unrealized losses representing temporary declines in value 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 these securities. For a discussion of the regulatory capital treatment of unrealized gains and losses, see Managements Discussion and Analysis of Financial Condition and Results of OperationsCapital.
103
The duration of the debt securities portfolio was approximately 0.09 years at September 30, 2006, compared to 1.7 years at year-end 2005.
The following table presents securities activity for the periods indicated.
The following table presents mortgage-backed securities activity for the periods indicated.
104
The following tables present the composition of the securities portfolio in dollar amount and in percentage of each investment type at the dates indicated.
(1) | Based on carrying value for each investment type. |
105
At December 31, | ||||||||||||||||||||||||||||||
2005 | 2004 | 2003 | ||||||||||||||||||||||||||||
Carrying Value |
Percent of
Total (1) |
Fair Value |
Carrying Value |
Percent of
Total (1) |
Fair Value |
Carrying Value |
Percent of
Total (1) |
Fair Value |
||||||||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||||||||||||
Trading account securities |
$ | 27.3 | 2.0 | % | $ | 27.3 | $ | 11.7 | 0.6 | % | $ | 11.7 | $ | 18.1 | 0.7 | % | $ | 18.1 | ||||||||||||
Securities held to maturity: |
||||||||||||||||||||||||||||||
Corporate and other |
1.3 | 0.1 | 1.3 | 1.3 | 0.1 | 1.3 | 1.3 | 0.1 | 1.3 | |||||||||||||||||||||
Mortgage-backed securities |
0.1 | | 0.1 | 0.1 | | 0.1 | 0.1 | | 0.1 | |||||||||||||||||||||
Total securities held to maturity |
1.4 | 0.1 | 1.4 | 1.4 | 0.1 | 1.4 | 1.4 | 0.1 | 1.4 | |||||||||||||||||||||
Securities available for sale: |
||||||||||||||||||||||||||||||
Debt securities: |
||||||||||||||||||||||||||||||
Mortgage-backed securities and collateralized mortgage obligations (CMOs) |
1,036.7 | 76.1 | 1,014.9 | 1,525.0 | 73.6 | 1,514.0 | 1,408.9 | 58.6 | 1,406.2 | |||||||||||||||||||||
US Treasury and agency |
295.0 | 21.6 | 287.7 | 488.8 | 23.6 | 485.1 | 666.1 | 27.7 | 663.3 | |||||||||||||||||||||
Corporate and other |
| | | 26.2 | 1.3 | 26.7 | 195.2 | 8.1 | 188.2 | |||||||||||||||||||||
State and municipal |
| | | 0.7 | | 0.7 | 1.6 | 0.1 | 1.6 | |||||||||||||||||||||
Total debt securities |
1,331.7 | 97.7 | 1,302.6 | 2,040.7 | 98.5 | 2,026.5 | 2,271.8 | 94.5 | 2,259.3 | |||||||||||||||||||||
Equity securities: |
||||||||||||||||||||||||||||||
Federal Home Loan Bank stock |
30.6 | 2.2 | 30.6 | 30.6 | 1.5 | 30.6 | 93.8 | 3.9 | 93.8 | |||||||||||||||||||||
Preferred stocks |
| | | | | | 18.7 | 0.8 | 18.4 | |||||||||||||||||||||
Common stocks |
| | | | | | 1.1 | | 1.1 | |||||||||||||||||||||
Other |
0.9 | 0.1 | 1.1 | 0.9 | | 1.0 | 14.4 | 0.6 | 12.9 | |||||||||||||||||||||
Total equity securities |
31.5 | 2.3 | 31.7 | 31.5 | 1.5 | 31.6 | 128.0 | 5.3 | 126.2 | |||||||||||||||||||||
Total securities available for sale |
1,363.2 | 100.0 | 1,334.3 | 2,072.2 | 100.0 | 2,058.1 | 2,399.8 | 99.8 | 2,385.5 | |||||||||||||||||||||
Net unrealized loss on securities available for sale |
(28.9 | ) | (2.1 | ) | | (14.1 | ) | (0.7 | ) | | (14.3 | ) | (0.6 | ) | | |||||||||||||||
Total securities available for sale, at fair value |
1,334.3 | 97.9 | 1,334.3 | 2,058.1 | 99.3 | 2,058.1 | 2,385.5 | 99.2 | 2,385.5 | |||||||||||||||||||||
Total securities |
$ | 1,363.0 | 100.0 | % | $ | 1,363.0 | $ | 2,071.2 | 100.0 | % | $ | 2,071.2 | $ | 2,405.0 | 100.0 | % | $ | 2,405.0 | ||||||||||||
(1) | Based on carrying value for each investment type. |
106
Carrying Values, Rates and Maturities . The table below presents information regarding the carrying values, weighted average rates and contractual maturities of the securities portfolio at September 30, 2006.
At September 30, 2006 | ||||||||||||||||||||||||||||||
One Year or Less |
More Than One
to Five Years |
More Than Five
to Ten Years |
More Than Ten
Years |
Total | ||||||||||||||||||||||||||
Carrying Value |
Weighted Average Rate |
Carrying Value |
Weighted Average Rate |
Carrying Value |
Weighted Average Rate |
Carrying Value |
Weighted Average Rate |
Carrying Value |
Weighted Average Rate |
|||||||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||||||||||||
Trading account securities |
$ | 11.9 | 4.68 | % | $ | 15.7 | 5.02 | % | $ | | | % | $ | 1.9 | 3.54 | % | $ | 29.5 | 4.79 | % | ||||||||||
Securities held to maturity: |
| | ||||||||||||||||||||||||||||
Corporate and other |
| | 1.1 | 5.92 | | | | | 1.1 | 5.92 | ||||||||||||||||||||
Mortgage-backed securities |
| | | | | | | | | | ||||||||||||||||||||
Total securities held to maturity |
| | 1.1 | 5.92 | | | | | 1.1 | 5.92 | ||||||||||||||||||||
Securities available for sale: |
||||||||||||||||||||||||||||||
Debt securities: |
||||||||||||||||||||||||||||||
US Treasury and agency |
145.4 | 5.12 | | | | | | | 145.4 | 5.12 | ||||||||||||||||||||
Total debt securities |
145.4 | 5.12 | | | | | | | 145.4 | 5.12 | ||||||||||||||||||||
Equity securities: |
||||||||||||||||||||||||||||||
Federal Home Loan Bank stock |
| | | | | | 25.2 | 5.50 | 25.2 | 5.50 | ||||||||||||||||||||
Other |
| | | | | | 0.5 | 3.86 | 0.5 | 3.86 | ||||||||||||||||||||
Total equity securities |
| | | | | | 25.7 | 5.48 | 25.7 | 5.48 | ||||||||||||||||||||
Total securities available for sale |
145.4 | 5.12 | | | | | 25.7 | 5.48 | 171.1 | 5.17 | ||||||||||||||||||||
Net unrealized gain on securities available for sale |
| | | | | | 0.2 | | 0.2 | | ||||||||||||||||||||
Total securities available for sale, at fair value |
145.4 | 5.12 | | | | | 25.9 | 5.48 | 171.3 | 5.17 | ||||||||||||||||||||
Total securities |
$ | 157.3 | 5.09 | % | $ | 16.8 | 5.07 | % | $ | | | % | $ | 27.8 | 5.35 | % | $ | 201.9 | 5.12 | % | ||||||||||
107
Sources of Funds
At the current time, Peoples Banks primary funding sources are deposits and stockholders equity, representing 97% of total assets. Borrowings, while less than 1% of total assets at September 30, 2006, are an available source of funding with a borrowing limit of $2.8 billion based on the level of qualifying collateral available for these sources. Peoples Bank also had unsecured borrowing capacity of $825 million.
Peoples Banks strategy is to focus on increasing deposits by providing a wide range of convenient services to individuals, corporations and municipalities. Peoples Bank provides customers access to their deposits through 75 traditional branches, 73 Stop & Shop supermarket branches, eight limited-service branches, over 250 ATMs, telephone banking and an Internet banking site that is fully integrated with Peoples Banks brokerage subsidiary, Peoples Securities. Core deposits equaled 83% of total assets at September 30, 2006 and 81% of total assets at both December 31, 2005 and 2004. Core deposits and stockholders equity constituted over 97% of Peoples Banks funding base at September 30, 2006 and over 94% at December 31, 2005.
The expansion of Peoples Banks branch network and its commitment to developing full-service relationships with its customers are integral components of Peoples Banks strategy to leverage the success of its supermarket banking initiative, expand market share and continue growing deposits. At September 30, 2006, Peoples Banks statewide network of Super Stop & Shop branches held deposits totaling $2.1 billion and deposits in supermarket branches open for more than one year averaged $30.4 million per store.
Non-interest-bearing deposits are an important source of low-cost funding and fee income for Peoples Bank. In addition, Peoples Bank believes that checking accounts represent one of the core relationships between a financial institution and its customers, and it is from these relationships that cross-selling of other financial services can be achieved. At September 30, 2006, December 31, 2005 and 2004, non-interest-bearing core deposits equaled 23%, 25% and 24% of core deposits, respectively.
Time deposits of $100,000 or more totaled $859 million and $698 million at September 30, 2006 and December 31, 2005, respectively, of which $280 million and $240 million mature within three months of the respective dates, $146 million and $141 million mature after three months but within six months of the respective dates, $391 million and $212 million mature after six months but within one year of the respective dates and $42 million and $105 million mature after one year of the respective dates. There were no brokered certificates of deposit at September 30, 2006, December 31, 2005 and 2004.
Commercial deposits fund a significant portion of the loan portfolio. Average non-interest-bearing commercial deposits decreased $40 million in the first nine months of 2006 after increasing $43 million, or 5%, in 2005 and $64 million, or 7%, in 2004. The decrease in 2006 is reflective of the current interest rate environment.
108
The following table presents our deposit activity for the periods indicated:
109
The following table presents the distribution of deposit accounts for the periods indicated by dollar amount and percent of portfolio, and the weighted average nominal interest rate on each category of deposits.
At December 31, | ||||||||||||||||||||||||||||||||||||
At September 30, 2006 | 2005 | 2004 | 2003 | |||||||||||||||||||||||||||||||||
Amount |
Percent
of total deposits |
Weighted
average nominal rate |
Amount |
Percent
of total deposits |
Weighted
average nominal rate |
Amount |
Percent
of total deposits |
Weighted
average nominal rate |
Amount |
Percent
of total deposits |
Weighted
average nominal rate |
|||||||||||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||||||||||||||||||
Core deposits: |
||||||||||||||||||||||||||||||||||||
Non-interest-bearing |
$ | 2,056.6 | 22.9 | % | | % | $ | 2,218.4 | 24.4 | % | | % | $ | 2,105.4 | 23.8 | % | | % | $ | 1,950.6 | 22.4 | % | | % | ||||||||||||
Savings, interest-bearing checking and money market |
3,270.6 | 36.4 | 1.37 | 3,749.8 | 41.3 | 1.29 | 4,217.5 | 47.6 | 0.82 | 4,135.5 | 47.5 | 0.79 | ||||||||||||||||||||||||
Time |
3,515.9 | 39.2 | 4.30 | 2,904.5 | 32.0 | 3.23 | 2,358.5 | 26.6 | 2.33 | 2,347.1 | 26.9 | 2.34 | ||||||||||||||||||||||||
Total core deposits |
8,843.1 | 98.5 | 2.22 | 8,872.7 | 97.7 | 1.60 | 8,681.4 | 98.0 | 1.03 | 8,433.2 | 96.8 | 1.04 | ||||||||||||||||||||||||
Non-core deposits |
135.5 | 1.5 | 0.32 | 209.9 | 2.3 | 1.27 | 180.6 | 2.0 | 0.62 | 280.8 | 3.2 | 1.21 | ||||||||||||||||||||||||
Total deposits |
$ | 8,978.6 | 100.0 | % | 2.18 | % | $ | 9,082.6 | 100.0 | % | 1.59 | % | $ | 8,862.0 | 100.0 | % | 1.02 | % | $ | 8,714.0 | 100.0 | % | 1.04 | % | ||||||||||||
Time deposits of $100,000 or more maturing: |
||||||||||||||||||||||||||||||||||||
Within 3 months |
$ | 280.3 | 3.1 | % | 4.34 | % | $ | 239.7 | 2.6 | % | 3.50 | % | $ | 120.1 | 1.3 | % | 1.93 | % | $ | 106.9 | 1.2 | % | 1.48 | % | ||||||||||||
After 3 months but within 6 months |
146.4 | 1.6 | 4.18 | 141.2 | 1.6 | 3.34 | 53.0 | 0.6 | 1.86 | 51.7 | 0.6 | 1.76 | ||||||||||||||||||||||||
After 6 months but within 1 year |
391.1 | 4.4 | 4.91 | 211.5 | 2.3 | 3.65 | 155.8 | 1.8 | 2.71 | 64.7 | 0.8 | 1.85 | ||||||||||||||||||||||||
After 1 year |
41.5 | 0.5 | 3.83 | 105.7 | 1.2 | 3.70 | 114.2 | 1.3 | 3.18 | 142.6 | 1.6 | 3.42 | ||||||||||||||||||||||||
Total |
$ | 859.3 | 9.6 | % | 4.55 | % | $ | 698.1 | 7.7 | % | 3.54 | % | $ | 443.1 | 5.0 | % | 2.52 | % | $ | 365.9 | 4.2 | % | 2.34 | % | ||||||||||||
110
The following table presents, by rate category, the amount of time deposit accounts outstanding at September 30, 2006 and December 31, 2005, 2004 and 2003.
The following table presents, by rate category, the remaining period to maturity of time deposit accounts outstanding as of September 30, 2006.
Borrowings. Total borrowings equaled less than 1% of total assets at September 30, 2006 compared to 3% at both December 31, 2005 and 2004. Peoples Bank uses federal funds purchased as a source of funds, which are typically unsecured overnight loans among banks. Sources include three of the twelve regional Federal Home Loan Banks and several money center and large regional banks. Federal funds purchased represented less than 1% of total assets at September 30, 2006 and 2% of total assets at both December 31, 2005 and 2004.
In previous years, Peoples Banks primary source for borrowings was advances from the Federal Home Loan Bank of Boston, which provides credit for member institutions within its assigned region. Peoples Banks outstanding Federal Home Loan Bank advances at December 31, 2005 represented less than one-half of one percent of total assets compared to 1% of total assets at December 31, 2004. At September 30, 2006, there were no outstanding Federal Home Loan Bank advances. In 2004, Peoples Bank prepaid $799 million of Federal Home Loan Bank advances and $110 million of long-term repurchase agreements as part of a balance sheet restructuring.
Another source of funds in previous years has been repurchase agreements. These transactions involve the sale of securities to broker/dealers under agreements to repurchase the same (or substantially the same) securities. Repurchase agreements with broker/dealers are limited to Reporting Federal Reserve Dealers in government securities that have been approved by Peoples Banks Board of Directors.
111
Federal Home Loan Bank advances at the periods indicated are summarized as follows:
At September 30, | At December 31, | ||||||||||||||||||||||||||||||||||
2006 | 2005 | 2004 | 2003 | ||||||||||||||||||||||||||||||||
Principal |
Weighted
Average Rate |
Maximum
Amount Outstanding at Any Month-End |
Principal |
Weighted
Average Rate |
Maximum
Amount Outstanding at Any Month-End |
Principal |
Weighted
Average Rate |
Maximum
Amount Outstanding at Any Month-End |
Principal |
Weighted
Average Rate |
Maximum
Amount Outstanding at Any Month-End |
||||||||||||||||||||||||
(Dollars in millions) | |||||||||||||||||||||||||||||||||||
Federal Home Loan Bank advances maturing: |
|||||||||||||||||||||||||||||||||||
Within 1 year |
| | $ | 25.0 | 4.00 | % | $ | 100.0 | 2.17 | % | $ | 165.1 | 0.94 | % | |||||||||||||||||||||
After 1 but within 2 years |
| | | | | | 303.6 | 4.87 | |||||||||||||||||||||||||||
After 2 but within 3 years |
| | | | | | 1.8 | 6.91 | |||||||||||||||||||||||||||
After 3 but within 4 years |
| | | | | | 25.6 | 6.26 | |||||||||||||||||||||||||||
After 4 but within 5 years |
| | | | | | 1.3 | 6.74 | |||||||||||||||||||||||||||
After 5 years |
| | | | | | 466.9 | 4.79 | |||||||||||||||||||||||||||
Total Federal Home Loan Bank advances |
$ | | | $ | 155.0 | $ | 25.0 | 4.00 | % | $ | 190.0 | $ | 100.0 | 2.17 | % | $ | 849.3 | $ | 964.3 | 4.20 | % | $ | 1,702.6 | ||||||||||||
112
Average borrowed funds for the periods indicated are summarized as follows:
Nine Months Ended September 30, 2006 |
Year Ended December 31, |
|||||||||||||||||||||||
2005 | 2004 | 2003 | ||||||||||||||||||||||
Average
Amount Outstanding |
Weighted
Average Rate |
Average
Amount Outstanding |
Weighted
Average Rate |
Average
Amount Outstanding |
Weighted
Average Rate |
Average
Amount Outstanding |
Weighted
Average Rate |
|||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||||||
Federal funds purchased maturing within 3 months: |
$ | 207.2 | 4.76 | % | $ | 250.5 | 3.19 | % | $ | 249.6 | 1.25 | % | $ | 517.9 | 1.80 | % | ||||||||
FHLB advances |
63.2 | 5.13 | 50.3 | 2.73 | 176.1 | 5.32 | 1,059.5 | 5.08 | ||||||||||||||||
Repurchase agreements maturing: |
||||||||||||||||||||||||
Within 3 months |
| | 1.7 | 2.41 | 15.6 | 0.86 | 91.7 | 0.98 | ||||||||||||||||
After 2 years but within 3 years |
| | | | 11.2 | 4.82 | 60.0 | 4.81 | ||||||||||||||||
After 5 years |
| | | | 9.3 | 3.99 | 50.0 | 3.99 | ||||||||||||||||
Total repurchase agreements |
| | 1.7 | 2.41 | 36.1 | 2.91 | 201.7 | 2.87 | ||||||||||||||||
Total borrowings |
$ | 270.4 | 4.84 | % | $ | 302.5 | 3.11 | % | $ | 461.8 | 2.94 | % | $ | 1,779.1 | 3.88 | % | ||||||||
At September 30, 2006, all borrowed funds were overnight federal funds.
The amortized cost and fair value of the underlying securities used as collateral for securities sold under agreements to repurchase, the average balances and the maximum outstanding at any month-end at or for the nine months ended September 30, 2006 and the years ended December 31, 2005 and 2004 are as follows:
The average balances of Peoples Banks advances from the Federal Home Loan Bank of Boston during 2006, 2005 and 2004 were $63.2 million, $50.3 million and $176.1 million, respectively, and the maximum Federal Home Loan Bank advances outstanding during 2006, 2005 and 2004 were $155.0 million, $190.0 million and $849.3 million, respectively.
Subordinated Notes
At September 30, 2006, Peoples Bank had $65 million of 9.875% subordinated notes and $44 million of 7.20% subordinated notes outstanding. Subordinated notes totaled $109 million at both September 30, 2006 and December 31, 2005 and $122 million at December 31, 2004. Peoples Bank repurchased $14 million and $71 million of its 9.875% subordinated notes in 2005 and 2004, respectively, and $62 million of its 7.20% subordinated notes in 2004. The repurchases in 2004 were part of a balance sheet restructuring. Costs relating to these repurchases are included in liability restructuring costs in the
113
Consolidated Statements of Income. The 7.20% subordinated notes matured on December 1, 2006 and have been repaid. The 9.875% subordinated notes are due in 2010. The 9.875% subordinated notes are unsecured general obligations of Peoples Bank with interest payable semi-annually, are subordinated to the claims of depositors and Peoples Banks other creditors and are not redeemable prior to maturity. They qualify, up to certain limits, as supplementary (tier 2) capital for risk-based capital purposes. The 7.20% subordinated notes did not qualify as supplementary capital at September 30, 2006 and December 31, 2005 since they were to mature in less than one year.
Subsidiaries
Peoples Bank has three wholly-owned and consolidated subsidiaries which provide a variety of financial services to customers: Peoples Securities, Inc., R.C. Knox and Company, Inc. and Peoples Capital and Leasing Corp.
Peoples Securities provides brokerage services, financial advisory services, investment management services and life insurance.
R.C. Knox provides insurance services.
Peoples Capital and Leasing, which provides equipment financing services, operates in 48 states and has a sales force in Connecticut, California, Georgia, Kansas, Minnesota, New Hampshire and Texas. Peoples Capital and Leasings concentration is in niche industries, such as printing, packaging and transportation. Peoples Capital and Leasing contributed $164 million to Peoples Banks commercial banking loan portfolio average growth for 2005, a 46% increase from 2004. At September 30, 2006, Peoples Capital and Leasing comprised 19% of the total commercial banking loan portfolio.
In addition, Peoples Bank has a fourth consolidated subsidiary, Peoples Mortgage Investment Company, that is a passive investment subsidiary. This subsidiary was formed as a result of Connecticut tax legislation 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.
Personnel
As of September 30, 2006, Peoples Bank had 2,320 full-time and 492 part-time employees. The employees are not represented by a collective bargaining unit, and Peoples Bank considers its relationship with its employees to be excellent.
114
BUSINESS OF PEOPLES UNITED FINANCIAL
Peoples United Financial has not engaged in any business to date; accordingly, there are no financial statements for Peoples United Financial at this time. Peoples United Financial is a newly-formed Delaware corporation and currently a wholly-owned subsidiary of Peoples Bank. Peoples United Financial was formed for the purpose of effectuating the conversion and offering described in this prospectus. Peoples United Financial is registering its common stock with the Securities and Exchange Commission. As described in this prospectus, Peoples United Financial will be selling shares of its common stock in the offering and will be issuing shares of its common stock to the existing stockholders of Peoples Bank in exchange for their shares of Peoples Bank common stock. The sale and share exchange will be part of the conversion and offering, which will result in the termination of existence of Peoples Mutual Holdings and Peoples United Financial becoming the savings and loan holding company for Peoples Bank. Upon completion of the conversion and offering, Peoples Bank will be wholly-owned by Peoples United Financial. Peoples United Financial intends to retain approximately 50% of the net proceeds from the offering. Peoples United Financial will invest its initial capital as discussed in How We Intend to Use the Proceeds from the Offering .
Immediately after completion of the conversion and offering, it is expected that Peoples United Financials only business activities will be to hold all of the outstanding common stock of Peoples Bank, to hold a loan to the employee stock ownership plan, to contribute 2,000,000 shares of its common stock and $20.0 million in cash from the offering to The Peoples Community Foundation and to contribute approximately 50% of the net proceeds from the offering to Peoples Bank as additional capital. Peoples United Financial may use the net proceeds it retains to purchase investment securities, finance the acquisition of other financial institutions or other businesses that are related to banking or for other general corporate purposes, including repurchases of common stock and payment of cash dividends. In the future, as the holding company of Peoples Bank, Peoples United Financial may pursue other business activities permitted by applicable laws and regulations for such holding companies, which may include the issuance of additional shares of common stock to raise capital or to support mergers or acquisitions and borrowing funds for reinvestment in Peoples Bank. There are no specific plans for any additional capital issuance, merger or acquisition, or other diversification of Peoples United Financials activities at the present time.
Peoples United Financials cash flows will depend upon earnings from the investment of the portion of net proceeds retained from the offering and any dividends received from Peoples Bank. Initially, Peoples United Financial will neither own nor lease any property, but will instead use the premises, equipment, and furniture of Peoples Bank. At the present time, Peoples United Financial intends to employ only persons who are officers of Peoples Bank to serve as its officers and will use the support staff of Peoples Bank from time to time. These persons will not be separately compensated by Peoples United Financial. Peoples United Financial may hire its own employees, as appropriate, in the future. See How We Intend To Use The Proceeds From The Offering .
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REGULATION OF PEOPLES BANK AND PEOPLES UNITED FINANCIAL
General
Peoples Bank has been a federally chartered savings bank since August 18, 2006 when it converted from a Connecticut chartered savings bank. Its deposit accounts are insured up to applicable limits by the Federal Deposit Insurance Corporation under the Deposit Insurance Fund. Under its charter, Peoples Bank is subject to extensive regulation, examination and supervision by the Office of Thrift Supervision as its chartering agency, and by the Federal Deposit Insurance Corporation as the deposit insurer. Following completion of the conversion and offering, Peoples United Financial will be a unitary savings and loan holding company regulated, examined and supervised by the Office of Thrift Supervision. Both Peoples United Financial and Peoples Bank must file reports with the Office of Thrift Supervision concerning their activities and financial condition, and must obtain regulatory approval from the Office of Thrift Supervision prior to entering into certain transactions, such as mergers with, or acquisitions of, other depository institutions. The Office of Thrift Supervision will conduct periodic examinations to assess Peoples United Financials and Peoples Banks compliance with various regulatory requirements. The Office of Thrift Supervision has primary enforcement responsibility over federally chartered savings banks and savings and loan holding companies and has substantial discretion to impose enforcement action on a savings bank or holding company that fails to comply with applicable regulatory requirements, particularly with respect to capital requirements imposed on savings banks. In addition, the Federal Deposit Insurance Corporation has the authority to recommend to the Director of the Office of Thrift Supervision that enforcement action be taken with respect to a particular federally chartered savings bank and, if action is not taken by the Director, the Federal Deposit Insurance Corporation has authority to take such action under certain circumstances.
This regulation and supervision establishes a comprehensive framework of activities in which a federal savings bank can engage and is intended primarily for the protection of the Deposit Insurance Fund and depositors. 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 Office of Thrift Supervision, the Federal Deposit Insurance Corporation or through legislation, could have a material adverse impact on Peoples United Financial and Peoples Bank and their operations and stockholders.
Federally Chartered Savings Bank Regulation
Activity Powers. Peoples Bank derives its lending, investment and other activity powers primarily from the Home Owners Loan Act, as amended, and the regulations of the Office of Thrift Supervision thereunder. Under these laws and regulations, federal savings banks, including Peoples Bank, generally may invest in:
| real estate mortgages; |
| consumer and commercial loans; |
| certain types of debt securities; and |
| certain other assets. |
Peoples Bank may also establish service corporations that may, subject to applicable limitations, engage in activities not otherwise permissible for Peoples Bank, including certain real estate equity investments and securities and insurance brokerage activities. Peoples Banks investment powers are subject to various limitations, including (1) a prohibition against the acquisition of any corporate debt security that is not rated in one of the four highest rating categories; (2) a limit of 400% of a savings banks capital on the aggregate amount of loans secured by non-residential real estate property; (3) a limit of 20% of a savings banks assets on commercial loans, with the amount of commercial loans in excess of 10% of assets being limited to small business loans; (4) a limit of 35% of a savings banks assets on the aggregate amount of consumer loans and acquisitions of certain debt securities, with amounts in excess of 30% of assets being limited to loans made directly to the original obligor and where no third-party finder or referral fees were paid; (5) a limit of 5% of assets on non-conforming loans (residential and farm loans in excess of the specific limitations of the Home Owners Loan Act); and (6) a limit of the greater of 5% of assets or a savings banks capital on certain construction loans made for the purpose of financing what is or is expected to become residential property. The Office of Thrift Supervision granted Peoples Bank a phase-in period of three years from the date of its conversion to a federal savings bank, August 18, 2006, to comply with the Home Owners Loan Acts commercial loan limits, with the ability to seek an additional one-year extension if necessary.
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Capital Requirements. The Office of Thrift Supervision capital regulations require federally chartered savings banks to meet three minimum capital ratios:
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Tangible Capital Ratio - A 1.5% tangible capital ratio, calculated as tangible capital to adjusted total assets. |
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Leverage (Core) Capital Ratio - A 4% leverage (core) capital ratio, calculated as core capital to adjusted total assets. The minimum leverage (core) capital ratio is reduced to 3% if the savings bank received the highest rating on its most recent safety and soundness examination. |
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Risk-Based Capital Ratio - An 8% total risk-based capital ratio, calculated as total capital to risk-weighted assets. For purposes of this calculation, total capital includes core and supplementary capital, provided that supplementary capital may not exceed 100% of core capital. |
In assessing an institutions capital adequacy, the Office of Thrift Supervision takes into consideration not only these numeric factors but also qualitative factors as well, and has the authority to establish higher capital requirements for individual institutions where necessary. Peoples Bank, as a matter of prudent management, targets as its goal the maintenance of capital ratios which exceed these minimum requirements and that are consistent with Peoples Banks risk profile. At September 30, 2006, Peoples Bank exceeded each of its capital requirements as shown in the following table:
Office of Thrift Supervision Requirements | ||||||||||||||||||
Peoples Bank Actual |
Minimum Capital Adequacy |
For Classification as Well-Capitalized |
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Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||
(Dollars in millions) | ||||||||||||||||||
As of September 30, 2006 |
||||||||||||||||||
Tangible capital |
$ | 1,248.5 | 11.80 | % | $ | 158.7 | 1.50 | % | n/a | n/a | ||||||||
Leverage (core) capital |
1,248.5 | 11.80 | 423.1 | 4.00 | $ | 528.9 | 5.00 | % | ||||||||||
Total-risk-based capital |
1,347.7 | 16.19 | 679.2 | 8.00 | 849.0 | 10.00 |
The Federal Deposit Insurance Corporation Improvement Act requires that the Office of Thrift Supervision and other federal banking agencies revise their risk-based capital standards, with appropriate transition rules, to ensure that they take into account interest rate risk, concentration risk and the risks of non-traditional activities. The Office of Thrift Supervision monitors the interest rate risk of individual institutions through the Office of Thrift Supervision requirements for interest rate risk management, the ability of the Office of Thrift Supervision to impose individual minimum capital requirements on institutions that exhibit a high degree of interest rate risk, and the requirements of Thrift Bulletin 13a, which provides guidance on the management of interest rate risk and the responsibility of boards of directors in that area.
The Office of Thrift Supervision continues to monitor the interest rate risk of individual institutions through analysis of the change in net portfolio value. Net portfolio value is defined as the net present value of the expected future cash flows of an entitys assets and liabilities and, therefore, hypothetically represents the value of an institutions net worth. The Office of Thrift Supervision has also used this net portfolio value analysis as part of its evaluation of certain applications or notices submitted by savings banks. The Office of Thrift Supervision, through its general oversight of the safety and soundness of savings associations, retains the right to impose minimum capital requirements on individual institutions to the extent the institution is not in compliance with certain written guidelines established by the Office of Thrift Supervision regarding net portfolio value analysis. The Office of Thrift Supervision has not imposed any such requirements on Peoples Bank.
Safety and Soundness Standards. Pursuant to the requirements of the Federal Deposit Insurance Corporation Improvement Act, as amended by the Riegle Community Development and Regulatory Improvement Act of 1994, each federal banking agency, including the Office of Thrift Supervision, 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. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director, or principal stockholder.
In addition, the Office of Thrift Supervision adopted regulations to require a savings bank that is given notice by the Office of Thrift Supervision that it is not satisfying any of such safety and soundness standards to submit a compliance plan
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to the Office of Thrift Supervision. If, after being so notified, a savings bank fails to submit an acceptable compliance plan or fails in any material respect to implement an accepted compliance plan, the Office of Thrift Supervision 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. If a savings bank fails to comply with such an order, the Office of Thrift Supervision may seek to enforce the order in judicial proceedings and to impose civil monetary penalties.
Prompt Corrective Action. The Federal Deposit Insurance Corporation Improvement Act also established a system of prompt corrective action to resolve the problems of undercapitalized institutions. Under this system, the federal bank regulators, including the Office of Thrift Supervision, are required to take certain and authorized to take other, supervisory actions against undercapitalized institutions, based upon five categories of capitalization which the Federal Deposit Insurance Corporation Improvement Act 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 banks 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 Office of Thrift Supervision is required to monitor closely the condition of an undercapitalized savings 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 any parent holding company. The aggregate liability of a parent holding company is limited to the lesser of:
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an amount equal to 5% of the banks total assets at the time it became undercapitalized; and |
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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 Office of Thrift Supervision regulations, generally, a federal savings 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 6% or greater, and its leverage ratio is 5% or greater, and it is not subject to any order or directive by the Office of Thrift Supervision to meet a specific capital level. As of September 30, 2006, Peoples Banks regulatory capital ratios exceeded the Office of Thrift Supervisions numeric criteria for classification as a well-capitalized institution.
Insurance Activities. Peoples Bank is generally permitted to engage in certain insurance and annuity activities through its 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.
Federal banking agencies, including the Office of Thrift Supervision, 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 Federal Deposit Insurance Corporation merged the Bank Insurance Fund and the Savings Association Insurance Fund to form the Deposit Insurance Fund on March 31, 2006. Peoples Bank is a member of the Deposit Insurance Fund and pays its deposit insurance assessments to the Deposit Insurance Fund.
Pursuant to the Federal Deposit Insurance Corporation Improvement Act, the Federal Deposit Insurance Corporation established a system for setting deposit insurance premiums based upon the risks a particular bank or savings association posed to its deposit insurance fund. Effective January 1, 2007, the Federal Deposit Insurance Corporation established a risk-based assessment system for determining the deposit insurance assessments to be paid by insured depository institutions. Under the assessment system, the Federal Deposit Insurance Corporation assigns an institution to one of four risk categories, with the first category having two sub-categories based on the institutions most recent supervisory and capital evaluations,
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designed to measure risk. Assessment rates currently range from 0.05% of deposits for an institution in the highest sub-category of the highest category to 0.43% of deposits for an institution in the lowest category. The Federal Deposit Insurance Corporation is authorized to raise the assessment rates as necessary to maintain the required reserve ratio of 1.25%. The Federal Deposit Insurance Corporation allows the use of credits for assessments previously paid, and Peoples Bank believes that it has credits that will offset certain assessments.
In addition, all Federal Deposit Insurance Corporation-insured institutions are required to pay assessments to the Federal Deposit Insurance Corporation at an annual rate of approximately 0.0124% 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 in 2017 through 2019.
Under the Federal Deposit Insurance Act, the Federal Deposit Insurance Corporation may terminate the insurance of an institutions 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 Federal Deposit Insurance Corporation. The management of Peoples Bank does not know of any practice, condition or violation that might lead to termination of deposit insurance.
Transactions with Affiliates of Peoples Bank. Peoples Bank is subject to the affiliate and insider transaction rules set forth in Sections 23A, 23B, 22(g) and 22(h) of the Federal Reserve Act, as well as additional limitations as adopted by the Director of the Office of Thrift Supervision. Office of Thrift Supervision regulations regarding transactions with affiliates and insider transactions generally conform to Regulation W and Regulation O, respectively, issued by the Federal Reserve Board. Affiliated transactions provisions, among other things, prohibit or limit a savings bank from extending credit to, or entering into certain transactions with, its affiliates (which for Peoples Bank would include Peoples United Financial) and principal stockholders, directors and executive officers of Peoples Bank.
In addition, Section 11 of the Home Owners Loan Act prohibits a savings bank from making a loan to an affiliate that is engaged in non-bank holding company activities and prohibits a savings bank from purchasing or investing in securities issued by an affiliate that is not a subsidiary. Office of Thrift Supervision regulations also include certain specific exemptions from these prohibitions. The Federal Reserve Board and the Office of Thrift Supervision 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 and the Office of Thrift Supervision regulations regarding transactions with affiliates.
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 Peoples Bank, that are subject to the insider lending restrictions of Section 22(h) of the Federal Reserve Act.
Privacy Standards. Peoples Bank is subject to Office of Thrift Supervision regulations implementing the privacy protection provisions of the Gramm-Leach-Bliley Act. These regulations require Peoples 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, Peoples Bank is required to provide its customers with the ability to opt-out of having Peoples 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, Peoples Bank is subject to federal regulatory guidelines establishing standards for safeguarding customer information. These regulations implement certain provisions of the Gramm-Leach-Bliley Act. 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.
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Community Reinvestment Act. Under the Community Reinvestment Act, as implemented by the Office of Thrift Supervision regulations, any federally chartered savings bank, including Peoples 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 Community Reinvestment Act does not establish specific lending requirements or programs for financial institutions nor does it limit an institutions discretion to develop the types of products and services that it believes are best suited to its particular community. The Community Reinvestment Act requires the Office of Thrift Supervision, in connection with its examination of a federally chartered savings bank, to assess the depository institutions 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 Community Reinvestment Act regulations rate an institution based on its actual performance in meeting community needs. In particular, the evaluation system focuses on three tests:
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a lending test, to evaluate the institutions record of making loans in its service areas; |
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an investment test, to evaluate the institutions record of investing in community development projects, affordable housing, and programs benefiting low or moderate income individuals and businesses; and |
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a service test, to evaluate the institutions delivery of services through its branches, ATMs and other offices. |
The Community Reinvestment Act also requires all institutions to make public disclosure of their Community Reinvestment Act ratings. Peoples Bank has received an outstanding rating in its most recent Community Reinvestment Act examination performed by the Federal Deposit Insurance Corporation and the Connecticut Department of Banking in 2006. 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 Community Reinvestment Act. Peoples Bank has no such agreements in place at this time.
Loans to One Borrower. Under the Home Owners Loan Act, savings banks are generally subject to the national bank limits on loans to one borrower. Generally, savings banks may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of the institutions 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. Peoples Bank is in compliance with applicable loans to one borrower limitations.
Nontraditional Mortgage Products. The federal banking agencies recently published final 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 significant portion of Peoples Banks adjustable-rate residential mortgage loans are alternative mortgage loans.
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 required increased scrutiny for alternative mortgage products. Institutions that originate or service alternative mortgages should have (1) strong risk management practices that include maintenance of capital levels and allowance for loan losses commensurate with the risk; (2) prudent lending policies and underwriting standards that address a borrowers repayment capacity; and (3) 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.
Peoples Bank is required to and intends to comply with the guidance as it is interpreted and applied by the Office of Thrift Supervision.
Qualified Thrift Lender Test. The Home Owners Loan Act requires federal savings banks to meet a Qualified Thrift Lender test. Under the Qualified Thrift Lender test, a savings bank is required to maintain at least 65% of its portfolio assets (total assets less (1) specified liquid assets up to 20% of total assets; (2) intangibles, including goodwill; and (3) the value of property used to conduct business) in certain qualified thrift investments (primarily residential mortgages and related investments, including certain mortgage-backed securities, credit card loans, student loans, and small business loans)
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on a monthly basis during at least 9 out of every 12 months. The Office of Thrift Supervision letter dated July 3, 2006 approving, among other things, Peoples Banks conversion from a Connecticut savings bank to a federal savings bank granted the bank an exception from the Qualified Thrift Lender test for a period of four years from the date of its conversion to a federal charter.
A savings bank that fails the Qualified Thrift Lender test and does not convert to a bank charter generally will be prohibited from: (1) engaging in any new activity not permissible for a national bank; (2) paying dividends not permissible under national bank regulations; and (3) establishing any new branch office in a location not permissible for a national bank in the institutions home state. In addition, if the institution does not requalify under the Qualified Thrift Lender test within three years after failing the test, the institution would be prohibited from engaging in any activity not permissible for a national bank and may have to repay any outstanding advances from the Federal Home Loan Bank as promptly as possible.
Limitation on Capital Distributions. The Office of Thrift Supervision regulations impose limitations upon certain capital distributions by federal savings banks, such as certain cash dividends, payments to repurchase or otherwise acquire its shares, payments to stockholders of another institution in a cash out merger and other distributions charged against capital.
The Office of Thrift Supervision regulates all capital distributions by Peoples Bank directly or indirectly to Peoples United Financial, including dividend payments. As the subsidiary of a savings and loan holding company, Peoples Bank currently must file a notice with the Office of Thrift Supervision at least 30 days prior to each capital distribution. However, if the total amount of all capital distributions (including any proposed capital distribution) for the applicable calendar year exceeds net income for that year to date plus the retained net income for the preceding two years, then Peoples Bank must file an application to receive the approval of the Office of Thrift Supervision for a proposed capital distribution.
Peoples Bank may not pay dividends to Peoples United Financial if, after paying those dividends, it would fail to meet the required minimum levels under risk-based capital guidelines and the minimum leverage and tangible capital ratio requirements or if the Office of Thrift Supervision notified Peoples Bank that it was in need of more than normal supervision. Under the Federal Deposit Insurance Act, an insured depository institution such as Peoples 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 Federal Deposit Insurance Act). Payment of dividends by Peoples 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. In addition, Peoples Bank may not declare or pay cash dividends on its capital stock if such dividend would reduce Peoples Banks regulatory capital below the amount then required for the liquidation account. See The Conversion and OfferingLiquidation Rights for a discussion of the liquidation account.
Liquidity. Peoples Bank maintains sufficient liquidity to ensure its safe and sound operation, in accordance with Office of Thrift Supervision regulations.
Assessments. The Office of Thrift Supervision charges assessments to recover the cost of examining federal savings banks and their affiliates. These assessments are based on three components: (1) the size of the institution on which the basic assessment is based; (2) the institutions 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 (3) the complexity of the institutions 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.
The Office of Thrift Supervision also assesses fees against savings and loan holding companies, such as Peoples United Financial. The Office of Thrift Supervision semi-annual assessment for savings and loan holding companies includes a $3,000 base assessment with an additional assessment based on the holding companys risk or complexity, organizational form and condition.
Branching. Under Office of Thrift Supervision branching regulations, Peoples Bank is generally authorized to open branches within or beyond the State of Connecticut if Peoples Bank (1) continues to meet the requirements of a highly-rated federal savings bank, and (2) publishes public notice at least 35 days before opening a branch and no one opposes the branch. If a comment in opposition to a branch opening is filed and the Office of Thrift Supervision determines the comment to be relevant to the approval process standards, and to require action in response, the Office of Thrift Supervision may, among other things, require a branch application or elect to hold a meeting with Peoples Bank and the person who submitted the comment. Office of Thrift Supervision authority preempts any state law purporting to regulate branching by federal savings banks.
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Anti-Money Laundering and Customer Identification. Peoples Bank is subject to Office of Thrift Supervision and Financial Crimes Enforcement Network regulations implementing the Bank Secrecy Act, as amended by the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, or 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 obligations on a broad range of financial institutions, including savings banks like Peoples Bank.
The USA PATRIOT Act and the related Office of Thrift Supervision regulations impose the following requirements with respect to financial institutions:
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Establishment of anti-money laundering programs, including adoption of written procedures, designation of a compliance officer and auditing of the program; |
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Establishment of a program specifying procedures for obtaining identifying information from customers seeking to open new accounts, including verifying the identity of customers within a reasonable period of time; |
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Establishment of enhanced due diligence policies, procedures and controls designed to detect and report money laundering; |
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Prohibitions on correspondent accounts for foreign shell banks and compliance with record keeping obligations with respect to correspondent accounts of foreign banks; and |
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Requirements that bank regulators consider a holding companys effectiveness in combating money laundering when ruling on Federal Reserve Act and Bank Merger Act applications. |
Federal Home Loan Bank System. Peoples Bank is a member of the Federal Home Loan Bank system, which consists of twelve regional Federal Home Loan Banks, each subject to supervision and regulation by the Federal Housing Finance Board. The Federal Home Loan Bank provides a central credit facility primarily for member thrift 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 Federal Home Loan Banks. 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 Federal Home Loan Banks. These policies and procedures are subject to the regulation and oversight of the Federal Housing Finance Board. All long-term advances are required to provide funds for residential home financing. The Federal Housing Finance Board has also established standards of community or investment service that members must meet to maintain access to such long-term advances. Peoples Bank, as a member of the Federal Home Loan Bank of Boston, is currently required to purchase and hold shares of capital stock in the Federal Home Loan Bank of Boston in amount equal to 0.35% of Peoples Bank Membership Stock Investment Base plus an Activity Based Stock Investment Requirement. The Activity Based Stock Requirement is equal to 3.0% of any outstanding principal for overnight advances, 4.0% of any outstanding principal for term advances with an original term of two days to three months and 4.5% of any outstanding principal for term advances with an original term greater than three months. Peoples Bank is in compliance with these requirements.
Federal Reserve System. Federal Reserve Board regulations require federally chartered savings banks to maintain non-interest-earning cash reserves against their transaction accounts (primarily negotiable order of withdrawal and demand deposit accounts). Institutions must maintain a reserve of 3% against aggregate transaction accounts between $7.8 million and $48.3 million (subject to adjustment by the Federal Reserve Board) plus a reserve of 10% (subject to adjustment by the Federal Reserve Board between 8% and 14%) against that portion of total transaction accounts in excess of $48.3 million. The first $7.8 million of otherwise reservable balances is exempt from the reserve requirements. Peoples Bank is in compliance with the foregoing requirements. Because required reserves must be maintained in the form of either vault cash, a non-interest-bearing account at a Federal Reserve Bank or a pass-through account as defined by the Federal Reserve Board, the effect of this reserve requirement is to reduce Peoples Banks interest-earning assets.
Federal Holding Company Regulation
Upon completion of the conversion, Peoples United Financial will become a unitary savings and loan holding company within the meaning of the Home Owners Loan Act. As such, Peoples United Financial will be registered with the Office of
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Thrift Supervision and subject to Office of Thrift Supervision regulation, examination, supervision and reporting requirements. In addition, the Office of Thrift Supervision will have enforcement authority over Peoples United Financial and its savings bank subsidiary. Among other things, this authority permits the Office of Thrift Supervision to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings bank.
Activities Restrictions Applicable to Savings and Loan Holding Companies. Under the Gramm-Leach-Bliley Act, the activities of all unitary savings and loan holding companies formed after May 4, 1999, such as Peoples United Financial, must be financially related activities permissible for bank holding companies, as defined under the Gramm-Leach-Bliley Act. Accordingly, Peoples United Financials activities will be restricted to:
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furnishing or performing management services for a savings institution subsidiary of such holding company; |
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conducting an insurance agency or escrow business; |
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holding, managing, or liquidating assets owned or acquired from a savings institution subsidiary of such company; |
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holding or managing properties used or occupied by a savings institution subsidiary of such company; |
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acting as trustee under a deed of trust; |
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any other activity (1) that the Federal Reserve Board, by regulation, has determined to be permissible for bank holding companies under Section 4(c) of the Bank Holding Company Act of 1956, unless the Director of the Office of Thrift Supervision, by regulation, prohibits or limits any such activity for savings and loan holding companies, or (2) that multiple savings and loan holding companies were authorized by regulation to directly engage in on March 5, 1987; |
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purchasing, holding, or disposing of stock acquired in connection with a qualified stock issuance if the purchase of such stock by such holding company is approved by the Director of the Office of Thrift Supervision; and |
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any activity permissible for financial holding companies under section 4(k) of the Bank Holding Company Act. |
Permissible activities that are deemed to be financial in nature or incidental thereto under section 4(k) of the Bank Holding Company Act include:
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lending, exchanging, transferring, investing for others, or safeguarding money or securities; |
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insurance activities or providing and issuing annuities, and acting as principal, agent, or broker; |
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financial, investment, or economic advisory services; |
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issuing or selling instruments representing interests in pools of assets that a bank is permitted to hold directly; |
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underwriting, dealing in, or making a market in securities; |
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activities previously determined by the Federal Reserve Board to be closely related to banking; |
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activities that bank holding companies are permitted to engage in outside of the United States; and |
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portfolio investments made by an insurance company. |
In addition, Peoples United Financial cannot be acquired or acquire a company unless the acquirer or target, as applicable, is engaged solely in financial activities.
Restrictions Applicable to All Savings and Loan Holding Companies. Federal law prohibits a savings and loan holding company, including Peoples United Financial, directly or indirectly, from acquiring:
|
control (as defined under the Home Owners Loan Act) of another savings bank (or a holding company parent) without prior Office of Thrift Supervision approval; |
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through merger, consolidation or purchase of assets, another savings bank or a holding company thereof, or acquiring all or substantially all of the assets of such institution or holding company without prior Office of Thrift Supervision approval; or |
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control of any depository institution not insured by the Federal Deposit Insurance Corporation (except through a merger with and into the holding companys savings bank subsidiary that is approved by the Office of Thrift Supervision). |
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A savings and loan holding company may not acquire as a separate subsidiary an insured institution that has a principal office outside of the state where the principal office of its federal savings bank subsidiary is located, except:
|
in the case of certain emergency acquisitions approved by the Federal Deposit Insurance Corporation; |
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if such holding company controls a savings association subsidiary that operated a home or branch office in such additional state as of March 5, 1987; or |
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if the laws of the state in which the target savings association is located specifically authorize a savings association chartered by that state to be acquired by a savings association chartered by the state where the acquiring savings association or savings and loan holding company is located or by a holding company that controls such a state chartered association. |
The Home Owners Loan Act prohibits a savings and loan holding company (directly or indirectly, or through one or more subsidiaries) from acquiring another savings bank or holding company thereof without prior written approval of the Office of Thrift Supervision; acquiring or retaining, with certain exceptions, more than 5% of a non-subsidiary savings bank, a non-subsidiary holding company, or a non-subsidiary company engaged in activities other than those permitted by the Home Owners Loan Act; or acquiring or retaining control of a depository institution that is not federally insured. In evaluating applications by holding companies to acquire savings banks, the Office of Thrift Supervision 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 convenience and needs of the community and competitive factors.
Federal Securities Law
Peoples Banks securities are currently registered with the Office of Thrift Supervision under the Securities Exchange Act of 1934, as amended. Following the conversion, Peoples United Financials securities will be registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended. As such, Peoples Bank currently is, and following the conversion Peoples United Financial will be, subject to the information, proxy solicitation, insider trading, and other requirements and restrictions of the Securities Exchange Act of 1934.
Delaware Corporation Law
Peoples United Financial is incorporated under the laws of the State of Delaware, and is therefore subject to regulation by the state of Delaware. The rights of Peoples United Financials stockholders are governed by the Delaware General Corporation Law.
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Federal
General. The following discussion is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to Peoples Bank, Peoples Mutual Holdings or Peoples United Financial. For federal income tax purposes, Peoples Bank reports its income on the basis of a taxable year ending December 31, using the accrual method of accounting, and is generally subject to federal income taxation in the same manner as other corporations. Because Peoples Bank and Peoples United Financial constitute an affiliated group of corporations, they are eligible to report their income on a consolidated basis. However, because Peoples Mutual Holdings has owned less than 80% of the common stock of Peoples Bank, it has not been a member of such affiliated group and has reported its income on a separate return. Peoples Bank is not currently under audit by the Internal Revenue Service, and has been audited by the Internal Revenue Service through the tax year ended December 31, 2003.
Corporate Alternative Minimum Tax. In addition to the regular corporate income tax, corporations generally are subject to an alternative minimum tax in an amount equal to 20% of alternative minimum taxable income, to the extent the alternative minimum tax exceeds the corporations regular income tax. The alternative minimum tax is available as a credit against future regular income tax. We do not expect to be subject to the alternative minimum tax.
Exclusion of Dividends; Dividends Received Deduction. Peoples United Financial may exclude from its income 100% of dividends received from Peoples Bank because Peoples Bank is a member of the affiliated group of corporations of which Peoples United Financial is the parent. Because Peoples Mutual Holdings has not been a member of such affiliated group, it has not qualified for such 100% dividends received exclusion, but it has been entitled to deduct 80% of the dividends it has received from Peoples Bank because it has owned more than 20% of the common stock of Peoples Bank.
State
Connecticut State Taxation . For Connecticut income tax purposes, Peoples Bank reports its income on the basis of a taxable year ending December 31 and is subject to Connecticut state income taxation in the same manner as other corporations. Because Peoples Bank and Peoples United Financial constitute an affiliated group of corporations, they are eligible to file a Connecticut Combined Corporation Business Tax Return. Peoples Bank is not currently under audit with respect to its Connecticut income tax returns.
In 1998, Peoples Bank formed a passive investment company subsidiary, Peoples Mortgage Investment Company, in accordance with Connecticut tax laws, which permit transfers of mortgage loans to such subsidiaries on or after January 1, 1999. The related earnings of the subsidiary, and any dividends it pays to the parent, are not subject to Connecticut income tax. As a result of the exclusion of such earnings and dividends from Connecticut taxable income beginning in 1999, Peoples Bank has established a valuation allowance for the full amount of its Connecticut deferred tax asset attributable to net temporary differences and state net operating loss carryforwards. Connecticut tax net operating loss carryforwards totaled $681.4 million at December 31, 2005 and expire between 2020 and 2025.
New York State Taxation. Peoples Bank will be required to file a New York Banking Corporation Franchise Tax Return as a result of hiring mortgage calling officers in New York State during 2006, and its plan to open 15 branches in Westchester County over the next three years (seven by the end of 2007). Accordingly, Peoples Bank will be subject to tax in an amount equal to the greater of (1) 7.5% of its income allocable to New York State; (2) 3% of alternative net income allocated to New York State; (3) .01% of the average value of assets allocable to New York State; or (4) a nominal minimum tax. Entire net income is similar to federal taxable income with certain modifications and alternative net income is equal to entire net income without certain deductions.
In addition, New York State imposes a Metropolitan Transportation Business Tax Surcharge equal to 17% of the New York State franchise tax allocable to business activities carried on in the metropolitan district. The Metropolitan Transportation Business Tax district includes Westchester County.
Massachusetts Taxation. Peoples Bank is required to file a Massachusetts Financial Excise Tax and pay Massachusetts excise tax because Peoples Bank maintains a commercial loan production office in Massachusetts. Peoples Banks Massachusetts tax liability is equal to the greater of 10.5% of net income allocated to Massachusetts or a minimum tax.
Delaware State Taxation. As a Delaware holding company not earning income in Delaware, Peoples United Financial is exempt from Delaware corporate income tax but is required to file annual returns and pay annual fees and a franchise tax to the state of Delaware.
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Peoples Banks corporate headquarters is located at Bridgeport Center, in Bridgeport, Connecticut. The Bridgeport Center building, which is owned by Peoples Bank, had a net book value of $71.9 million at December 31, 2005 and Peoples Bank occupies approximately 92% of the building; all other available office space has been leased to unrelated parties. At December 31, 2005, Peoples Bank also conducted banking operations from its 75 traditional branches, 70 supermarket branches and 8 limited-service branches. Peoples Banks branch network is primarily concentrated in Fairfield County, where it has 60 branches. Peoples Bank also has 33 branches in Hartford County, 32 branches in New Haven County, 12 branches in New London County, five branches in both Tolland County and Litchfield County, four branches in Middlesex County and two branches in Windham County. Peoples Bank owns 11 of its banking offices, which had an aggregate net book value of $8.4 million at December 31, 2005. Peoples Banks remaining banking operations are conducted in leased offices.
At December 31, 2005, Peoples Bank was obligated under various noncancelable operating leases for office space, which expire on various dates through 2027. Certain leases contain renewal options and provide for increased rental based principally on the consumer price index and fair market rental value provisions. The future minimum rental commitments under operating leases in excess of one year at December 31, 2005 were: $18.1 million in 2006; $18.3 million in 2007; $15.9 million in 2008; $15.1 million in 2009; $13.7 million in 2010; and an aggregate of $34.1 million in 2011 through 2027. Rent expense under operating leases was $17.5 million, $16.8 million and $16.3 million for 2005, 2004 and 2003, respectively.
In addition to its corporate headquarters and branch offices, Peoples Bank owns six other banking facilities with an aggregate net book value of $12.6 million at December 31, 2005. These facilities are used for a variety of purposes.
In the normal course of business, Peoples Bank is subject to various legal proceedings. In the opinion of management, Peoples financial condition or results of operations will not be affected materially as a result of the outcome of these legal proceedings.
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MANAGEMENT OF PEOPLES UNITED FINANCIAL
Directors
Composition of the Board. The Certificate of Incorporation and Bylaws of Peoples United Financial provide for the election of directors by the stockholders of Peoples United Financial and for the division of the Board of Directors into three classes of directors as nearly equal in number as reasonably possible. The terms of office of the members of one class will expire and successors will be elected for a three-year term at each annual meeting of the stockholders of Peoples United Financial, beginning at the 2007 annual meeting of the stockholders of Peoples United Financial. Peoples United Financials Bylaws provide that there will be between 5 and 15 members of the Board of Directors, as fixed by resolution of the Board of Directors. Peoples United Financial currently has a ten-member Board.
Who Our Directors Are . The table below states our directors names, their ages as of December 31, 2006, their positions with Peoples United Financial and the years their terms expire. Information concerning the principal occupations, employment and compensation of the directors of Peoples United Financial in their capacity as directors of Peoples Bank during the past five years is set forth under Management of Peoples Bank .
Name |
Age |
Term
Expires |
Positions Held |
|||
Collin P. Baron |
59 | 2008 | Director | |||
George P. Carter |
69 | 2009 | Vice Chairman of the Board and Lead Director | |||
Jerry Franklin |
59 | 2009 | Director | |||
Eunice S. Groark |
68 | 2009 | Director | |||
Janet M. Hansen |
64 | 2007 | Director | |||
Richard M. Hoyt |
64 | 2008 | Director | |||
John A. Klein |
57 | 2008 | President, Chief Executive Officer and Chairman of the Board | |||
Jeremiah J. Lowney, Jr. |
70 | 2007 | Director | |||
Jack E. McGregor |
72 | 2007 | Director | |||
James A. Thomas |
67 | 2009 | Director |
Committees of the Board of Directors. Peoples United Financial expects to establish three standing committees: the Audit Committee, the Compensation and Nominating Committee and the Executive Committee.
Audit Committee. The Audit Committee, which is expected to meet jointly with the Peoples Bank Audit Committee described under Board of Directors Committees below, will be established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934. Each member of the Audit Committee will be independent as that term is defined in Rule 4200(a) (15) of the listing standards of the Nasdaq Stock Market. Each member of the Audit Committee will also satisfy the more stringent definition of independence required for members of audit committees generally, as set forth in Rule 4350(d)(2)(A) of the listing standards of the Nasdaq Stock Market. It is expected that the members of Peoples Banks Audit Committee, George P. Carter (Chairman), Jerry Franklin, Janet M. Hansen, Richard M. Hoyt, and Jeremiah J. Lowney, Jr., will also be members of the Peoples United Financial Audit Committee. The Audit Committee will be responsible for monitoring the accounting practices and internal controls of Peoples United Financial, including the supervision of an annual independent audit of Peoples United Financials financial statements by independent registered public accountants. The Audit Committee will adopt a charter that will provide details concerning the operations of the committee and will be made available on Peoples Banks website at www.peoples.com. It is expected that this charter will be substantially similar to the Peoples Bank Audit Committee charter, which was attached as Exhibit A to Peoples Banks Proxy Statement for the 2006 Annual Meeting and is also available on Peoples Banks website at www.peoples.com.
Compensation and Nominating Committee. Peoples United Financial plans to establish a Compensation and Nominating Committee, whose members are expected to be James A. Thomas (Chairman), George Carter and Jerry Franklin. Messrs. Thomas, Carter and Franklin are also members of the Peoples Bank Human Resources Committee. It is anticipated that meetings of the Compensation and Nominating Committee will be held jointly with those of the Peoples Bank Human Resources Committee. Each member of the Compensation and Nominating Committee will be independent, as that term is defined in Rule 4200(a)(15) of the listing standards of the Nasdaq Stock Market. The Compensation and Nominating Committee will be responsible for oversight of the executive and employee compensation programs of Peoples Bank and Peoples United Financial, including conducting performance reviews of the executive officers of Peoples Bank and
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Peoples United Financial and approval of policies with respect to executive compensation. The Compensation and Nominating Committee will adopt a charter, which will provide details concerning the operations of the committee and will be made available on Peoples Banks website at www.peoples.com. It is expected that this charter will be substantially similar to the Peoples Bank Human Resources Committee charter, which is available on Peoples Banks website at www.peoples.com.
Executive Committee. Peoples United Financial intends to establish an Executive Committee, whose members are expected to be the same as the members of Peoples Banks existing Executive Committee: George P. Carter (Chairman), Collin P. Baron, Jerry Franklin, Eunice S. Groark, John A. Klein, Jack E. McGregor and James A. Thomas. To the extent not inconsistent with law or Peoples United Financials Certificate of Incorporation or Bylaws, the Executive Committee will exercise all the powers and authority of the Board in the management of the business and affairs of Peoples United Financial during intervals between meetings of the Board. The Executive Committee will adopt a charter which will provide details concerning the operations of the committee and will be made available on Peoples Banks website at www.peoples.com. It is expected that this charter will be substantially similar to the Peoples Bank Executive Committee charter, which is available on Peoples Banks website at www.peoples.com.
Executive Officers
Peoples United Financials executive officers will be appointed annually by the Board of Directors of Peoples United Financial and serve at the Boards discretion. However, one of our officers does have an employment agreement with Peoples Bank, as further described under Management of Peoples BankPotential Payments upon Termination or Change in ControlEmployment Agreement below. We expect to appoint all of the executive officers of Peoples Bank as the executive officers of Peoples United Financial. Based on that expectation, the table below states our executive officers names, their ages as of December 31, 2006, and their positions with Peoples United Financial. Information concerning the principal occupations, employment and compensation of the executive officers of Peoples United Financial during the past five years is set forth under Management of Peoples Bank .
Name |
Age |
Positions Held |
||
Jacinta A. Coleman | 58 | Executive Vice President and Chief Information Officer | ||
Robert R. DAmore | 53 | Executive Vice President, Marketing and Regional Banking | ||
Brian F. Dreyer | 60 | Executive Vice President, Commercial Banking | ||
Bryan J. Huebner | 56 | Executive Vice President, Consumer Financial Services | ||
John A. Klein | 57 | President, Chief Executive Officer and Chairman of the Board | ||
William T. Kosturko | 57 | Executive Vice President and General Counsel | ||
Henry R. Mandel | 62 | Executive Vice President, Organization Effectiveness | ||
Philip R. Sherringham | 53 | Executive Vice President and Chief Financial Officer | ||
Mark K. Vitelli | 44 | Executive Vice President, Direct Banking and Operations |
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Director and Executive Officer Compensation
Since the formation of Peoples United Financial, none of its directors, executive officers or other personnel have received remuneration from Peoples United Financial. It is currently expected that no separate compensation will be paid to the executive officers or other personnel of Peoples United Financial. However, directors of Peoples United Financial who are not employees of Peoples United Financial or of Peoples Bank or any of their subsidiaries (outside directors) will be compensated for service as directors of Peoples United Financial. No separate compensation will be paid to a director of Peoples Bank who attends a board or committee meeting that is held jointly with a board or committee meeting of Peoples United Financial and who is compensated for that meeting by Peoples United Financial. Compensation will be paid to outside directors of Peoples United Financial according to the following table:
Annual Fees: | Per-Meeting Attendance Fees: | |||||||
Cash retainer (all members) |
$ | 24,000 |
Board meetings (all members) |
$ | 950 | |||
Equity compensation (all members) (1) |
95,000 |
Committee meetings: |
||||||
Vice Chairman of the Board/Lead Director |
65,000 |
Audit Committee: |
||||||
Committee Chairman: |
Chairman |
1,450 | ||||||
Audit Committee |
10,500 |
Other Audit Committee members |
1,200 | |||||
Compensation and Nominating Executive |
|
4,000
4,000 |
Members of all Committees (except Audit) |
950 |
(1) | Paid pursuant to the Peoples United Financial Directors Equity Compensation Plan, discussed below. |
A director who, by invitation, attends a meeting of a committee of which he or she is not a regular member will be paid the same attendance fee as is payable to members of that committee. From time to time, the Chairman of the Audit Committee may perform certain additional services in his capacity as Chairman without a meeting of the Audit Committee (e.g., meetings with representatives of Peoples United Financials independent registered public accountants). In such cases, he will receive an amount equal to the Chairmans regular Audit Committee meeting attendance fee. On occasion, one or more other members of the Audit Committee may participate in the review of regulatory filings to be made by Peoples United Financial, and will receive an amount equal to the regular Audit Committee attendance fee for their participation in such review.
As part of the conversion, Peoples United Financial will assume the Peoples Bank Directors Equity Compensation Plan, which will cease to exist as a plan maintained by Peoples Bank and will be renamed the Peoples United Financial Directors Equity Compensation Plan. Awards will be made in Peoples United Financial common stock rather than Peoples Bank common stock. Non-employee directors will receive compensation under the Peoples United Financial Directors Equity Compensation Plan. Under the Peoples United Financial Directors Equity Compensation Plan, each director who is not an employee will be granted an annual award of shares of common stock based on a target dollar value of $95,000 immediately following each annual meeting of stockholders. A person appointed as a director between annual meetings is eligible for a full or partial grant of an annual award at the time of his or her appointment, in the discretion of the Compensation and Nominating Committee.
Cash dividends payable with respect to shares of common stock issued to directors pursuant to the Peoples United Financial Directors Equity Compensation Plan will be paid in the same amount and at the same time as dividends are paid to stockholders generally. Stock dividends, stock splits and similar transactions will have the same effect on shares of common stock issued pursuant to the Peoples United Financial Directors Equity Compensation Plan as on all other shares of common stock outstanding.
Shares of common stock issued pursuant to the Peoples United Financial Directors Equity Compensation Plan will generally not be transferable by a director until the third anniversary of the grant date or, if earlier, at his or her cessation of service as a Peoples United Financial director. In the event of a directors death, shares of common stock held in his or her name will be issued to his or her beneficiary. All transfer restrictions will lapse upon a change in control, as such term is defined in the plan.
Directors of Peoples United Financial may also be entitled to participate in certain stock benefit plans established by Peoples United Financial. See Management of Peoples BankFuture Benefit Plans .
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Directors
Composition of the Board . The Charter and Bylaws of Peoples Bank provide for the election of directors by the stockholders of Peoples Bank and for the division of the Board of Directors into three classes of directors as nearly equal in number as reasonably possible. The terms of office of the members of one class expire and successors are elected for a three-year term at each annual meeting of stockholders. Following the conversion, beginning at the 2007 annual meeting of the stockholders of Peoples Bank, Peoples United Financial, as Peoples Banks sole stockholder, will elect all of Peoples Banks directors. Peoples Banks Bylaws provide that there will be between five and 15 members of the Board of Directors, as fixed by resolution of the Board of Directors. The Board of Directors has resolved that there will be ten members of the Board.
Who Peoples Banks Directors Are . The following table states Peoples Banks directors names, their ages as of December 31, 2006, their positions and the years when they began serving as directors:
Name |
Age |
Director
Since |
Term
Expires |
Positions Held |
||||
Collin P. Baron |
59 | 2001 | 2008 | Director | ||||
George P. Carter |
69 | 1976 | 2009 | Vice Chairman of the Board and Lead Director | ||||
Jerry Franklin |
60 | 1997 | 2009 | Director | ||||
Eunice S. Groark |
68 | 1995 | 2009 | Director | ||||
Janet M. Hansen |
64 | 2004 | 2007 | Director | ||||
Richard M. Hoyt |
64 | 2002 | 2008 | Director | ||||
John A. Klein |
57 | 1999 | 2008 | President, Chief Executive Officer and Chairman of the Board | ||||
Jeremiah J. Lowney, Jr. |
70 | 1998 | 2007 | Director | ||||
Jack E. McGregor |
72 | 1989 | 2007 | Director | ||||
James A. Thomas |
67 | 1997 | 2009 | Director |
Directors Backgrounds . The business experience of each of Peoples Banks directors is as follows:
Collin P. Baron is a member of the law firm of Pullman & Comley, LLC. He has been affiliated with the firm since 1973. Mr. Baron became a director of Peoples Bank in 2001 and is a Trustee of Peoples Mutual Holdings. He is Chairman of the Treasury and Finance Committee and serves as a member of the Executive and Loan Review Committees.
George P. Carter is the President of Connecticut Foods, Inc. Mr. Carter was first elected to the Board in 1976 and is a Trustee of Peoples Mutual Holdings. He is Vice Chairman and Lead Director of the Board and serves as Chairman of Peoples Audit and Executive Committees and as a member of Peoples Banks Operational Risk, Human Resources and Loan Review Committees. Mr. Carter also serves as a director of Bridgeport Hospital.
Jerry Franklin is the President and Chief Executive Officer of Connecticut Public Broadcasting Inc., a position he has held since 1985. Mr. Franklin was elected to the Board of Directors in 1997 and is a member of Peoples Banks Audit, Executive, and Human Resources Committees. Mr. Franklin also serves as Chairman of the Loan Review Committee. He also serves as a Trustee of Peoples Mutual Holdings.
Eunice S. Groark , attorney, served as Lieutenant Governor of the State of Connecticut from 1991 until January 1995. She currently serves as a Trustee of the Phoenix Edge Series Funds. Mrs. Groark was first elected to the Board of Directors in 1995. She is Chairman of the Trust Committee and is a member of the Executive, Treasury and Finance, and Operational Risk Committees.
Janet M. Hansen was employed as Executive Vice President of Aquarion Company, a diversified water management company, from 1995 until her retirement in March 2005. Mrs. Hansen served as Aquarion Companys Chief Financial Officer from 1992 through 1999. She was President and Chief Executive Officer of Aquarion Companys principal operating subsidiary, Aquarion Water Company from 2000 to 2003. Ms. Hansen continues to serve as a director of Aquarion Water Company of Connecticut. Mrs. Hansen became a member of Peoples Banks Board of Directors in February 2004. She is a member of the Audit, Operational Risk and Trust Committees. She also serves on the Board of Directors of Bridgeport Hospital and of the University of Connecticut Foundation.
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Richard M. Hoyt is President and Chief Executive Officer of Chapin & Bangs Co., a steel service center, and is Chairman and Chief Executive Officer of Lindquist Steels, Inc., a distributor of tool steel. He has occupied each of these positions for more than five years. Mr. Hoyt also serves as a director of Bridgeport Hospital. Mr. Hoyt, who is also a Trustee of Peoples Mutual Holdings, was first elected as a director of Peoples Bank in 2002. Mr. Hoyt is a member of the Audit, Treasury and Finance, and Trust Committees.
John A. Klein became President of Peoples Bank on June 1, 1999, Chief Executive Officer on October 1, 1999 and Chairman of the Board of Directors on January 1, 2000. Mr. Klein has served in a variety of capacities since beginning his career at Peoples Bank in 1971. Mr. Klein first became a member of Peoples Banks Board in 1999. He is a member of the Executive, Treasury and Finance, and Operational Risk Committees. Mr. Klein also serves as a Trustee of Peoples Mutual Holdings.
Jeremiah J. Lowney, Jr. , D.D.S. is an orthodontist whose practice has been based in the Norwich, Connecticut area for more than 30 years. Dr. Lowney has also served since 1982 as the President of the Haitian Health Foundation, a health care facility that provides humanitarian health services in Haiti. Dr. Lowney served as a director of Norwich Financial Corp. and The Norwich Savings Society until the merger of those companies into Peoples Bank in February 1998, when he became a director of Peoples Bank. Dr. Lowney is a member of the Audit, Loan Review, and Operational Risk Committees.
Jack E. McGregor is co-Chairman of the Board of Get Hooked! LLC, an investor group that owns the Bridgeport Bluefish minor league baseball team. Mr. McGregor is also a managing member of the investment firms of Westchester Baseball, LLC and Black Rock Investors, LLC, and is of counsel to the law firm of Cohen and Wolf, P.C. Mr. McGregor was Chairman of the Board of Aquarion Company until October 1, 1996. Mr. McGregor served as Aquarion Companys President from 1987 through 1995 and Chief Executive Officer from 1990 to 1995. Mr. McGregor retired as a director of Aquarion Company on January 10, 2000. He continues to serve as a director of Aquarion Water Company of Connecticut, and CDG Technology, Inc., and as a member of the Advisory Board of the St. Lawrence Seaway Development Corporation. Mr. McGregor has been a director of Peoples Bank since 1989. He is Chairman of the Operational Risk Committee, and serves as a member of the Executive, Treasury and Finance, and Loan Review Committees.
James A. Thomas served as Associate Dean at Yale Law School from 1969 until his retirement in 2004, and served as Master of Saybrook College of Yale University from 1990 to 1996. Mr. Thomas, who serves as Chairman of the Board of Trustees of Peoples Mutual Holdings, was elected to the Board of Directors of Peoples Bank in 1997. He serves as Chairman of the Human Resources Committee and is a member of the Executive, Loan Review and Trust Committees. Mr. Thomas is also a director of UIL Holdings Corporation, the holding company for the United Illuminating Company.
Executive Officers
Peoples Banks executive officers serve at the discretion of the Board of Directors of Peoples Bank. However, one of Peoples Banks officers does have an employment agreement, as further described under Potential Payments Upon Termination or Change in ControlEmployment Agreement below. The name, principal occupation and business experience for at least the last five years of each executive officer of Peoples Bank is set forth in the table below as of December 31, 2006. For purposes of this table, Peoples Bank includes the present stock-form bank as well as its predecessor mutual-form bank prior to its reorganization in 1988.
Name |
Age |
Held
Current Position Since |
With
Peoples Bank Since |
Positions Held |
||||
Jacinta A. Coleman |
58 | 2000 | 2000 | Executive Vice President and Chief Information Officer | ||||
Robert R. DAmore |
53 | 2000 | 1981 | Executive Vice President, Marketing and Regional Banking | ||||
Brian F. Dreyer |
60 | 2001 | 1991 | Executive Vice President, Commercial Banking | ||||
Bryan J. Huebner |
56 | 1996 | 1975 | Executive Vice President, Consumer Financial Services | ||||
John A. Klein |
57 | 2000 | 1971 | President, Chief Executive Officer and Chairman of the Board | ||||
William T. Kosturko |
57 | 1994 | 1991 | Executive Vice President and General Counsel | ||||
Henry R. Mandel |
62 | 2001 | 1998 | Executive Vice President, Organization Effectiveness | ||||
Philip R. Sherringham |
53 | 2003 | 2003 | Executive Vice President and Chief Financial Officer | ||||
Mark K. Vitelli |
44 | 1999 | 1984 | Executive Vice President, Direct Banking and Operations |
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Executive Officers Backgrounds. The business experience of each of Peoples Banks executive officers is set forth below. Except as otherwise indicated, each executive officer has held his or her current position for the past five years.
Jacinta A. Coleman has been an Executive Vice President and Chief Information Officer since 2000.
Robert R. DAmore has been an Executive Vice President (Marketing and Regional Banking) since 2000. Mr. DAmore has served in various capacities for Peoples Bank since 1981.
Brian F. Dreyer has been an Executive Vice President (Commercial Banking) since 2001. Mr. Dreyer has served in various capacities for Peoples Bank since 1991.
Bryan J. Huebner has been an Executive Vice President (Consumer Financial Services) since 1996. Mr. Huebner has served in various capacities for Peoples Bank since 1975.
John A. Klein became President of Peoples Bank on June 1, 1999, Chief Executive Officer on October 1, 1999 and Chairman of the Board of Directors on January 1, 2000. Mr. Klein has served in a variety of capacities since beginning his career at Peoples Bank in 1971. Mr. Klein first became a member of Peoples Banks Board in 1999. He is a member of the Executive, Treasury and Finance, and Operational Risk Committees. Mr. Klein also serves as a Trustee of Peoples Mutual Holdings.
William T. Kosturko has been an Executive Vice President since 1994 and has been General Counsel since 1991.
Henry R. Mandel has been an Executive Vice President (Organization Effectiveness) since 2001. Mr. Mandel has served in various capacities for Peoples since 1998.
Philip R. Sherringham has been an Executive Vice President and Chief Financial Officer since 2003. Prior to joining Peoples Bank, Mr. Sherringham was an Executive Vice President and Chief Financial Officer at United California Bank in Los Angeles. He joined United California Banks predecessor, Sanwa Bank California in 1993.
Mark K. Vitelli has been an Executive Vice President (Direct Banking and Operations) since 1999. Mr. Vitelli has served in various capacities for Peoples Bank since 1984.
Meetings of the Board of Directors and its Committees
During 2006, Peoples Banks Board of Directors held 21 meetings. No director attended fewer than 75% of the aggregate of (a) the total number of meetings of the Board of Directors held while he or she was a director and (b) the total number of meetings held by all committees of the Board on which he or she served. The Board of Directors encourages all Board members to attend the Annual Meeting of Stockholders. All ten individuals serving as directors at the time of the 2006 Annual Meeting attended that meeting.
Board of Directors Committees
Peoples Bank has seven standing committees: the Audit Committee, the Executive Committee, the Human Resources Committee (which performs the functions of a nominating committee and a compensation committee), the Loan Review Committee, the Operational Risk Committee, the Treasury and Finance Committee and the Trust Committee.
Audit Committee . The Audit Committee met 12 times during 2006. The Audit Committee was established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934. Each member of the Audit Committee is independent, as that term is defined in Rule 4200(a)(15) of the listing standards of the Nasdaq Stock Market. Each member of the Audit Committee also satisfies the more stringent definition of independence required for members of audit committees generally, as set forth in Rule 4350(d)(2)(A) of the listing standards of the Nasdaq Stock Market. The members of the Audit Committee are George P. Carter (Chairman), Jerry Franklin, Janet M. Hansen, Richard M. Hoyt and Jeremiah J. Lowney, Jr. The Audit Committee is responsible for monitoring the accounting practices and internal controls of Peoples Bank, including the supervision of an annual audit of Peoples Banks financial statements by independent registered public accountants. Peoples Banks Board of Directors has adopted a written charter for the Audit Committee, including provisions recognizing the specific audit committee responsibilities imposed by the Sarbanes-Oxley Act of 2002, Securities and
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Exchange Commission rules implementing that Act, and the listing standards of the Nasdaq Stock Market. A copy of the charter was attached as Exhibit A to Peoples Banks Proxy Statement for the 2006 Annual Meeting and is also available on Peoples Banks website at www.peoples.com.
Executive Committee. The members of Peoples Banks Executive Committee are George P. Carter (Chairman), Collin P. Baron, Jerry Franklin, Eunice S. Groark, John A. Klein, Jack E. McGregor and James A. Thomas. The Executive Committee may formulate and recommend to the Board of Directors for approval general policies regarding the management and affairs of Peoples Bank, and may perform such other functions as are provided in the Bylaws of Peoples Bank or as directed by the Board of Directors. The Executive Committee did not meet during 2006.
Human Resources Committee. The Human Resources Committee, which is comprised of James A. Thomas (Chairman), George P. Carter, and Jerry Franklin, met 26 times during 2006. Each member of the Committee is independent, as that term is defined in Rule 4200(a)(15) of the listing standards of the Nasdaq Stock Market. The Human Resources Committee is responsible for making policy decisions concerning the compensation and benefit programs maintained by Peoples Bank, and conducts periodic performance reviews of the senior and executive officers of Peoples Bank. The Human Resources Committee also recommends nominees for election as directors to the full Board of Directors. A current copy of the Human Resources Committee charter is available on Peoples Banks website at www.peoples.com.
Loan Review Committee. The members of Peoples Banks Loan Review Committee are Jerry Franklin (Chairman), Collin P. Baron, George P. Carter, Jeremiah J. Lowney, Jr., Jack E. McGregor and James A. Thomas. The Loan Review Committee, which met 23 times during 2006, is charged with reviewing and approving strategies, planning and procedures concerning Peoples Banks commercial, commercial real estate, consumer and community lending activities, reviewing lending activities of Peoples Bank and, where appropriate, approving loans brought before the Committee for approval.
Operational Risk Committee. The Operational Risk Committee is responsible for formulating a bank-wide framework to manage operational risk as a distinct type of potential risk to the safety and soundness of Peoples Bank. The Operational Risk Committee receives and evaluates information from both internal and external sources relating to perceived operational risks and to Peoples Banks ongoing efforts to manage such risks, and makes reports and recommendations to the full Board as appropriate with respect to operational risk issues. The Operational Risk Committee, which is comprised of Jack E. McGregor (Chairman), George P. Carter, Eunice S. Groark, Janet M. Hansen, John A. Klein and Jeremiah J. Lowney, Jr., met six times in 2006.
Treasury and Finance Committee. Peoples Banks Treasury and Finance Committee is responsible for approving policies and strategies for, and reviewing the investments and financial activities of, Peoples Banks Investments and Treasury group. The Treasury and Finance Committee is also charged with reviewing and approving Peoples Banks asset/liability strategies, including wholesale funding, and interest rate risk management activities. In addition, the Treasury and Finance Committee is responsible for monitoring Peoples Banks bank-owned life insurance program, including oversight of the programs investment performance, risk management and internal controls. The Treasury and Finance Committee met eight times during 2006. Collin P. Baron is the Chairman of the Treasury and Finance Committee; its other members are Eunice S. Groark, Richard M. Hoyt, John A. Klein, and Jack E. McGregor.
Trust Committee. Eunice S. Groark is the Chairman of Peoples Banks Trust Committee. Janet M. Hansen, Richard M. Hoyt and James A. Thomas are also members of the Trust Committee, which met four times during 2006. The Trust Committee is responsible for making policy for, and
Compensation of Directors and Executive Officers
This section includes information about the director compensation and executive compensation practices of Peoples Bank. To date, Peoples United Financial has not paid any separate compensation to its directors or executive officers. We do not presently expect to pay separate compensation to our executive officers (who are also officers of Peoples Bank) in the future. We do expect to pay separate compensation to our directors in the future, as discussed under the heading Management of Peoples United Financial Director and Executive Officer Compensation.
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Compensation Discussion and Analysis
To date, Peoples Bank has compensated its executive officers for their services. Peoples Bank expects to continue this practice. Peoples United Financial will not pay any additional or separate compensation until we have a business reason to establish separate compensation programs; however, equity-based awards made as part of Peoples Bank executive compensation will be made in Peoples United Financial common stock rather than Peoples Bank common stock.
This discussion is focused specifically on the compensation of the five executive officers named in the Summary Compensation Table which appears later in this section. These five executives are referred to in this discussion as the named executive officers, or NEOs.
Overview. The Human Resources Committee of the Peoples Bank Board of Directors is responsible for overseeing and making recommendations to the independent members of the Board of Directors with respect to the compensation of the named executive officers, including the Chief Executive Officer. As part of these duties, the Committee conducts an annual performance review of the Chief Executive Officer and, in consultation with the Chief Executive Officer, reviews the performance of each other named executive officer. The independent members of the Board of Directors have ultimate authority to approve the compensation of all named executive officers, including the Chief Executive Officer.
The Human Resources Committee also reviews, oversees and approves the management and implementation of Peoples Banks human resources policies and its principal employee benefit plans. The Committee may undertake other duties that are related to Peoples Banks human resources function. The Committee has a formal charter, which is available on-line under the heading Investor Relations Corporate Governance Board and Committee Structure Human Resources Committee at www.peoples.com. The charter describes the Committees scope of authority and its duties.
The Human Resources Committee consists of three directors, all of whom are independent within the meaning of Rule 4200 of the Nasdaq Stock Market. The Board of Directors evaluates the independence of Committee members annually, using the standards contained in Rule 4200. This evaluation, and the determination that each member of the Committee is independent, was most recently made in February 2006.
Executive Participation in Committee Discussions. The executive officers who participate in the Human Resources Committees compensation-setting process are the Chief Executive Officer and the Executive Vice President for the Organization Effectiveness Division. The Executive Vice President and General Counsel acts as Secretary to the Committee. The Chief Financial Officer also participates to a limited extent in connection with the establishment of financially-driven performance goals. Executive participation is meant to provide the Human Resources Committee with input regarding Peoples Banks compensation philosophy, process and decisions. In addition to providing factual information such as company-wide performance on relevant measures, these executives articulate managements views on current compensation programs and processes, recommend relevant performance measures to be used for future awards, and otherwise supply information to assist the Human Resources Committee. The Chief Executive Officer also provides information about individual performance assessments for the other named executive officers, and expresses to the Human Resources Committee his view on the appropriate levels of compensation for the other named executive officers for the ensuing year.
Executives participate in Committee discussions purely in an informational and advisory capacity, but have no vote in the Committees decision-making process. The Chief Executive Officer does not attend those portions of Human Resources Committee meetings during which his performance is evaluated or his compensation is being determined. No executive officer other than the Chief Executive Officer attends those portions of Human Resources Committee meetings during which the performance of the other named executive officers is evaluated or their compensation is being determined.
Use of Consultants. The Human Resources Committee engages an independent compensation consultant to assist it in the annual compensation process for named executive officers. The consultant, which is retained by and reports to the Human Resources Committee, works extensively with the Chief Executive Officer and management in performing its duties for the Committee. The consultant provides expertise and information about competitive trends in the employment marketplace, including established and emerging compensation practices at other companies. The consultant also provides survey data, and assists in assembling relevant comparison groups for various purposes and establishing benchmarks for particular components of core compensation from the survey and comparison group data. The Committee engaged the firm of Towers Perrin to serve as its independent compensation consultant during 2006.
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Management also engages one or more consultants to provide additional information, advice, and professional services related to other aspects of the compensation function. These consultants work primarily with management but may also communicate directly with the Human Resources Committee. The consultant engaged to assist the Human Resources Committee in the annual compensation process may also be engaged to perform some of these additional services.
Compensation Objectives. Broadly speaking, the overall goals of Peoples Banks executive compensation programs are to attract, motivate, retain, and pay key executives (including the NEOs) for performance. The methods used to achieve these goals are strongly influenced by the compensation and employment practices of Peoples Banks competitors within the financial services industry, and elsewhere in the marketplace, for executive talent. Other considerations include each named executive officers individual performance as well as the encouragement of behaviors directed towards attainment of corporate goals, not all of which are financial in nature or capable of being quantified.
The compensation program is designed to reward the named executive officers based on their level of assigned management responsibilities, individual performance levels, and individual value in the job marketplace. At-risk components of compensation reward the NEOs, including the Chief Executive Officer, based primarily on company-wide performance while also considering their performance against individually-set performance objectives. The Chief Executive Officers individual performance objectives are the same as the strategic and financial performance objectives of Peoples Bank as a whole. For the other named executive officers, individual performance objectives are set by the Chief Executive Officer and are reviewed by the Human Resources Committee. Equity-based components of compensation provide an incentive for executive behaviors that are aligned with the interests of stockholders. The retirement component of the compensation program rewards the named executive officers for their long-term contributions to the organization.
Components of Compensation. Peoples Bank uses many different building blocks as part of its overall executive compensation program. Some are paid in cash, while others are based on Peoples Bank common stock. The principal components of executive compensation packages consist of:
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Base salary |
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Annual cash bonus (also referred to as the Short-Term Incentive Plan (STIP) Bonus) |
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Long-term incentives |
Long-term incentives are awarded under the Peoples Bank 1998 Long-Term Incentive Plan, or LTIP. Awards under the LTIP are made in one of three forms:
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Long-term cash bonus (also referred to as the LTIP Bonus) |
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Stock options |
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Restricted stock grants |
LTIP Bonuses are paid out at the end of a three-year performance cycle. Equity-based awards under the LTIP (stock options and restricted stock grants) vest incrementally over time, and in the case of stock options have value only if the market price of Peoples Bank common stock increases after the awards are made.
NEOs receive a variety of fringe benefits as compensation. Some of these are available to a broad range of employees. Others are limited to senior and executive officers. Fringe benefits for the named executive officers are:
Broad-based fringe benefits :
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Medical, dental and vision coverage (employee shares cost) |
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Pre-tax health and dependent care spending accounts |
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Adoption assistance |
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Employee referral services |
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Group life insurance coverage (capped at $50,000 for NEOs) |
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Long-term disability insurance coverage equal to 50% of base salary |
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Senior and executive officers only :
| Tax preparation services |
| Financial planning services |
| Annual $500 reimbursement for health club membership |
| Company-supplied automobile (includes operating expenses) |
| Supplemental long-term disability insurance coverage |
| Home security services |
Peoples Bank also bears the expense of other club memberships for named executive officers, if the membership is used primarily for business-related purposes.
Retirement benefits also represent an important source of compensation to the named executive officers. As with fringe benefits, some forms of retirement benefits are available to a broad range of employees, while others are limited to senior and executive officers. Retirement benefits are provided through these programs (tax-qualified plans are marked with an asterisk):
Broad-based retirement programs :
| Peoples Bank Employees Retirement Plan* |
| Peoples Bank 401(k) Employee Savings Plan* |
| Retiree health benefits (retiree shares cost) |
Senior and executive officers only :
| The Peoples Bank Cap Excess Plan |
| Peoples Bank Enhanced Senior Pension Plan |
| Peoples Bank Supplemental Savings Plan |
Certain executive officers only :
| Peoples Bank Deferred Compensation Plan for Certain Executive Officers |
Additional information about the Long-Term Incentive Plan can be found later in this section under the heading 1988 Long-Term Incentive Plan ; for the Deferred Compensation Plan for Certain Executive Officers under the heading Deferred Compensation Plan , and for the Employees Retirement Plan, the 401(k) Employee Savings Plan, the Cap Excess Plan, the Enhanced Senior Pension Plan, and the Supplemental Savings Plan, in the discussion following the table headed Pension Benefits.
In addition to the components of executive compensation described above, Mr. Klein is a party to an employment agreement with Peoples Bank. If Mr. Kleins employment with Peoples Bank continues through December 31, 2014, he will not be entitled to any payments or benefits other than those provided through the various executive compensation plans and programs described above. If Mr. Kleins employment with Peoples Bank terminates before that date, he may become entitled to a variety of additional payments and benefits depending on when and for what reason his employment was terminated. These include payments designed to equal Mr. Kleins projected base salary and annual cash bonus for a specified period, as well as matching contributions that would have been made on Mr. Kleins behalf in the 401(k) Employee Savings Plan and the Supplemental Savings Plan during that same period. In addition, Mr. Klein may become entitled to extra retirement benefits in an amount which, when added to the benefits he will actually receive under the Employees Retirement Plan, the Cap Excess Plan and the Enhanced Senior Pension Plan, will cause him to receive a total benefit equal to what he would have received if he had remained employed by Peoples Bank for a specified period of time. See Potential Payments Upon Termination or Change in Control for information about potential payments to Mr. Klein upon termination of his employment with Peoples Bank.
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The term of Mr. Kleins employment agreement was designed to give Peoples Bank the ability to retain Mr. Kleins services until the end of the year in which he reaches age 65, which is considered his normal retirement age. Contract provisions requiring payment of additional post-employment benefits under certain conditions were considered to be appropriate in view of Mr. Kleins position with Peoples Bank, his prospects for securing near-term re-employment in a comparable position should his employment with Peoples Bank be terminated, and common practices in the marketplace for executive talent at the time he entered into the agreement.
Assembling the Components. The Human Resources Committee analyzes the level and relative mix of each of the principal components of the compensation packages for named executive officers on an annual basis. The Chief Executive Officer also makes recommendations to the Committee relating to compensation to be paid to the named executive officers other than himself. Based on this analysis and (where appropriate) the Chief Executive Officers recommendations, the Human Resources Committee makes annual recommendations to the independent members of the Board of Directors about each named executive officers compensation package to the extent derived from base salary, STIP Bonus and long-term incentives. This portion of executive compensation is also called core compensation.
Decisions about core compensation are made without reference to other elements of compensation (i.e., fringe benefits and retirement benefits). With one exception, fringe benefits and retirement benefits are not specifically tailored for the named executive officers, and are provided under programs that provide similar benefits to non-executive employees of Peoples Bank. The Deferred Compensation Plan for Certain Executive Officers is an exception to this general rule. As noted in the section entitled Deferred Compensation Plan , this plan was created after enactment of the Sarbanes-Oxley Act of 2002 and the resulting termination of named executive officers participation in the split-dollar life insurance program.
The Human Resources Committee reviews the other components of executive compensation (fringe benefits and retirement benefits), but does not necessarily consider changes to those components on an annual basis. Changes to the level or types of benefits within these categories, including considerations relating to the addition or elimination of benefits and plan design changes, are made by the Human Resources Committee on an aggregate basis with respect to the group of employees entitled to those benefits, and not with reference to a particular named executive officers compensation package. Decisions about these components of compensation are made without reference to the named executive officers core compensation packages, as they involve issues of more general application and often include consideration of trends in the industry or in the employment marketplace.
The Human Resources Committee seeks to create what it believes is the best mix of the principal components of core compensation (base salary; STIP Bonus; long-term incentives) in delivering the named executive officers core compensation. These components are evaluated in relation to benchmark data derived from information reported in publicly-available proxy statements or from market survey data. The companies which are the source of the benchmark data may be different for the Chief Executive Officer and for the other named executive officers, due to differences in the availability of reliable data for comparable executive positions below the Chief Executive Officer level. As discussed below under the heading Committee Actions Affecting 2006 Compensation , the Committee uses the benchmark data as a primary reference point when setting the Chief Executive Officers compensation, but as a secondary reference point when setting the compensation for the other named executive officers.
For each named executive officer, a significant percentage of core compensation is at-risk, meaning that it will generally be earned or increase in value when Peoples Bank or the named executive officer is successful in ways that are aligned with and support shareholder interests. At-risk elements of compensation may have no value or may be worth less than the target value if applicable performance goals are not fully attained or the price of Peoples Bank common stock declines or remains flat after the date the at-risk compensation was awarded. At-risk compensation includes all components of core compensation other than base salary.
Assembly of the core compensation package for each named executive officer begins with the establishment of target ranges for the separate elements making up each named executive officers core compensation package. The Human Resources Committee establishes these target ranges in consultation with members of executive management.
The Human Resources Committee next determines the base salary component for each named executive officer, including the Chief Executive Officer. The Human Resources Committee reviews base salary information compiled by management from the sources described above, then formulates a recommendation for the base salary component of each named executive officers compensation in relation to that information. The target base salary for the Chief Executive Officer
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is determined using the percentile target range established for the elements of his core compensation and for each other named executive officer based on target ranges for each element of core compensation. The target base salary for each named executive officer may then be adjusted on an individual basis to reflect a variety of factors. Deviations from the targets typically reflect each executives length of service, experience, value to the organization, and expertise in his or her field of responsibility. A number of these factors are subjective in nature.
The Human Resources Committee follows a similar process for each other element of core compensation (i.e., STIP Bonus and long-term incentives) using the target ranges established for the elements of core compensation.
The target amount of the STIP Bonus award and the target amount of the LTIP Bonus award are each expressed as a percentage of the executives base salary for the ensuing year. The assumed value of stock options for purposes of assembling the compensation package is determined using the Black-Scholes option valuation model, and the assumed value of restricted stock grants is the market value of Peoples Bank stock, in each case determined several months before the date of grant due to the extended lead times involved in the annual compensation setting process. For planning purposes, the market value of Peoples Bank stock may be an average value over a period of several months rather than a point-in-time value. The relative weighting of stock options, restricted stock grants and targeted LTIP Bonus awards is determined with reference to the competitive data made available to the Human Resources Committee. In each case, the Committee may decide to depart from the target levels so established, for the same reasons as discussed with respect to base salary or because of significant changes in the value of Peoples Bank stock since the valuation dates used to develop recommendations for equity-based awards.
The annual process of assembling target compensation packages for the named executive officers is forward-looking in nature. All at-risk components are based on the expectation that target levels of performance will be achieved over the time horizon that is relevant to each at-risk component. Actual performance over the applicable measurement period may exceed or fall short of the targets, and Peoples Banks stock may be worth more or less in the future compared to valuations used in formulating equity-based awards. This means that when at-risk compensation is actually received by a named executive officer, it may be worth more or less to the executive than was expected at the time the award was initially made. This applies to forms of at-risk compensation paid out in cash (STIP Bonus and LTIP Bonus) or realized in the stock market from the exercise of stock options or sale of shares of restricted stock after vesting.
The value (or lack of value) realized by named executive officers from at-risk awards granted in prior years is not taken into account by the Human Resources Committee in the process of setting compensation for the current year. The Committee believes that doing so would be inconsistent with the underlying reasons for the use of at-risk compensation. If current year awards were increased to make up for below-target performance in prior years or decreased to account for above-target performance in prior years, the Committee would be diluting or eliminating the link between performance and reward. Named executive officers would have little incentive to improve performance if it meant decreased target awards in the future, or if the negative consequences for poor performance would be cushioned by increases in the target value of future awards. In addition, the value realized by a named executive officer from equity-based awards granted in prior periods depends in large measure on when the executive decides to realize that value by exercising options or by selling vested shares of restricted stock. The Committee does not believe it would be appropriate to adjust future grants in light of these types of individual decisions.
The objective of the annual compensation-setting process is to establish the appropriate level and mix of compensation for each named executive officer, in reference to the factors discussed above. Therefore, the Human Resources Committee believes that the accounting treatment of any given element of core compensation is not a relevant consideration in the design and compensation-setting process.
For the same reasons, the Human Resources Committee considers, but does not give undue weight to, the tax treatment of each component of compensation. Under Section 162(m) of the Internal Revenue Code, annual compensation paid to a named executive officer is not deductible if it exceeds $1 million unless it qualifies as performance-based compensation as defined in the tax code and related tax regulations. Base salary and compensation derived from restricted stock awards are not forms of performance-based compensation. Many fringe benefits also do not qualify as performance-based compensation. Stock options are treated as a form of performance-based compensation because their value is entirely dependent on the performance of Peoples Banks stock in the market after the date the option is granted. Short-term bonus and long-term cash bonus awards may qualify as forms of performance-based compensation under the income tax regulations.
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The Human Resources Committee understands that Peoples Bank will not be able to deduct a certain portion of the compensation paid to the named executive officers if it does not qualify as performance-based compensation for tax purposes and exceeds the Section 162(m) limit. The Committee further understands that the absence of this deduction will increase the effective cost of such compensation. The Committee believes this represents an additional cost of doing business that should be borne by the organization as a result of non-tax decisions regarding the appropriate level and mix of compensation for each named executive officer.
Linking Company Performance to Incentive Plan Funding. Each year, the Human Resources Committee establishes one or more prospective company-wide performance targets for use in making funding determinations that affect payment of STIP Bonuses and LTIP Bonuses. Actual performance is evaluated against the target performance measures after the close of the year to which the measures apply. The results of that comparison are used to calculate the level of funding available to pay STIP Bonuses and to allocate funding for future payouts of LTIP Bonuses awarded for periods including that year.
For purposes of the STIP Bonus, each named executive officer other than the Chief Executive Officer is also evaluated on several individual performance measures which are set at the beginning of the year and relate to the strategic business objectives for the ensuing year. Each named executive officer has a unique set of individual performance measures. The degree to which a named executive officer satisfies these individualized measures is taken into account in determining the amount to be paid out to that executive as a STIP Bonus. No individual performance measures are set for the Chief Executive Officer; his performance is measured by the attainment of Peoples Banks performance, strategic and financial objectives for the year.
The organizations target performance measures are objective measures that reflect Peoples Banks operating results for the year for which the target is established. The Committee has historically sought to ensure that attainment of the target performance measure is challenging yet achievable. The Human Resources Committee has historically established a single performance target in relation to earnings per share, or EPS. The Committee seeks to establish a target based on earnings from sources that are reasonably predictable and stable. Therefore, the Committee often specifies a target EPS measure that is based on earnings from continuing operations. After the conclusion of the fiscal year, the Chief Executive Officer may suggest that the Committee consider additional adjustments to earnings from continuing operations which are designed to eliminate the effects of extraordinary or unusual events. Some events for which these kinds of adjustments are made do recur from time to time, but are nevertheless considered to be extraneous to the conduct of normal day-to-day banking business. The Committee is not required to adopt the Chief Executive Officers recommendations. For any given year, the Human Resources Committee may decide to establish performance measures in addition to or in place of an EPS-based measure.
For purposes of determining the level of funding available to pay STIP Bonuses, actual performance for the relevant year is compared to the target performance measure(s) without reference to any external factors. If actual performance falls below the targeted level but is at least 80% of the targeted level, STIP Bonuses may be paid based on a reduced level of available funding.
The process is somewhat different for the LTIP Bonus. The actual amount paid out pursuant to an LTIP Bonus award is determined over a three-year performance cycle. A new performance cycle begins at the start of each calendar year. Thus, Peoples Banks performance for a given year will affect three LTIP Bonus awards: one which was made at the beginning of the year for which performance is being evaluated, one which was made at the beginning of the year before that, and one which was made at the beginning of the second year before that. Amounts allocated for payout with respect to each year in a given three-year performance cycle will be paid out to the executive after the end of the third year. For example, after 2006 results have been determined, amounts will be allocated for eventual payout as LTIP Bonus for the 2006 portion of the three-year performance cycles covering the periods of 2006-2008; 2005-2007; and 2004-2006. In early 2007, the named executive officer will receive a payout of all LTIP Bonus amounts allocated to him over the entire 2004-2006 performance cycle. LTIP Bonus amounts allocated to the named executive officer for the two performance cycles ending in later years will not be paid out until all years in the cycle have been completed.
Half of the amount allocated in a given year for each named executive officers LTIP Bonus awards depends on actual performance compared to the target performance measure(s) for that year, without regard to external factors. This process is similar to that which is followed for the STIP Bonus funding determination.
The other half of the amount allocated for each named executive officers LTIP Bonus award in a given year is determined by reference to the target performance measure compared to the performance of a peer group of financial
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institutions on the same performance measure. The peer group is designated by the Human Resources Committee at the beginning of the year for which the target performance measure is set. The composition of the peer group is determined by the Committee with input from executive management and the Committees compensation consultant, and may be updated from time to time as necessary to reflect changes (such as mergers) affecting the companies included in the group at the time the group was identified. When EPS is used as the performance measure, the Committee has typically compared the compounded annual growth rate of the target EPS measure for the year in question to the compounded annual growth rate in the median EPS for the peer group.
As is the case for the STIP Bonus, if actual performance on either measure falls below the targeted level but is at least 80% of the targeted level, amounts may be allocated for payment of LTIP Bonuses based on a reduced level of available funding.
The Human Resources Committee has historically used the same target performance measure both for purposes of calculating the STIP Bonus funding levels, and for purposes of calculating the LTIP Bonus allocation for the applicable year. The Committee is not required to use the same performance measure(s) for both of these purposes.
Timing of Equity Grants. Stock option grants and restricted stock grants are effective as of the grant date, and options are priced at fair market value on the date of grant. The grant date is the date the equity awards are approved for issuance by the independent members of the Board of Directors, acting on recommendations made to them by the Human Resources Committee. The Long-Term Incentive Plan defines fair market value as the average of the high and low price of Peoples Bank stock on the grant date or, if the grant date is not a day when the stock market is open, on the most recent day for which trading data is reported by the market. Equity grants are only made to named executive officers during the normal annual compensation-setting cycle except under circumstances discussed under the heading Exceptions to Usual Procedures .
Stock Ownership Guidelines. Peoples Bank has not established any formal policies or guidelines addressing expected levels of stock ownership by the named executive officers.
Exceptions to Usual Procedures. The Human Resources Committee may from time to time recommend to the independent members of the Board of Directors that they approve the payment of special cash compensation or the grant of special equity-based awards to one or more named executive officers in addition to payments and grants approved during the normal annual compensation-setting cycle. The Committee might make such a recommendation if it believes it would be appropriate to reward one or more named executive officers in recognition of contributions to a particular project, or in response to competitive and other factors that were not addressed during the normal annual compensation-setting cycle. On occasion, special payments are contingent on some period of future service by the named executive officer. All equity grants are subject to future vesting contingencies, which may be different from and shorter than the vesting periods that apply to grants made during the normal annual compensation-setting cycle.
The Committee will make off-cycle compensation decisions and recommendations whenever a current employee is promoted to executive officer status, or an executive officer is hired. The Committee may depart from the compensation guidelines it would normally follow for executives in the case of outside hires.
When the Human Resources Committee is expected to consider recommending approval of equity-based grants outside the normal annual compensation-setting cycle, the Chief Executive Officer in consultation with the General Counsel may request the independent members of the Board of Directors to defer approval of those grants if the Board of Directors or one or more executives are aware of favorable or unfavorable material information regarding Peoples Bank that has not been disclosed to the public. Once such information has been appropriately disclosed, the Chief Executive Officer notifies the Committee and the independent members of the Board of Directors, who then take appropriate action with respect to any grants for which action was deferred.
Rating Past Performance; Payout Decisions. The preceding discussion primarily reflects the Human Resources Committees actions with respect to target compensation to be paid in or on account of services rendered in future periods. The Committee also is responsible for reviewing the actual performance of Peoples Bank against performance targets established in prior periods. The evaluation of Peoples Banks performance in relation to those targets is essential to determining the extent to which cash bonuses are paid or allocated for the benefit of named executive officers. For more information about these performance targets and how they are used, see Linking Company Performance to Incentive Plan Funding above.
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The amount actually paid out to each named executive officer (including the Chief Executive Officer) pursuant to a STIP Bonus award depends on four factors: the extent to which the overall STIP Bonus pool is funded for the year; whether the Committee decides to apply an overall funding adjustment factor applicable to all employees who may be eligible to receive a STIP Bonus; the named executive officers performance with respect to his individual performance measures; and possible upward or downward adjustment of the named executive officers payout based on an evaluation of his leadership behaviors in a given year. The Chief Executive Officer evaluates the performance and leadership behaviors of all named executive officers other than himself. The Human Resources Committee evaluates the performance and leadership behaviors of the Chief Executive Officer.
As discussed earlier, the Committee often specifies a target performance measure intended to fairly represent the results of continuing operations of Peoples Bank during the ensuing year. Events may occur during the course of the year which cause management to conclude that the measure as so established does not in fact achieve its intended goal. In that case, the Chief Executive Officer may ask the Human Resources Committee to exercise discretion in deciding whether or to what degree the applicable performance measure has been attained or exceeded. The Committee may, but is not required to, exercise that discretion.
The extent to which the overall STIP Bonus pool for all eligible employees (including named executive officers) is funded is determined by the performance of Peoples Bank measured against the target performance metrics specified by the Human Resources Committee. The bonus pool is not funded unless Peoples Bank attains at least 80% of the target performance measures for the year. Maximum funding of the bonus pool will occur if Peoples Bank achieves 120% of the target performance measures.
Once the funding level has been determined, the Committee then decides whether to apply an overall funding adjustment factor. Application of this factor, which may be positive or negative, results in an automatic adjustment of equal magnitude to the target payout amounts for each named executive officers STIP Bonus for the preceding year in alignment with overall results for Peoples Bank. The Human Resources Committee will consider applying an overall funding adjustment factor when the actual financial performance of Peoples Bank for the preceding year was extraordinarily different from expected performance, and when the Committee believes that actual performance was not primarily attributable to any particular operating unit or units within the organization.
Each named executive officer other than the Chief Executive Officer is also evaluated on several performance measures that were set at the beginning of the previous year and which relate to the strategic business objectives of the organization for that year. Each named executive officer has a unique set of individual performance measures. The degree to which a named executive officer satisfies these individualized measures is taken into account in determining the amount to be paid out to that executive as a STIP Bonus. In general, no named executive officer could receive a STIP Bonus payout in excess of 200% of the target short-term cash bonus amount. However, in making recommendations to the independent members of the Board of Directors with respect to the named executive officers, the Human Resources Committee has the discretion to disregard this cap in circumstances it deems appropriate.
As discussed above under the heading Linking Company Performance to Incentive Plan Funding , the actual payout for the LTIP Bonus award is determined over a three-year period. Target LTIP Bonus awards are made to each named executive officer on an annual basis. As a result, in any given year there are three overlapping LTIP Bonus cycles in effect (one with respect to the first year of the cycle, one with respect to the second year of the cycle, and the third with respect to the final year of the cycle). Annual funding decisions are made for each active cycle based on Peoples Banks performance against the target performance measure(s) established in the preceding year for each cycle.
The funding for each active cycle is divided into two separate but related parts. If applicable minimum performance metrics are met in a given year for a given portion of the LTIP Bonus award, an allocation is made for that portion of the award for each active cycle. Amounts allocated in a given year are not paid out until after the end of the full three-year performance cycle. The maximum amount that may be paid out pursuant to an LTIP Bonus award upon expiration of a three-year bonus cycle is 150% of the target amount of the LTIP Bonus award that was established at the beginning of the three-year cycle.
Fifty percent of the annual LTIP Bonus allocation is based solely on the performance of Peoples Bank against the applicable target performance measure(s). The remaining fifty percent of the annual LTIP Bonus allocation is based on the relative performance of Peoples Bank on the target performance measure(s) as compared to the median performance of a
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peer group of financial institutions on the same measure(s) for the same year. The composition of the peer group may change from year to year. See the discussion under the heading Linking Company Performance to Incentive Plan Funding.
Committee Actions Affecting 2006 Compensation. The Human Resources Committee took a variety of actions during 2006 that affected executive compensation for the year. During the first quarter of 2007, the Human Resources Committee will evaluate the performance of Peoples Bank against the target performance measures established in early 2006 and take other actions relating to calculation of actual payments and allocations for the STIP Bonus and LTIP Bonus based on 2006 performance. Actions taken by the Committee in 2006 with reference to performance measures established for 2005 are not included in the following discussion.
Annual Compensation-Setting Process - Chief Executive Officer. In February 2006, the Human Resources Committee recommended, and the independent members of the Board of Directors approved, the various components of Mr. Kleins annual compensation package. Details regarding base salary, stock options, and restricted stock grants are included in the detailed compensation tables following this section. Information about the STIP Bonus and LTIP Bonus target amounts established by the Committee for Mr. Klein are included in this discussion.
For 2006, the Committee selected the following companies for use in benchmarking Mr. Kleins compensation package:
BancorpSouth, Inc. | Bank of Hawaii Corporation | |
City National Corporation | Commerce Bancshares, Inc. | |
Commercial Federal Corporation | Downey Financial Corp. | |
First Citizens Bancshares, Inc. | FirstMerit Corporation | |
Hudson United Bancorp | TCF Financial Corporation | |
Trustmark Corporation | Valley National Bancorp | |
Whitney Holding Corporation |
The companies in this group are all in the financial services industry. They were selected primarily on the basis of asset size, being roughly comparable in asset size to Peoples Bank at the time the group was selected. Compensation information for companies included in the peer group was obtained by reviewing publicly available proxy statements and other relevant filings made with securities regulatory authorities.
For 2006, the Committee established the target value of Mr. Kleins core compensation package at approximately $2.7 million. This would have placed Mr. Klein in the third quartile for core compensation paid to chief executive officers of the companies included in the peer group. This target was established based on the recent financial performance of Peoples Bank, Mr. Kleins estimated value in the marketplace, and the Committees view of Mr. Kleins critical role in the future success of Peoples Bank.
After establishing the target value for Mr. Kleins overall core compensation package, the Committee made detailed determinations for each element of that package in order to arrive at the desired overall result:
Base Salary: The Committee set Mr. Kleins base salary at $775,215 representing a 3.5% increase from his base salary in 2005. This placed Mr. Kleins base salary in the third quartile of the base salaries for chief executive officers of the companies included in the peer group. At this level, Mr. Kleins base salary represented approximately 29% of the target value of his core compensation package, consistent with the Committees philosophy of emphasizing the at-risk components of core compensation for executive officers.
STIP Bonus: Mr. Kleins STIP Bonus target for 2006 was established at 75% of his base salary for 2006. The actual amount to be paid out to Mr. Klein will be determined based on the financial performance of Peoples Bank for the year. The amount paid out will not exceed 200% of the target amount (representing a maximum of 150% of Mr. Kleins base salary for 2006), unless the Human Resources Committee exercises its discretion to exceed that limit. See Rating Past Performance for a discussion of the amount paid out to Mr. Klein pursuant to this award.
The Committee established Mr. Kleins STIP Bonus target at this level in part based on market practice and trends, and in part to achieve the desired mix between base compensation and at-risk compensation.
Long-Term Incentives: To arrive at the desired total target value of Mr. Kleins core compensation package for 2006, and in light of the levels of base salary and STIP Bonus award already determined, the Committee established the target value of the long-term incentive portion of Mr. Kleins compensation package for 2006 at approximately $1.37 million.
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The target value of the long-term incentive portion of Mr. Kleins compensation package is made up of the target value of the LTIP Bonus award, the value of stock options using the Black-Scholes methodology, and the assumed value of restricted stock grants. Option values and assumed restricted stock grant values were based on stock price data several months prior to the actual grant date. In addition, the Committee recommended a special grant of 9,000 shares of restricted stock to Mr. Klein as a leadership bonus. As a result, Mr. Kleins total core compensation as finally established was at approximately the 75th percentile for chief executive officers of companies included in the peer group.
The relative mix of the three components of Mr. Kleins long-term incentive compensation package (including the leadership grant) was designed so that approximately two-thirds of the target value would be attributable to equity-based forms of compensation. The Committee considered this weighting to be an appropriate means of aligning Mr. Kleins compensation with the long-term interests of Peoples Bank stockholders.
Mr. Kleins LTIP Bonus target for the three-year performance cycle beginning with 2006 was established at 72% of his base salary for 2006. The actual amount to be paid out to Mr. Klein will be determined based on the financial performance of Peoples Bank during 2006, 2007 and 2008. The amount paid out will not exceed 150% of the target amount (representing a maximum of 108% of Mr. Kleins base salary for 2006).
The Human Resources Committee recommended the award to Mr. Klein of options to purchase 42,192 shares of Peoples Bank common stock. Additional information about these options is contained in the Summary Compensation Table and the table headed Grants of Plan-Based Awards and accompanying discussion, all of which appear below. These options will have no value unless the market value of Peoples Bank common stock is higher than the exercise price of the options. The actual value realized by Mr. Klein upon his exercise of these options will depend on the market value of Peoples Bank stock at the time of exercise. The target value of these stock options represented approximately 17% of Mr. Kleins long-term compensation for 2006, reflecting the Committees decision to weight equity-based awards towards stock grants rather than towards options.
The Human Resources Committee also recommended the award to Mr. Klein of 24,000 shares of Peoples Bank common stock, subject to vesting restrictions. As previously discussed, a portion of this award (9,000 shares) was made to Mr. Klein as a leadership bonus. Additional information about these restricted shares is contained in the Summary Compensation Table and the table headed Grants of Plan-Based Awards and accompanying discussion, all of which appear below. The actual value realized by Mr. Klein from these shares will depend on the market value of Peoples Bank stock at the time he chooses to sell the shares. The target value of these shares represented approximately 48% of Mr. Kleins compensation package for 2006, and 74% of all equity-based forms of compensation awarded to Mr. Klein.
All Human Resources Committee actions taken with respect to Mr. Kleins compensation were presented as recommendations for approval by the independent members of the Board of Directors. All of the Committees recommendations regarding Mr. Kleins compensation were approved by the independent members of the Board of Directors in February 2006.
Annual Compensation-Setting Process Other Named Executive Officers. In February 2006, the Human Resources Committee recommended, and the independent members of the Board of Directors approved, the various components of the annual compensation packages for all other named executive officers. Details regarding base salary, stock options, and restricted stock grants made to the named executive officers are included in the detailed compensation tables following this section. Information about the STIP Bonus and LTIP Bonus target amounts established by the Committee for the named executive officers are included in this discussion.
The Human Resources Committee began the compensation-setting process for these named executive officers by referring to internally developed broad guidelines which specify target dollar ranges for executive compensation. These guidelines are based in large part on competitive trends in the employment marketplace, including established and emerging compensation practices at other companies. The Committee initially established the overall level of core compensation for each named executive officer (other than the Chief Executive Officer) within the guideline ranges after considering the recent performance of Peoples Bank and the contribution of each named executive officer to those results, the value of each executives job in the marketplace, and the criticality of each named executive officer to the future success of Peoples Bank in attaining its goals.
The Committee next evaluated these preliminary compensation decisions in comparison to the compensation of executives having comparable responsibilities at companies in a peer group designated by the Committee. This peer group
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was different from, and larger than, the peer group used to establish the Chief Executive Officers compensation, due to the limited amount of data available for comparable executive positions in the first peer group.
For 2006, the companies making up the peer group used as a comparison reference for the compensation packages for the other named executive officers were:
AmSouth Bancorporation | BancWest Corporation | |
Taylor Capital Group, Inc. | Commerce Bancshares, Inc. | |
Commercial Federal Corporation | Compass Bancshares, Inc. | |
F.N.B. Corporation | Harris Financial Corp. | |
Hibernia Corp. | Huntington Bancshares Incorporated | |
IndyMac Bancorp, Inc. | Irwin Financial Corporation | |
Marshall & Isley Corporation | The South Financial Group | |
Southern Bancorp, Inc. | SVB Financial Group | |
Texas Capital Bancshares, Inc. | UnionBanCal Corporation | |
Webster Financial Corporation |
The companies in this group all participate in relevant executive compensation surveys sponsored by the Committees compensation consultant.
The Committee compared its preliminary compensation decisions for the named executive officers with the peer group data to ensure that those preliminary decisions did not deviate significantly from market practice.
The target value of the named executive officers core compensation packages, as established by the Committee for 2006 following the steps outlined above and based on equity valuation assumptions as of a date several months prior to the Committees action, each fell within the third quartile for core compensation paid to executive officers performing similar duties with the companies included in the peer group.
After establishing the target value for each named executive officers overall core compensation package, the Committee made detailed determinations for each element of that package in order to arrive at the desired overall result:
Base Salary : The Committee first set the 2006 base salary for each named executive officer, within target dollar ranges contemplated by the internal guidelines. Salary increases for the named executive officers represented increases of from 5% to 9% compared to base salaries for 2005. At these levels, base salaries represented between 26% and 39% of the target value of each named executive officers core compensation package, consistent with the Committees philosophy of emphasizing the at-risk components of core compensation for executive officers.
STIP Bonus : The named executive officers STIP Bonus targets for 2006 were established within a range of 60% to 65% of each executives base salary for 2006. The actual amount to be paid out to each named executive officer will be determined in part based on the financial performance of Peoples Bank for the year and in part based on the other factors discussed under the heading Rating Past Performance; Payout Decisions . The amount paid out will not exceed 200% of the target amount (representing a maximum of 120 - 130% of each named executive officers base salary for 2006), unless the Human Resources Committee exercises its discretion to exceed that limit. See Rating Past Performance for a discussion of the amounts paid out to the named executive officers pursuant to these awards.
The Committee established the named executive officers STIP Bonus targets at these levels in part based on market practice and trends, and in part to achieve the desired mix between base compensation and at-risk compensation.
Long-Term Incentives : To arrive at the desired total target value of each named executive officers core compensation package for 2006, and in light of the levels of base salary and STIP Bonus awards already determined, the Committee established the target value of the long-term incentive portion of the named executive officers core compensation packages for 2006 in a range from approximately $327,000 to $865,000. The target value of the long-term portion of each named executive officers compensation package reflects the target value of the LTIP Bonus award, the value of stock options using the Black-Scholes method, and the assumed value of restricted stock grants. Option values and assumed restricted stock grant values were based on stock price data several months prior to the actual grant date.
With one exception, the relative mix of the three components of each executives long-term compensation package was designed so that approximately two-thirds of the target value would be attributable to equity-based forms of
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compensation. The Committee considered this weighting to be an appropriate means of aligning executive compensation with the long-term interests of Peoples Bank stockholders. The Chief Financial Officers long-term incentive package was designed so that more than 80% of the target value would be attributable to equity-based forms of compensation. This difference reflected the Committees and Chief Executive Officers view that the Chief Financial Officers compensation should be more strongly tied to the long-term value of Peoples Bank stock as an incentive for performance.
The LTIP Bonus targets for the three-year performance cycle beginning with 2006 were established for the named executive officers in a range between 33% 41% of each executives base salary for 2006. The actual amount to be paid out to each named executive officer will be determined based on the financial performance of Peoples Bank during 2006, 2007 and 2008. The amount paid out will not exceed 150% of the target amount (representing between 49.5% 61.5% of each executives base salary for 2006).
The Human Resources Committee recommended the award to the named executive officers of options to purchase between 15,165 and 46,960 shares of Peoples Bank common stock. Additional information about these options is contained in the Summary Compensation Table and the table headed Grants of Plan-Based Awards and accompanying discussion, all of which appear below. These options will have no value unless the market value of Peoples Bank common stock is higher than the exercise price of the options. The actual value realized by each named executive officer upon his exercise of these options will depend on the market value of Peoples Bank stock at the time of exercise. The target value of these stock options represented between approximately 20% and 24% of each named executive officers long-term compensation for 2006, reflecting the Committees decision to weight equity-based awards towards stock grants rather than towards options.
The Human Resources Committee also recommended the award to the named executive officers of between 5,565 and 17,300 shares of Peoples Bank common stock, subject to vesting restrictions. Additional information about these restricted shares is contained in the table headed Grant of Plan-Based Awards below. The actual value realized by each named executive officer from these shares will depend on the market value of Peoples Bank stock at the time he chooses to sell such shares. The target value of these shares represented between 27% and 44% of each named executive officers total compensation package for 2006 based on estimated values for stock options and shares of restricted stock at the time compensation recommendations were formulated. The target value of these shares represented 70% of all equity-based forms of compensation awarded to the named executive officers, based on the same estimates.
As a result of increases in the market value of Peoples Banks common stock subsequent to the date used for estimating the values of stock options and shares of restricted stock, the grant-date value of options and restricted stock grants was higher than the values used in establishing core compensation packages for the named executive officers. The Committee did not choose to reduce the number of options or shares of restricted stock awarded to each named executive officers to reflect this increase. Therefore, the target values of the named executive officers core compensation packages at the grant date were in the fourth quartile for core compensation paid to executive officers performing similar duties with the companies included in the peer group.
All Human Resources Committee actions taken with respect to the named executive officers (other than the Chief Executive Officer) were presented as recommendations for approval by the independent members of the Board of Directors. The Chief Executive Officer participated in the development of these recommendations but did not vote on the adoption of these recommendations by the Committee. All of the Committees recommendations regarding the compensation of the named executive officers were approved by the independent members of the Board of Directors in February 2006.
Establishing Performance Targets. In December 2005, the Human Resources Committee established the performance target for purposes of determining actual payouts and allocations for the STIP Bonus and all current cycles of outstanding LTIP Bonus awards. The Committee specified a target based on EPS from continuing operations. This measure differs from EPS as reported under generally accepted accounting principles because it excludes income or loss from discontinued activities. The performance target was approximately equal to Peoples Banks then-anticipated earnings per share from continuing operations for 2005. Management advised the Committee that it considered this target to be challenging given the expected interest rate and competitive environment for 2006. The Committee thus viewed the performance target to be a challenging yet achievable goal based on this information.
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The Committee also identified the group of institutions against which Peoples Banks 2006 financial performance will be measured for purposes of calculating allocations under all current long-term cash bonus cycles. The companies in this group are:
Associated Banc-Corp | Astoria Financial Corporation | |
BancorpSouth, Inc. | Bank of Hawaii Corporation | |
City National Corporation | Colonial BancGroup, Inc. | |
Commerce Bancshares, Inc. | Downey Financial Corp. | |
First Citizens BancShares, Inc. | FirstMerit Corporation | |
TCF Financial Corporation | Trustmark Corporation | |
Valley National Bancorp | Webster Financial Corporation | |
Whitney Holding Corporation |
This peer group was identical to the peer group used to measure 2005 performance, with the exception of three institutions that were acquired in late 2005 or scheduled to be acquired in early 2006. It was substantially similar to the peer group used in setting the Chief Executive Officers compensation for 2006, with the addition of five institutions that were considered inappropriate for use in analyzing compensation primarily due to asset size, but which have certain characteristics that make them useful for performance comparisons.
Rating Past Performance. In January 2007, the Human Resources Committee evaluated Peoples Banks actual performance during 2006 against the STIP and LTIP performance targets established in February 2006. The Committee noted that Peoples Bank had restructured its balance sheet significantly during 2006. This was done for strategic reasons and with the full knowledge and approval of the Board of Directors, but had not been contemplated at the time the performance targets for 2006 were established. Therefore, the Committee decided that for purposes of making funding decisions for the STIP Bonus and the LTIP Bonus, it would be appropriate to use an adjusted EPS result that would disregard the securities losses resulting from the restructuring of the balance sheet. On that basis, Peoples Banks EPS from continuing operations for 2006, net of adjustments for securities losses, was $0.98 which exceeded the performance target established at the beginning of the year. This compared favorably to Peoples Banks reported EPS from continuing operations of $0.85.
The Committee approved funding for the overall STIP Bonus pool for all STIP participants, including the named executive officers, on the basis of these results. The Committee did not apply an automatic bank-wide funding adjustment factor to the STIP Bonus pool for 2006 with respect to the named executive officers.
The Human Resources Committee also applied this adjusted EPS result to determine the level of allocations to be made with respect to the three outstanding LTIP Bonus cycles that included 2006. The adjusted EPS result was compared to the internally-established target in order to calculate 50% of the allocation for each cycle. In determining the other 50% of the LTIP Bonus allocation, the Committee compared Peoples Banks EPS growth rate (as adjusted) during 2006 against the median EPS growth rate of the banks in the peer group selected for 2006. Peer results available through September 30, 2006 were used for this purpose. Based on the third quarter comparison with the results of the peer group and upon the financial performance of Peoples Bank in the fourth quarter of 2006, the Committee decided it was reasonable to conclude that Peoples Banks 2006 results on this measure would significantly exceed the median EPS growth rate for the peer institutions for the full year. Therefore, the Committee approved LTIP Bonus allocations on this measure at the maximum level for all named executive officers including the Chief Executive Officer.
On the basis of Peoples Banks strong performance results for 2006, and Mr. Kleins outstanding personal leadership in driving several key strategic long term initiatives, the Committee recommended, and the independent members of the Board of Directors approved, a 2006 STIP Bonus payout to Mr. Klein of $1,053,808. This was higher than the target amount of his STIP Bonus for the year but less than the maximum amount payable, as described in the table entitled Grant of Plan-Based Awards appearing below. In addition, a total of $720,174 was allocated to the three outstanding LTIP Bonus cycles for Mr. Klein based on Peoples Banks financial performance during 2006. Allocated amounts will be paid out for a given LTIP Bonus cycle after the end of the third year in the applicable three-year cycle. More detailed information on the amounts allocated to each LTIP Bonus cycle is provided following the Summary Compensation Table below.
In determining the 2006 STIP Bonus payouts for the other four named executive officers, the Human Resources Committee considered Mr. Kleins evaluation of each named executive officers performance against the individual set of previously-established key performance measures for each officer. Based on each individuals level of achievement and the
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level of funding available in the STIP Bonus pool, the Committee recommended, and the independent members of the Board of Directors approved, payouts of STIP Bonuses in amounts higher than the target amount of each named executive officers 2006 STIP Bonus, as described in the table entitled Grant of Plan-Based Awards appearing below. Mr. Klein also recommended to the Committee that an upward leadership adjustment of 15% be applied in calculating the amount to be paid out to Mr. Sherringham to acknowledge the extraordinary organizational impact his personal contributions had on Peoples Banks 2006 results and positioning for future success. The Committee adopted this recommendation, which was approved by the independent members of the Board of Directors. As a result, Mr. Sherringhams STIP Bonus payout represented a higher percentage of his 2006 STIP Bonus target amount than was the case for the other named executive officers. See the table entitled Grant of Plan-Based Awards appearing below for more information.
Amounts ranging from $129,530 to $199,495 were allocated to all outstanding three-year LTIP Bonus cycles for the named executive officers based on Peoples Banks financial performance during 2006. Allocated amounts will be paid out for a given LTIP Bonus cycle after the end of the third year in the applicable three-year cycle. More detailed information on the amounts allocated for each LTIP Bonus cycle is provided following the Summary Compensation Table below.
Other Committee Actions. In July 2006, the Human Resources Committee recommended, and the independent members of the Board of Directors approved, supplemental grants of restricted stock to the Chief Executive Officer and the other named executive officers. Mr. Klein was awarded 6,000 shares and the other named executive officers were each awarded between 7,500 and 12,700 shares of Peoples Bank stock, subject to incremental vesting over the course of four years. In addition, these shares remain subject to additional restrictions on transfer for two years after the final vesting date.
The Committee took this action following a series of discussions with the Chief Executive Officer and others, in which management shared with the Human Resources Committee information about current levels of stock ownership by Peoples Bank executives in comparison with other institutions.
Management presented the Committee with information prepared by Pearl Meyer & Partners (a special consultant engaged by management to assist in the analysis), illustrating the percentage of equity owned by the Chief Executive Officer, Chief Financial Officer, and other executive officers of a group of financial institutions, compared to equity ownership of Peoples Bank stock by its executive officers. The companies in the comparison group were:
Associated Banc-Corp. | Astoria Financial Corporation | |
BancorpSouth, Inc. | Bank United Financial Corp. | |
City National Corporation | Colonial BancGroup, Inc. | |
Commerce Bancshares, Inc. | Cullen/Frost Bankers, Inc. | |
First Federal Financial Services, Inc. | Fremont General Corporation | |
Hudson City Bancorp, Inc. | International Bancshares Corp. | |
MAF Bancorp, Inc. | Mercantile Bankshares Corporation | |
New Alliance Bancshares, Inc. | New York Community Bancorp, Inc. | |
Sovereign Bancorp, Inc. | TCF Financial Corporation | |
TD Banknorth, Inc. | Valley National Bancorp | |
Webster Financial Corporation |
The Human Resources Committee considered the information presented by management and was persuaded that supplemental grants of restricted stock, coupled with additional post-vesting transfer restrictions, were appropriate under the circumstances. The Committee noted that although the supplemental grants constituted additional compensation to each of the grant recipients, the decision to make the grants was not made for compensation-related reasons. For this reason, the supplemental grants were not analyzed within the context of the Committees normal compensation philosophy or standards, and represented an intentional departure from those guidelines.
All grants were made in compliance with the terms of the Peoples Bank 1998 Long-Term Incentive Plan. Under that plan, the aggregate number of restricted shares issuable to any single person during a calendar year is capped at 30,000. Thus, in determining the number of shares awarded as a supplemental grant to each named executive officer, the Committee took into consideration the number of shares of restricted stock previously granted to each such executive in February 2006.
The Committee and the independent members of the Board of Directors also carefully considered the timing of the supplemental grants with reference to the public availability of material information concerning Peoples Bank. The
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Committee and the independent members of the Board of Directors, with input from the Chief Executive Officer and the General Counsel of Peoples Bank, concluded that at the grant date there was no material, non-public information concerning Peoples Bank and that it was therefore appropriate to make the supplemental grants at that time.
Prospective Changes to Compensation Programs. The Board of Directors approved changes to the Peoples Bank Employees Retirement Plan which became effective during 2006. New employees hired on or after August 14, 2006 are not eligible to participate in this plan. Instead, Peoples Bank is providing a new benefit to that group of employees under the Peoples Bank 401(k) Employee Savings Plan. The new benefit consists of an employer retirement contribution made on behalf of each covered employee to the Employee Savings Plan, in an annual amount equal to 3% of the employees eligible earnings. This new benefit is not available to anyone who remains eligible to participate in the Employees Retirement Plan. All of the named executive officers, including the Chief Executive Officer, remain eligible to participate in the Employees Retirement Plan and are not affected by this change.
Employees who are not eligible to participate in the Employees Retirement Plan are also not eligible to participate in the Peoples Bank Cap Excess Plan or the Peoples Bank Enhanced Senior Pension Plan. Management is currently considering whether to seek Board approval for one or more non-tax qualified plans which would provide additional benefits to persons who would otherwise have been eligible to participate in the Cap Excess Plan and/or the Enhanced Senior Pension Plan if they had been employed prior to August 14, 2006. The establishment of any such plan would not affect any of the named executive officers, including the Chief Executive Officer.
The Board of Directors has approved the establishment of an employee stock ownership plan, or ESOP, in connection with the proposed conversion of Peoples Bank and its parent, Peoples Mutual Holdings, from the mutual holding company form to a fully public stock holding company form. The ESOP will be a tax-qualified, broad-based employee benefit program. All named executive officers, including the Chief Executive Officer, will be eligible to receive benefits under this program.
Additional equity-based benefit plans may be adopted no earlier than six months following the effective date of the proposed conversion. While it is likely that the named executive officers, including the Chief Executive Officer, will be eligible to receive benefits under those plans, no decisions have been made as to the content or structure of such plans, or as to the manner in which awards under such plans (if adopted) would be made.
See Future Benefit Plans for additional information about the ESOP and the additional equity-based benefit plans.
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Summary Compensation Table
The following table sets forth a summary for the last fiscal year of the cash and non-cash compensation paid or awarded by Peoples Bank to its Chief Executive Officer and to its four most highly compensated executive officers, other than the Chief Executive Officer, who were serving as executive officers at the end of the 2006 fiscal year, whose total compensation for 2006 was at least $100,000 (the named executive officers).
Name and Principal Position |
Year |
Salary
($) |
Stock
Awards ($) |
Option
Awards ($) |
Non-Equity
Incentive Plan Compensation ($) |
Change in
Pension Value and Nonqualified Deferred Compensation Earnings ($) |
All Other
Compensation ($) |
Total ($) | ||||||||
John A. Klein (1) |
2006 | 772,190 | 486,939 | 62,462 | 1,773,982 | 456,200 | 261,149 | 3,812,922 | ||||||||
Philip R. Sherringham (2) |
2006 | 420,961 | 274,259 | 69,520 | 676,026 | 130,300 | 61,288 | 1,632,354 | ||||||||
Robert R. DAmore (3) |
2006 | 307,692 | 188,578 | 34,760 | 384,099 | 126,400 | 82,937 | 1,124,466 | ||||||||
Brian F. Dreyer (4) |
2006 | 307,780 | 167,019 | 34,760 | 374,261 | 313,500 | 113,614 | 1,310,934 | ||||||||
William T. Kosturko (5) |
2006 | 315,515 | 133,530 | 22,451 | 367,465 | 202,900 | 117,565 | 1,159,426 |
(1) | Mr. Klein does not receive any additional compensation for serving as a director of Peoples Bank. Mr. Klein is the President, Chief Executive Officer and Chairman of the Board. Mr. Klein is the principal executive officer of Peoples Bank. |
(2) | Mr. Sherringhams position is Executive Vice President and Chief Financial Officer. Mr. Sherringham is the principal financial officer of Peoples Bank. |
(3) | Mr. DAmores position is Executive Vice President, Marketing and Regional Banking. |
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(4) | Mr. Dreyers position is Executive Vice President, Commercial Banking. |
(5) | Mr. Kosturkos position is Executive Vice President and General Counsel. |
The Bonus column has been omitted from the Summary Compensation Table because no named executive officer earned any compensation during 2006 of a type required to be disclosed in that column.
The amounts shown in the Stock Awards column equal the amount recognized by Peoples Bank during 2006 as compensation expense for financial statement reporting purposes as a result of stock awards made in 2006 and in prior years. Stock awards are valued at the average of the high and low stock price on the grant date. A portion of that grant-date value is recorded as expense over the vesting period applicable to the grant. For more information on stock awards made to the named executive officers during 2006, see the table in this section entitled Grants of Plan-Based Awards .
The amounts shown in the Option Awards column equal the amount recognized by Peoples Bank during 2006 as compensation expense for financial reporting purposes as a result of options granted in 2006. No expense was recognized for options granted in prior years, as a result of the accelerated vesting of all such options in December 2005, prior to the effective date of FAS 123R. Stock options issued in 2006 were valued at $6.46 per option, using the Black-Scholes option valuation model with the following assumptions: exercise price equal to fair market value of stock ($31.31) on grant date; dividend yield of 2.81%; expected volatility rate of 22.75%; risk-free interest rate of 4.64%; and expected term of 4.99 years. A portion of that value is recorded as expense over the vesting period applicable to the grant. For more information on option grants made to the named executive officers during 2006, see the table entitled Grants of Plan-Based Awards .
The amounts shown in the Non-Equity Incentive Plan Compensation column reflect short-term incentive bonus payments made to the named executive officers with respect to performance in 2006, and amounts designated for payment as long-term incentive bonuses to the named executive officers based on Peoples Banks performance in 2006. Details of these amounts are as follows:
Short-Term
(STIP Bonus) (1) |
Long-Term Incentive Bonus (LTIP Bonus) |
|||||||||||
2004 - 2006
Performance Cycle (1) |
2005 - 2007
Performance Cycle (2) |
2006 - 2008
Performance Cycle (3) |
||||||||||
John A. Klein |
$ | 1,053,808 | $ | 228,157 | $ | 241,777 | $ | 250,239 | ||||
Philip R. Sherringham |
$ | 476,531 | $ | 58,427 | $ | 62,946 | $ | 78,122 | ||||
Robert R. DAmore |
$ | 241,800 | $ | 44,069 | $ | 46,806 | $ | 51,424 | ||||
Brian F. Dreyer |
$ | 231,791 | $ | 44,211 | $ | 46,820 | $ | 51,439 | ||||
William T. Kosturko |
$ | 237,935 | $ | 40,587 | $ | 42,007 | $ | 46,936 |
(1) | Payable in 2007. |
(2) | Payable in 2008. |
(3) | Payable in 2009. |
The total amount payable to each named executive officer as a long-term incentive bonus for the 2004 2006 performance cycle is as follows: Mr. Klein, $722,638; Mr. Sherringham, $185,054; Mr. DAmore, $139,580; Mr. Dreyer, $140,031; and Mr. Kosturko, $128,549. These amounts, which for each individual include the amounts shown in the column headed 2004 2006 Performance Cycle in the table above, are based on the performance of Peoples Bank for each of the three years included in that performance cycle.
Amounts shown in the column headed Change in Pension Value and Nonqualified Deferred Compensation Earnings are for the twelve months ended September 30, 2006 which is the pension plan measurement date used by Peoples Bank for financial reporting purposes. This column does not include any earnings on compensation deferred by any named executive officer under the Supplemental Savings Plan. Information about these earnings and how they are calculated is shown in the table headed Non-Qualified Deferred Compensation and accompanying text.
Amounts shown as All Other Compensation are attributable to perquisites and other personal benefits, and to other items of compensation that are not reported elsewhere in the Summary Compensation Table. Perquisites and other personal benefits consist of a company-supplied automobile, tax preparation and financial planning services, reimbursement for up to $500 for health club membership, reimbursement for the executives cost of enhanced long-term disability insurance, and
152
home security services. Some of the named executive officers have elected to forego one or more of these perquisites. For Messrs. Klein, DAmore, and Dreyer, perquisites also include the cost of club memberships which are used primarily, but not exclusively, for business purposes. Additional items shown as All Other Compensation include: employer matching contributions to the 401(k) Employee Savings Plan and the Supplemental Savings Plan (Mr. Klein, $77,360; Mr. Sherringham, $36,178; Mr. DAmore, $25,701; Mr. Dreyer, $25,716; and Mr. Kosturko, $24,620); annual accruals under the Deferred Compensation Plan for Certain Executive Officers (Mr. Klein, $138,052; Mr. DAmore, $34,857; Mr. Dreyer, $54,391; and Mr. Kosturko, $61,752 (no accruals for Mr. Sherringham under this plan)); and a tax gross-up payment with respect to the reimbursement paid to each executive for the cost of enhanced long-term disability insurance (Mr. Klein, $4,503; Mr. Sherringham, $1,704; Mr. DAmore, $1,008; Mr. Dreyer, $816; and Mr. Kosturko, $1,304).
153
Grant of Plan-Based Awards.
The following table sets forth information concerning grants of
Grant of Plan-Based Awards
Name |
Grant Date(1) |
Estimated Future Payouts Under Non-Equity Incentive Plan Awards(2) |
All Other
Number of
Shares
of
or Units (#) |
All Other
Awards;
of Securities Underlying Options (#) |
Exercise
or Base Price of Option Awards ($/Sh) (3) |
Closing
($) (3) |
Grant Date Fair
Value of Stock and Option Awards ($) |
|||||||||||||||||||||||||
Threshold ($) | Target ($) | Maximum ($) | ||||||||||||||||||||||||||||||
John A. Klein |
Feb. 16, 2006
Feb. 16, 2006 Feb. 16, 2006 Jul. 27, 2006 Feb. 16, 2006 |
(4)
(5) |
|
$290,706
46,513 |
$581,411
558,155 |
$1,162,822
837,232 |
24,000
6,000 |
42,192 | $31.31 |
$31.37
36.23 31.37 |
$751,680
218,040 272,560 |
|||||||||||||||||||||
Total: | $337,219 | Total: | $1,139,566 | Total: | $2,000,054 | Total: | 30,000 | Total: | 42,192 | Total: | $1,242,280 | |||||||||||||||||||||
Philip R. Sherringham |
Feb. 16, 2006
Feb. 16, 2006 Feb. 16, 2006 Jul. 27, 2006 Feb. 16, 2006 |
(4)
(5) |
|
$138,125
14,521 |
$276,250
174,250 |
$552,500
261,375 |
17,300
12,700 |
46,960 | $31.31 |
$31.37
36.23 31.37 |
$541,836
461,518 303,362 |
|||||||||||||||||||||
Total: | $152,646 | Total: | $450,500 | Total: | $813,875 | Total: | 30,000 | Total: | 46,960 | Total: | $1,306,716 | |||||||||||||||||||||
Robert R. DAmore |
Feb. 16, 2006
Feb. 16, 2006 Feb. 16, 2006 Jul. 27, 2006 Feb. 16, 2006 |
(4)
(5) |
$
|
100,750
9,558 |
$201,500
114,700 |
$403,000
172,050 |
8,620
12,500 |
23,480 | $31.31 |
$31.37
36.23 31.37 |
$269,978
454,250 151,681 |
|||||||||||||||||||||
Total: | $ | 110,308 | Total: | $316,200 | Total: | $575,050 | Total: | 21,120 | Total: | 23,480 | Total: | $875,909 | ||||||||||||||||||||
Brian F. Dreyer |
Feb. 16, 2006
Feb. 16, 2006 Feb. 16, 2006 Jul. 27, 2006 Feb. 16, 2006 |
(4)
(5) |
$
|
100,779
9,561 |
$201,557
114,733 |
$403,114
172,100 |
8,620
7,500 |
23,480 | $31.31 |
$31.37
36.23 31.37 |
$269,978
272,550 151,681 |
|||||||||||||||||||||
Total: | $110,340 | Total: | $316,290 | Total: | $575,214 | Total: | 16,120 | Total: | 23,480 | Total: | $694,209 | |||||||||||||||||||||
William T. Kosturko |
Feb. 16, 2006
Feb. 16, 2006 Feb. 16, 2006 Jul. 27, 2006 Feb. 16, 2006 |
(4)
(5) |
$
|
95,174
8,724 |
$190,348
104,691 |
$380,695
157,037 |
5,565
7,500 |
15,165 | $31.31 |
$31.37
36.23 31.37 |
$174,296
272,550 97,966 |
|||||||||||||||||||||
Total: | $ | 103,898 | Total: | $295,039 | Total: | $537,732 | Total: | 13,065 | Total: | 15,165 | Total: | $544,812 |
(1) | For equity grants, this is the date grants are approved by the independent members of the Board of Directors. |
(2) | The threshold payment for a STIP Bonus is shown as 50% of the target amount, and for an LTIP Bonus is shown as 8.33% of the target amount. Zero payouts are also possible. The maximum payout with respect to a STIP Bonus award is shown as 200% of the target amount, which is the limit generally applicable to such awards. However, the Human Resources Committee has discretion to authorize a payout in excess of this limit. |
(3) | Exercise price is equal to fair market value which is defined in the 1998 Long-Term Incentive Plan as the average of the high and low stock price on the grant date. This will usually differ from the closing price on the grant date. |
(4) | STIP Bonus award for 2006, payable in 2007. |
(5) | LTIP Bonus award for 2006, payable at the end of the 2006-2008 performance cycle. |
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The columns disclosing estimated future payouts under equity incentive compensation plans have been omitted from the table because no named executive officer earned any compensation during 2006 of a type required to be disclosed in those columns.
All stock and option awards shown in this table were made pursuant to the Peoples Bank 1998 Long-Term Incentive Plan. That plan defines fair market value as the average of the high and low trading price of Peoples Bank common stock on the Nasdaq Stock Market on the date of grant or, if no trades take place on that date, the most recent day for which trading data is available.
Cash dividends paid with respect to shares of restricted stock are accumulated for the benefit of the grantee in a non-interest bearing account, and will be paid to the grantee as soon as practicable after the end of the applicable restriction period.
Stock and option awards made in February 2006 will vest 50% on February 1, 2008, 25% on February 1, 2009 and 25% on February 1, 2010. Stock awards made in July 2006 will vest 50% on the second anniversary of the grant date, 25% on the third anniversary of the grant date, and 25% on the fourth anniversary of the grant date. Unless otherwise permitted by the Human Resources Committee and under other limited circumstances, none of the shares awarded in July 2006 may be transferred by the recipient until the sixth anniversary of the grant date. This transfer restriction does not apply if the recipient ceases to be employed by Peoples Bank.
For purposes of FAS 123R and this table, the grant date fair value of stock awards is equal to the number of shares awarded multiplied by the fair market value of the shares as determined pursuant to the 1998 Long-Term Incentive Plan. Similarly, the grant date fair value of options is determined using the Black-Scholes option valuation model with the following assumptions: exercise price equal to fair market value of stock ($31.31) on grant date; dividend yield of 2.81%; expected volatility rate of 22.75%; risk-free interest rate of 4.64%; and expected option term of 4.99 years.
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Outstanding Equity Awards at Fiscal Year-End
Option Awards | Stock Awards | |||||||||||||||||||||
Name |
Number of
Securities Underlying Unexercised Options (#) Exercisable |
Number of
Securities Underlying Unexercised Options (#) Unexercisable |
Option
Exercise Price ($) |
Option Expiration
|
Number of
Shares or Units of Stock That Have Not Vested (#) |
Market Value of
Not Vested ($) |
||||||||||||||||
John A. Klein |
67,500
162,000 22,500 67,500 67,500 46,935 |
42,192 (1) |
$
|
13.75
11.78 10.04 11.16 19.84 25.25 31.31 |
May 20, 2009 Mar. 1, 2011 Feb. 21, 2012 Feb. 20, 2013 Feb. 19, 2014 Feb. 17, 2015 Feb. 16, 2016 |
5,625
(2)
12,375 (3) 15,180 (4) 24,000 (1) 6,000 (5) |
$ 250,988
552,173 677,332 1,070,880 267,720 |
|||||||||||||||
Total: | 433,935 | Total: | 42,192 | Total: | 63,180 | Total: | $ | 2,819,092 | ||||||||||||||
Philip R. Sherringham |
15,132
10,125 15,300 |
46,960 (1) |
$
|
11.45
19.84 25.25 31.31 |
Apr. 10, 2013 Feb. 19, 2014 Feb. 17, 2015 Feb. 16, 2016 |
2,082
(2)
3,375 (3) 5,400 (4) 17,300 (1) 12,700 (5) |
$ 92,899
150,593 240,948 771,926 566,674 |
|||||||||||||||
Total: | 40,557 | Total: | 46,960 | Total: | 40,857 | Total: | $ | 1,823,039 | ||||||||||||||
Robert R. DAmore |
5,963
3,037 14,175 20,250 15,300 |
23,480 (1) |
$
|
11.78
10.04 11.16 19.84 25.25 31.31 |
Mar. 1, 2011 Feb. 21, 2012 Feb. 20, 2013 Feb. 19, 2014 Feb. 17, 2015 Feb. 16, 2016 |
1,308
(2)
2,610 (3) 4,200 (4) 8,620 (1) 12,500 (5) |
$58,363
116,458 187,404 384,624 557,750 |
|||||||||||||||
Total: | 58,725 | Total: | 23,480 | Total: | 29,238 | Total: | $ | 1,304,600 | ||||||||||||||
Brian F. Dreyer |
4,050
14,175 20,250 15,300 |
23,480 (1) |
$
|
10.04
11.16 19.84 25.25 31.31 |
Feb. 21, 2012 Feb. 20, 2013 Feb. 19, 2014 Feb. 17, 2015 Feb. 16, 2016 |
1,308
(2)
2,610 (3) 4,200 (4) 8,620 (1) 7,500 (5) |
$58,363
116,458 187,404 384,624 334,650 |
|||||||||||||||
Total: | 53,775 | Total: | 23,480 | Total: | 24,238 | Total: | $ | 1,081,500 | ||||||||||||||
William T. Kosturko |
8,900
10,800 24,413 17,438 13,500 |
15,165 (1) |
$
|
11.78
10.04 11.16 19.84 25.25 31.31 |
Mar. 1, 2011 Feb. 21, 2012 Feb. 20, 2013 Feb. 19, 2014 Feb. 17, 2015 Feb. 16, 2016 |
1,125
(2)
2,250 (3) 3,600 (4) 5,565 (1) 7,500 (5) |
$50,198
100,395 160,632 248,310 334,650 |
|||||||||||||||
Total: | 75,051 | Total: | 15,165 | Total: | 20,040 | Total: | $ | 894,185 |
(1) | Vesting schedule: 50% on Feb. 1, 2008; 25% on Feb. 1 2009; 25% on Feb. 1, 2010 |
(2) | Vesting schedule: 100% on Feb. 1, 2007. |
(3) | Vesting schedule: 50% on Feb. 1, 2007, 50% on Feb. 1, 2008. |
(4) | Vesting schedule: 50% on Feb. 1, 2007, 25% on Feb. 1, 2008 and 25% on Feb. 1, 2009. |
(5) | Vesting schedule: 50% on Jul. 27, 2008, 25% on Jul. 27, 2009 and 25% on Jul. 27, 2010. |
The market value of unvested stock awards was calculated for purposes of this table using a per-share value of $44.62, which was the closing price of Peoples Bank common stock on December 29, 2006 (the last business day of the year).
The columns disclosing awards under equity incentive compensation plans have been omitted from the table because no named executive officer earned any compensation during 2006 or in prior years of a type required to be disclosed in those columns.
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Option Exercises and Stock Vested
Option Awards | Stock Awards | |||||||||||||||||
Name |
Number of
Shares Acquired on Exercise (#) |
Value Realized on
Exercise ($) |
Number of
Shares Acquired on Vesting (#) |
Value Realized on
Vesting ($) |
||||||||||||||
John A. Klein |
N/A | N/A |
1,688
5,625 5,625 11,250 1,125 |
$52,573
175,191 171,506 343,013 34,301 |
||||||||||||||
Total: | 25,313 | Total: | $ | 776,584 | ||||||||||||||
Philip R. Sherringham |
15,131
10,125 |
$288,144
107,854 |
1,237
844 3,375 |
$37,716
25,734 102,904 |
||||||||||||||
Total: | 25,256 | Total: | $ | 395,998 | Total: | 5,456 | Total: | $ | 166,354 | |||||||||
Robert R. DAmore |
N/A | N/A |
957
1,970 1,308 2,610 |
$29,806
61,356 39,881 79,579 |
||||||||||||||
Total: | 6,845 | Total: | $ | 210,622 | ||||||||||||||
Brian F. Dreyer |
N/A | N/A |
1,800
1,266 1,407 1,308 2,610 |
$56,061
39,430 43,821 39,881 79,579 |
||||||||||||||
Total: | 8,391 | Total: | $ | 258,772 | ||||||||||||||
William T. Kosturko |
N/A | N/A |
845
1,125 1,125 2,250 |
$26,318
35,038 34,301 68,603 |
||||||||||||||
Total: | 5,345 | Total: | $ | 164,260 |
When stock awards vest, each executive also receives payment of all accumulated dividends paid with respect to the shares from the date the award was granted through the vesting date. The named executive officers received accumulated dividend payments during 2006 in the following amounts: Mr. Klein, $51,553; Mr. Sherringham, $9,268; Mr. DAmore, $14,638; Mr. Dreyer, $19,437; and Mr. Kosturko, $11,144.
157
Pension Benefits (1)
Name |
Plan Name |
Number of
Years of Credited Service (#) |
Present Value of
Accumulated Benefit ($) (2) |
||||||
John A. Klein |
Peoples Bank Employees Retirement Plan (3) Peoples Bank Cap Excess Plan |
32.53 |
$
|
671,800
3,912,800 |
|||||
Total: | $ | 4,584,600 | |||||||
Philip R. Sherringham (4) |
Peoples Bank Employees Retirement Plan (3) Peoples Bank Cap Excess Plan Peoples Bank Enhanced Senior Pension Plan |
2.5 |
$
|
44,200
91,900 137,700 |
|||||
Total: | $ | 273,800 | |||||||
Robert R. DAmore |
Peoples Bank Employees Retirement Plan (3) Peoples Bank Cap Excess Plan Peoples Bank Enhanced Senior Pension Plan |
23.8 |
$
|
426,100
443,300 250,500 |
|||||
Total: | $ | 1,119,900 | |||||||
Brian F. Dreyer |
Peoples Bank Employees Retirement Plan (3) Peoples Bank Cap Excess Plan Peoples Bank Enhanced Senior Pension Plan |
14.85 |
$
|
380,700
407,000 817,100 |
|||||
Total: | $ | 1,604,800 | |||||||
William T. Kosturko |
Peoples Bank Employees Retirement Plan (3) Peoples Bank Cap Excess Plan Peoples Bank Enhanced Senior Pension Plan |
14.98 |
$
|
336,700
402,800 763,800 |
|||||
Total: | $ | 1,503,300 |
(1) | The column disclosing benefits paid from any of the plans named in the table has been omitted from the table because no named executive officer received any such payments during 2006. |
(2) | Values are as of September 30, 2006, which is the pension plan measurement date used by Peoples Bank for financial reporting purposes. |
(3) | Tax-qualified defined benefit plan. |
(4) | Mr. Sherringham has not satisfied the vesting requirements under any of the listed plans. |
Values shown in the table are presented using a discount rate of 6%, and assume that benefits are payable to the listed officer in the form of a single life annuity with payments beginning October 1, 2006. The project and prorate method was used to calculate the accrued benefit. The values shown do not assume any pre-retirement decrements.
Retirement Plans
The Peoples Bank Employees Retirement Plan is a tax-qualified noncontributory defined benefit plan. The Peoples Bank Cap Excess Plan and the Peoples Bank Enhanced Senior Pension Plan are nonqualified supplemental defined benefit plans which together are referred to as the Supplemental Retirement Plans.
The Employees Retirement Plan provides retirement benefits for eligible employees (employees who have completed at least 1,000 hours of service within certain periods and who have attained age 21). Subject to the limitations imposed under the Internal Revenue Code, benefit payments are based on the employees years of credited service and the higher of (a) the employees average annual compensation paid during the five consecutive calendar years during the last ten years of participation that produce the highest average, or (b) 12 times the employees average monthly compensation paid during the last 60 consecutive months during which the employee received a salary while a participant in the Employees Retirement Plan.
For purposes of the benefit calculation, compensation is the covered employees normal straight time pay, plus overtime pay, sales incentive compensation and annual incentive compensation, as well as salary reduction amounts elected under Peoples Banks employee benefit programs. Under the Internal Revenue Code, compensation in excess of specified limits
158
cannot be considered for purposes of determining benefits under the Employees Retirement Plan. For the named executive officers, compensation is the sum of salary and bonus, and, for 2004, the cash portion of a special transaction-related award paid to certain named executive officers, subject, for purposes of the Employees Retirement Plan benefit calculations, to the limits specified in the Internal Revenue Code. Subject to certain grandfathered benefits under the terms of the Employees Retirement Plan and the Internal Revenue Code, the basic pension benefit is a lifetime annual pension payable to employees retiring at age 65 equal to 1.1% of average annual compensation up to the retirees Social Security covered compensation (which is an average of Social Security wage bases), plus 1.7% of average annual compensation in excess of the retirees Social Security covered compensation, all multiplied by the retirees years of credited service up to 30 years.
The Cap Excess Plan covers employees who are participants in the Employees Retirement Plan, who are otherwise eligible under the Cap Excess Plan and whose benefits under the Employees Retirement Plan are affected by limitations on compensation described above and limitations on benefit amounts under the Internal Revenue Code. The Cap Excess Plan benefit is equal to the monthly benefit the participant would have received under the Employees Retirement Plan if such limitations did not apply, less the amount he or she has actually received. A participant in the Cap Excess Plan becomes vested at the same time vesting occurs under the Employees Retirement Plan.
The Enhanced Senior Pension Plan provides for the payment of supplemental pension benefits for employees who are otherwise eligible under the Enhanced Senior Pension Plan and have attained age 50. The Enhanced Senior Pension Plan provides for an annual target retirement benefit equal to the excess of (1) 50% of the average compensation that would be used in calculating Employees Retirement Plan benefits if the limitations on compensation imposed by the Internal Revenue Code did not apply, over (2) the benefits payable to the covered employee under any other qualified defined benefit plans maintained by the employees former employers, subject to certain exceptions. Amounts presented in the table assume that the named executive officer is not entitled to receive benefits of this type from any former employer. The target benefit is then reduced by 1/15th for each year of credited service with Peoples Bank less than 15. Target benefits under the Enhanced Senior Pension Plan are offset by benefits payable under the Employees Retirement Plan and the Cap Excess Plan. A participant in the Enhanced Senior Pension Plan becomes vested upon attaining age 55 or upon completing five years of service (whichever is later), and in any event upon reaching his or her normal retirement date. In addition, all participants in the Enhanced Senior Pension Plan become fully vested upon a change in control of Peoples Bank or Peoples Mutual Holdings (as defined below under Change of Control Agreements ) or on the date either Peoples Bank or Peoples Mutual Holdings enters into an agreement the consummation of which would result in a change in control. The conversion itself will not result in a change in control.
The Supplemental Retirement Plans generally provide for payment of benefits at the same time and in the same manner as payment of benefits to the participant under the Employees Retirement Plan.
A trust has been established to provide for payment of Peoples Banks obligations under the Supplemental Retirement Plans to the extent Peoples Bank does not pay them directly. The purpose of the trust is to provide participants in the Supplemental Retirement Plans with greater assurance that the benefits to which they are entitled will be paid. Peoples Bank has funded the trust, but all assets in the trust will remain subject to the claims of Peoples Banks general creditors in the event of Peoples Banks insolvency.
Employees who began employment with Peoples Bank on or after August 14, 2006 are not eligible to participate in the Employees Retirement Plan. Instead, Peoples Bank is providing a new benefit to that group of employees under the 401(k) Employee Savings Plan. The new benefit consists of an employer retirement contribution made on behalf of each covered employee to the plan, in an annual amount equal to 3% of the employees eligible earnings. Employees must satisfy certain eligibility requirements in order to qualify for this new benefit. Also, this new benefit is not available to anyone who remains eligible to participate in the Employees Retirement Plan. See Prospective Changes to Compensation Programs.
Employees who are not eligible to participate in the Employees Retirement Plan are also not eligible to participate in the Supplemental Retirement Plans. Peoples Bank is currently considering whether to provide additional benefits under one or more non-tax qualified plans to persons who would otherwise have been eligible to participate in the Supplemental Retirement Plans if they had been employed prior to August 14, 2006.
401(k) Employee Savings Plan . Peoples Bank maintains a tax-qualified defined contribution plan for substantially all of the employees of Peoples Bank as of the first day of the calendar month following their hire date. Eligible employees may contribute from 1% to 20% of their annual compensation to the plan on a pre-tax basis each year, subject to limitations of the
159
Internal Revenue Code (for 2006 the limit was $15,000 exclusive of any catch-up contributions). Each year, Peoples Bank matches 100% of a participants contributions up to 4% of earnings (as defined in the plan) and may in its discretion make an additional matching contribution of up to 1% of a participants earnings. All of the named executive officers are eligible to participate in the 401(k) Employee Savings Plan.
Supplemental Savings Plan. Peoples Bank maintains a Supplemental Savings Plan which covers certain eligible employees who are also participants in the 401(k) Employee Savings Plan who are affected by the limitations on contributions and benefit amounts under the Internal Revenue Code. Eligible employees (including all named executive officers) may contribute from 1% to 20% of their annual salary and STIP Bonus on a pre-tax basis each year without regard to Internal Revenue Code limits.
The Supplemental Savings Plan includes an employer match feature that is substantially similar to the match feature in the 401(k) Employee Savings Plan. Matching contributions are made in the form of credits to the Supplemental Savings Plan participants account under the plan. The basic match is equal to the lesser of 4% of the participants eligible compensation, or the amount of the participants actual contribution to the Supplemental Savings Plan for the applicable year. Peoples Bank may choose to make an across-the-board additional discretionary contribution equal to the lesser of 1% of the participants eligible compensation, or the amount of the participants actual contribution to the Supplemental Savings Plan in excess of 4% of his or her eligible compensation for the applicable year. The discretionary contribution, if made, is usually made in the calendar year following the year for which the Supplemental Savings Plan contributions were made by the participant. For example, Peoples Bank made basic matching contributions to the Supplemental Savings Plan during 2006 on the basis of participant contributions to the plan during 2006. In addition, Peoples Bank made a discretionary contribution to the Supplemental Savings Plan in February 2006 on behalf of participants on the basis of their contributions to the plan during 2005. The amounts shown in the column headed Registrant Contributions in Last FY in the table below reflect both the basic and discretionary matching contributions made by Peoples Bank in 2006. If Peoples Bank makes discretionary matching contributions to the Supplemental Savings Plan based on named executive officers contributions during 2006, those contributions will be made in 2007 and will be reflected in future compensation disclosures made with respect to that year.
Prior to 2007, participant contributions to the Supplemental Savings Plan did not begin until the participant was no longer eligible to make additional contributions to the 401(k) Employee Savings Plan for the year due to Internal Revenue Code limits. Beginning in 2007, the plan allows a participant to defer amounts on a non-tax-qualified basis whether or not he or she is eligible (or elects to) contribute to the 401(k) Employee Savings Plan. Also beginning in 2007, the amount of Peoples Banks matching contributions for a participant in the Supplemental Savings Plan will be offset by the maximum amount of matching contributions the participant could have received under the 401(k) Employee Savings Plan.
The following table sets
Non-Qualified Deferred Compensation
Name |
Executive
Contributions in Last FY ($) |
Registrant
Contributions in Last FY ($) |
Aggregate
Earnings in Last FY ($) |
Aggregate
Withdrawals/ Distributions ($) |
Aggregate
Balance at Last FYE ($) |
||||||||||
John A. Klein |
$ | 66,827 | $ | 66,460 | $ | 383,179 | $ | | $ | 2,267,192 | |||||
Philip R. Sherringham |
$ | 59,271 | $ | 28,667 | $ | 92,420 | $ | | $ | 313,648 | |||||
Robert R. DAmore |
$ | 62,256 | $ | 20,767 | $ | 20,842 | $ | | $ | 291,344 | |||||
Brian F. Dreyer |
$ | 62,279 | $ | 20,782 | $ | 64,219 | $ | | $ | 777,109 | |||||
William T. Kosturko |
$ | 16,503 | $ | 13,720 | $ | 29,419 | $ | | $ | 508,784 |
All amounts shown in the above table reflect activity and balances in the Peoples Bank Supplemental Savings Plan.
Supplemental Savings Plan account balances maintained on behalf of each named executive officer are deemed to have been proportionately invested in the same manner as the executive chooses to invest actual balances held in his individual account under the Peoples Bank 401(k) Employee Savings Plan. Earnings on Supplemental Savings Plan balances are calculated based on the returns earned by the investments held in the executives account under the 401(k) Employee Savings Plan. Available investments under the 401(k) Employee Savings Plan consist of Peoples Bank common stock; various
160
open-end mutual funds; and the Putnam Stable Value Fund, a collective investment trust maintained by Putnam Fiduciary Trust Company which is designed to provide a stable fixed income vehicle for defined contribution plans.
Supplemental Savings Plan balances are distributable following the executives termination of employment with Peoples Bank. Plan balances accrued as of December 31, 2004 and all subsequent earnings relating to those balances are distributable over a 13-month period beginning one month after termination. All contributions (whether by the executive or by Peoples Bank) made after that date, and all earnings relating to those contributions, are distributable over a 13-month period beginning seven months after termination.
Amounts shown in this table in the column headed Executive Contributions in Last FY are also included in the Salary column of the Summary Compensation Table. Amounts shown in this table in the column headed Registrant Contributions in Last FY are also included in the All Other Compensation column of the Summary Compensation Table.
Potential Payments upon Termination or Change in Control
The following summaries set forth potential payments payable to the named executive officers upon termination of employment or in the event of a change in control of Peoples Bank.
Employment Agreement . Under the terms of the employment agreement between Peoples Bank and Mr. Klein, Peoples Bank has the right to remove or replace Mr. Klein at any time, with or without good cause. As used in Mr. Kleins employment agreement, good cause means:
|
the start of legal proceedings intended to obtain a conviction of Mr. Klein for a crime involving moral turpitude; |
|
a court order or judgment that is intended to prevent Mr. Klein from engaging in any activity that is material to the conduct of his duties to Peoples Bank because Mr. Klein acted or failed to act in a way that the Board of Directors determines Mr. Klein knew was unlawful; |
|
a finding by the Board of Directors that Mr. Klein substantially and materially failed to perform any duty he agreed to perform under the employment agreement or to comply with any other term of the employment agreement (after Mr. Klein has been given the opportunity to appear before the Board of Directors); |
|
an act of fraud, deception or dishonesty by Mr. Klein when performing his duties on behalf of Peoples Bank, or where Mr. Klein knew his action was wrongful and his action materially harms or could be expected to harm Peoples Bank; and |
|
the inability of Mr. Klein to perform his duties because of illness, accident or other similar cause for a period of 12 months during any 24 month period (Disability). |
Likewise, Mr. Klein may resign at any time, with or without good reason, but only after providing advance written notice to Peoples Bank. Good reason means a material breach of the employment agreement by Peoples Bank (unless Peoples Bank has cured the breach within 30 days of receiving notice from Mr. Klein), or the attempted termination of Mr. Klein by Peoples Bank without satisfying the notice and other requirements for termination set out in the agreement.
If Mr. Kleins employment is terminated by Peoples Bank for good cause or by Mr. Klein without good reason, he will be entitled to receive payment of the following amounts, to the extent accrued and unpaid (or, in the case of expenses, incurred and unreimbursed) as of the date of his termination: his base compensation; reimbursement of all reasonable expenses; payment for unused vacation time; all benefits payable pursuant to the terms of the Employees Retirement Plan and the 401(k) Employee Savings Plan; and amounts payable to him under Peoples Banks Supplemental Savings Plan and the Supplemental Retirement Plans. If Mr. Kleins employment is terminated by Peoples Bank otherwise than for good cause or by Mr. Klein for good reason, Peoples Bank will make the following payments to him, contingent upon Mr. Klein not disclosing any of Peoples Banks confidential information, returning to Peoples Bank all records or other materials relating to Peoples Bank, not soliciting any employee, customer or supplier to terminate their relationship with Peoples Bank, not participating in activities that may compete with the business of Peoples Bank, and not disparaging Peoples Bank, its management or its reputation:
|
beginning upon termination of Mr. Kleins employment and ending on the earliest of (1) the third anniversary of the employment termination date; (2) December 31, 2014; or (3) the date of Mr. Kleins death (the Benefit Term), (i) his base compensation as most recently determined, plus (ii) the amount of his annual bonus (calculated on the |
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assumption that all applicable performance targets that were last in effect had been met) for the period, plus (iii) an amount equal to 150% of the matching contributions Peoples Bank would have paid or accrued with respect to the 401(k) Employee Savings Plan and the Supplemental Savings Plan on his behalf, based on the salary deferral elections most recently in effect. The foregoing payments shall be made in accordance with regular pay practices provided that such payments shall not commence until the beginning of the seventh month following the month of Mr. Kleins termination, but the first such payment shall equal the payment due for such seventh month plus all prior payments which would have otherwise been payable. |
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following completion of the Benefit Term, extra retirement benefits to Mr. Klein or his designated beneficiary concurrent with any payments made to Mr. Klein or his beneficiary pursuant to the Employees Retirement Plan and the Supplemental Retirement Plans. The amount of the extra benefit, when added to the benefits payable under the Retirement Plan and the Supplemental Retirement Plans, will result in the total amount (including the extra benefit) payable to Mr. Klein to equal the amount he would have received if he had remained employed by Peoples Bank during the Benefit Term and received base compensation and bonuses equal to the amounts payable during the Benefit Term. |
In addition, the employment agreement provides that under certain circumstances, Peoples Bank will make monthly payments to Mr. Klein or his beneficiary in an amount equal to all or a portion of the actuarial reductions for early retirement applicable to monthly benefits payable under the Employees Retirement Plan and the Supplemental Retirement Plans, in the event Mr. Klein elects to receive retirement payments under those plans prior to his normal retirement date. If Mr. Kleins employment is terminated by Peoples Bank otherwise than for good cause or by Mr. Klein for good reason prior to December 31, 2014 but after December 31, 2009, he will be entitled to receive the full amount of the actuarial reduction. If Mr. Kleins employment is terminated by Peoples Bank otherwise than for good cause, or by Mr. Klein for good reason, prior to December 31, 2014 but after May 31, 2005, he will be entitled to receive (1) the full amount of the actuarial reduction if termination occurs after May 31, 2009; and (2) between 20% and 80% of that amount (depending on the actual date of termination) if termination occurs after that date.
If the Employees Retirement Plan or the Supplemental Retirement Plans are subsequently amended in a manner that would reduce the amount payable to Mr. Klein, the agreement requires Peoples Bank to pay the additional retirement benefits described in the two preceding paragraphs to Mr. Klein without regard to the effect of any such amendment.
Mr. Kleins employment agreement has been amended on an interim basis to ensure that the calculation of retirement benefits payable under the agreement, and the timing of the payment of such benefits to Mr. Klein, will comply with the provisions of Section 409A of the Internal Revenue Code.
Mr. Klein is currently a party to a change in control agreement identical to those described below to which all other executive officers of Peoples Bank are parties. If Mr. Kleins employment is terminated under circumstances which would entitle him to receive payments pursuant to the existing change in control agreement, Mr. Klein may elect either to receive the payments and benefits payable under the terms of the change in control agreement, or to receive the payments and benefits provided in his employment agreement. He may not receive payment both under the change in control agreement and his employment agreement.
Deferred Compensation Plan . All of the named executive officers except for Mr. Sherringham are participants in the Peoples Bank Deferred Compensation Plan for Certain Executive Officers. The Deferred Compensation Plan is designed to replace a portion of the benefits previously provided to the covered officers under Peoples Banks split-dollar life insurance program for senior officers. Executive officers no longer participate in the split-dollar program to avoid potential violations of certain provisions of the Sarbanes-Oxley Act of 2002, under which Peoples Banks payment of insurance premiums to be reimbursed by the executive at a later date might be characterized as an impermissible loan to the executive. Mr. Sherringham was not a participant in the split-dollar life insurance program, and is consequently the only named executive officer currently not covered by the Deferred Compensation Plan.
Terminating the named executive officers participation in the split-dollar program resulted in a loss of future cash value under individual whole life insurance policies maintained for each named executive officer who participated in the program. This future cash value represented a portion of the long-term benefits provided to these named executive officers in prior years. The Deferred Compensation Plan for Certain Executive Officers was adopted to offset that loss of value. The Deferred Compensation Plan is intended to provide each participant with a benefit approximately equal to the difference between the
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projected cash value (calculated at various ages) of the split-dollar life insurance policy previously maintained for his or her benefit, compared to the reduced cash value of a fully paid-up life insurance policy currently maintained for his or her benefit, net of reimbursement to Peoples Bank for insurance premiums paid by Peoples Bank under the split-dollar program for each named executive officers benefit prior to adoption of the Deferred Compensation Plan. The projected cash value of each participants original split-dollar policy is a fixed amount determined as of the date the plan was adopted; the projected cash value of the replacement policies is updated no less often than annually.
Payment of all cash values previously available to the named executive officers from the life insurance policies maintained under the split-dollar program would have been made by third-party insurers, with little cost to Peoples Bank because of the executives obligation to reimburse Peoples Bank for annual premiums paid over time. All amounts now payable under the Deferred Compensation Plan for Certain Executive Officers will be paid by Peoples Bank.
Benefits under the Deferred Compensation Plan are generally payable after the executives employment with Peoples Bank ends. The amount of the benefit is determined by first comparing the projected cash surrender value of the original policy at the executives age at termination to the projected cash value of the replacement policy, net of premium reimbursements due to Peoples Bank as noted above. Since benefits paid under the Deferred Compensation Plan are fully taxable, this preliminary value is adjusted, or grossed up, by an additional amount approximating the sum of all taxes payable by the executive on account of the benefit payment. The tax gross-up feature is included because, under the split-dollar program, the named executive officer could have used the split-dollar life insurance policy to provide his or her beneficiaries with a tax-free death benefit.
No benefits are payable under the Deferred Compensation Plan if an executive dies while still employed. In that case, the executives beneficiaries or estate will receive death benefits under both the replacement policy, and a term life insurance policy purchased for that executive. No benefits are payable under the Deferred Compensation Plan if a named executive officers employment is terminated for cause. For purposes of the Deferred Compensation Plan, cause means an act of dishonesty, moral turpitude, insubordination, or an intentional or grossly negligent act detrimental to the interests of Peoples Bank or any of its affiliates.
Change of Control Agreements . Peoples Bank has entered into change in control agreements with each of the named executive officers, including the Chief Executive Officer. The change in control agreements provide that if a Change in Control (as defined below) occurs during the term of each agreement, and within three years following the Change in Control the officer is discharged from employment, Peoples Bank will pay the officer a lump sum severance payment equal to 2.99 times his or her annual salary (for this purpose, base salary plus annual incentive compensation), as well as certain insurance benefits and supplemental retirement benefits. Peoples Bank believes that this double trigger (the requirement that after a Change in Control occurs the officer must subsequently be discharged) benefits stockholders by preventing a windfall payout to management in the event of a friendly change in control that, if consummated, may maximize shareholder value. Without the second trigger, Peoples Banks executive officers would benefit from accelerated vesting of equity awards and other benefits without providing a corresponding incentive to remain with the acquiring institution.
A Change in Control is defined to include (1) certain mergers, consolidations and recapitalizations of Peoples Bank or Peoples Mutual Holdings in which a majority of shares or voting power is not held in the same proportion as prior to the transaction, (2) sales of all or substantially all of the assets of Peoples Bank or Peoples Mutual Holdings, and the liquidation or dissolution of Peoples Bank or Peoples Mutual Holdings; (3) any person (with certain exceptions) acquiring beneficial ownership of securities having 25% or more of the voting power of the outstanding securities of Peoples Bank or Peoples Mutual Holdings; and (4) a change (with certain exceptions) in a majority of the members of the Board of Directors of Peoples Bank or the Board of Trustees of Peoples Mutual Holdings; provided, however, that the second-step conversion and offering will not constitute a Change in Control. An officer is deemed to be discharged if Peoples Bank discharges him or her or if the officer elects to terminate employment for good reason. The term good reason includes adverse changes in the officers responsibilities or conditions of employment, reductions in compensation, relocation beyond a specified number of miles and adverse changes in compensation and benefit plans. Peoples Bank is not required to make payments if the officer is discharged for cause after a Change in Control. Cause is defined to mean willful failure substantially to perform his or her duties with Peoples Bank or willfully engaging in conduct which is demonstrably and materially injurious to Peoples Bank.
The change in control agreements contain provisions designed to avoid the imposition of excise taxes on the officer and the disallowance of deductions to Peoples Bank under the parachute payment provisions of the Internal Revenue Code.
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None of the benefits payable under these agreements would be nondeductible by reason of Section 280G of the Internal Revenue Code. In addition, the change in control agreements provide that Peoples Bank will not be obligated to make any payments which would violate any law, regulation or regulatory order applicable to Peoples Bank, including Federal Deposit Insurance Corporation regulations which would prohibit golden parachute payments. Federal Deposit Insurance Corporation rules limit and, in certain circumstances, prohibit a Federal Deposit Insurance Corporation-insured institution from agreeing to make or making golden parachute payments at a time when the institution is in a troubled condition. However, the golden parachute rules contain an exception for those plans considered under the rules to be bona fide deferred compensation plans. The change in control agreements also contain provisions designed to ensure that the timing of payments pursuant to the change in control agreements will be consistent with Section 409A of the Internal Revenue Code.
The change in control agreements are not employment agreements, and a covered officer may therefore be discharged by Peoples Bank prior to a Change in Control without triggering any payment obligations under these agreements.
1998 Long-Term Incentive Plan. Peoples Bank currently maintains the 1998 Long-Term Incentive Plan which provides for discretionary awards of options to purchase common stock, stock appreciation rights, restricted stock awards, and performance-based awards of cash or stock to eligible officers and employees as determined by a committee of the Board of Directors consisting of two or more outside directors. The Long-Term Incentive Plan is not subject to ERISA and is not a tax-qualified plan. As of December 31, 2006, a total of 3,841,374 shares remained available for issuance under the plan.
The Long-Term Incentive Plan is designed so that all stock options, stock appreciation rights, and awards of restricted stock and performance-based awards can be fully deductible by Peoples Bank. However, Peoples Bank has the discretion to grant awards that will not qualify for tax deduction. Moreover, in certain circumstances such as death, disability or a change of control, awards may become payable even though performance goals are not met, in which event Peoples Bank might lose part or all of its tax deduction for such awards or payments.
The Board of Directors may at any time amend or terminate the Long-Term Incentive Plan, but no such amendment or termination may impair the rights of a participant without his or her consent. Except for adjustments for certain events such as reorganizations or recapitalizations, the Board of Directors may not, without stockholder approval, increase the total number of shares reserved for use under the plan, decrease the option price of any stock option to less than the fair market value on the date of grant, change the class of employees eligible to participate in the plan or alter certain exercise periods with respect to stock options.
Stock options and restricted stock awarded under the Long-Term Incentive Plan generally vest over a four-year period, with 50% vesting on the second anniversary of the grant date and 25% on each of the third and fourth anniversaries of the grant date. The agreements under which stock options and restricted stock are granted contain provisions that accelerate vesting upon retirement (at age 65), death and disability (which means permanent and total disability as determined by the Human Resources Committee of the Board of Directors of Peoples Bank).
We anticipate that the Long-Term Incentive Plan will continue in effect after the conversion, except that equity-based awards will be made in the form of Peoples United Financial common stock rather than Peoples Bank common stock.
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The following tables set forth the estimated value of the payments and benefits that would be paid to Mr. Klein under the terms of his employment agreement, the Long-Term Incentive Plan and in the event of a Change in Control, and to the other executive officers under the terms of their change in control agreements and the Long-Term Incentive Plan, assuming the event giving rise to such payment occurred on December 31, 2006.
John Klein | ||||||||||||||||||||||
Benefit |
Voluntary | For Cause | Death (1) | Disability | Retirement | Without Cause |
Change in Control |
|||||||||||||||
Cash Severance |
$ | | $ | | $ | | $ | | $ | | $ | 4,186,619 | $ | 4,584,725 | ||||||||
Cash LTIP Award |
$ | | $ | | $ | | $ | | $ | | $ | | $ | 545,627 | ||||||||
Equity (2) |
||||||||||||||||||||||
Restricted Stock |
$ | | $ | | $ | 2,819,092 | $ | 2,819,092 | $ | | $ | | $ | 2,819,092 | ||||||||
Unexercisable Options |
| | 561,365 | 561,365 | | | 561,365 | |||||||||||||||
Total |
$ | | $ | | $ | 3,380,457 | $ | 3,380,457 | $ | | $ | | $ | 3,380,457 | ||||||||
Retirement Benefits (3) |
||||||||||||||||||||||
DB Plan (4) |
$ | 378,425 | $ | 378,425 | $ | 412,404 | (5) | $ | 378,425 | $ | 378,425 | $ | 494,021 | 494,021 | ||||||||
Deferred Compensation Plan |
$ | 221,671 | $ | | $ | | $ | 221,671 | $ | 221,671 | $ | 221,671 | $ | 221,671 | ||||||||
Other Benefits |
||||||||||||||||||||||
Health & Welfare |
$ | | $ | | $ | | $ | | $ | | $ | 17,670 | $ | 17,670 | ||||||||
Tax Gross-Ups |
188,072 | | | 188,072 | 188,072 | 188,072 | 188,072 | |||||||||||||||
Total |
$ | 188,072 | $ | | $ | | $ | 188,072 | $ | 188,072 | $ | 205,742 | $ | 205,742 | ||||||||
Grand Total |
$ | 788,168 | $ | 378,425 | $ | 3,792,861 | $ | 4,168,625 | $ | 788,168 | $ | 5,108,053 | $ | 9,432,243 |
(1) | Does not include the proceeds from any employer-paid life insurance policies. |
(2) | Based on the closing price of Peoples Bank common stock on December 29, 2006 ($44.62). |
(3) | Some of the benefits payable to executive officers under Peoples Banks defined benefit retirement plan may be paid from the Enhanced Senior Pension Plan. Retirement benefits payable under the Enhanced Senior Pension Plan will be reduced by the amount, if any, the executive is entitled to receive from any qualified defined benefit plan maintained by an executive officers previous employer(s). The amounts set forth in the table above do not reflect any such possible reductions. |
(4) | Annual accrued benefit for single life annuity at age 65 calculated as of the measurement date for the defined benefit retirement plan (September 30, 2006) assuming payments would have commenced on October 1, 2006. In the event of a change in control, each executive officers benefits under the retirement plan are immediately vested and the officer is credited with an additional three years of service. |
(5) | Death benefit is calculated based on age and years of service at date of death. |
Philip R. Sherringham | ||||||||||||||||||
Benefit |
Voluntary | For Cause | Death (1) | Disability | Without Cause | Change in Control | ||||||||||||
Cash Severance |
$ | | $ | | $ | | $ | | $ | | $ | 1,333,641 | ||||||
Cash LTIP Award |
$ | | $ | | $ | | $ | | $ | | $ | 151,700 | ||||||
Equity (2) |
||||||||||||||||||
Restricted Stock |
$ | | $ | | $ | 1,823,039 | $ | 1,823,039 | $ | | $ | 1,823,039 | ||||||
Unexercisable Options |
| | 624,803 | 624,803 | | 624,803 | ||||||||||||
Total |
$ | | $ | | $ | 2,447,842 | $ | 2,447,842 | $ | | $ | 2,447,842 | ||||||
Retirement Benefits |
||||||||||||||||||
DB Plan |
$ | | $ | | $ | | $ | | $ | | $ | | ||||||
Deferred Compensation Plan |
$ | | $ | | $ | | $ | | $ | | $ | | ||||||
Other Benefits |
||||||||||||||||||
Health & Welfare |
$ | | $ | | $ | | $ | | $ | | $ | 16,737 | ||||||
Tax Gross-Ups |
| | | | | | ||||||||||||
Total |
$ | | $ | | $ | | $ | | $ | | $ | 16,737 | ||||||
Grand Total |
$ | | $ | | $ | 2,447,842 | $ | 2,447,842 | $ | | $ | 3,949,919 |
(1) | Does not include the proceeds from any employer-paid life insurance policies. |
(2) | Based on the closing price of Peoples Bank common stock on December 29, 2006 ($44.62). |
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Robert R. DAmore | |||||||||||||||||||
Benefit |
Voluntary | For Cause | Death (1) | Disability | Without Cause | Change in Control | |||||||||||||
Cash Severance |
$ | | $ | | $ | | $ | | $ | | $ | 1,487,077 | |||||||
Cash LTIP Award |
$ | | $ | | $ | | $ | | $ | | $ | 107,844 | |||||||
Equity (2) |
|||||||||||||||||||
Restricted Stock |
$ | | $ | | $ | 1,304,600 | $ | 1,304,600 | $ | | $ | 1,304,600 | |||||||
Unexercisable Options |
| | 312,401 | 312,401 | | 312,401 | |||||||||||||
Total |
$ | | $ | | $ | 1,617,001 | $ | 1,617,001 | $ | | $ | 1,617,001 | |||||||
Retirement Benefits (3) |
|||||||||||||||||||
DB Plan (4) |
$ | | $ | | $ | 48,255 | (5) | $ | | $ | | $ | | ||||||
Deferred Compensation Plan |
$ | 30,463 | $ | | $ | | $ | 30,463 | $ | 30,463 | $ | 30,463 | |||||||
Other Benefits |
|||||||||||||||||||
Health & Welfare |
$ | | $ | | $ | | $ | | $ | | $ | | |||||||
Tax Gross-Ups |
25,846 | | | 25,846 | 25,846 | 25,846 | |||||||||||||
Total |
$ | 25,846 | $ | | $ | | $ | 25,846 | $ | 25,846 | $ | 25,846 | |||||||
Grand Total |
$ | 56,309 | $ | | $ | 1,665,256 | $ | 1,673,310 | $ | 56,309 | $ | 3,268,231 |
(1) | Does not include the proceeds from any employer-paid life insurance policies. |
(2) | Based on the closing price of Peoples Bank common stock on December 29, 2006 ($44.62). |
(3) | Some of the benefits payable to executive officers under Peoples Banks defined benefit retirement plan may be paid from the Enhanced Senior Pension Plan. Retirement benefits payable under the Enhanced Senior Pension Plan will be reduced by the amount, if any, the executive is entitled to receive from any qualified defined benefit plan maintained by an executive officers previous employer(s). The amounts set forth in the table above do not reflect any such possible reductions. |
(4) | Annual accrued benefit for single life annuity at age 65 calculated as of the measurement date for the defined benefit retirement plan (September 30, 2006) assuming payments would have commenced on October 1, 2006. In the event of a change in control, each executive officers benefits under the retirement plan are immediately vested and the officer is credited with an additional three years of service. |
(5) | Death benefit is calculated based on age and years of service at date of death. |
Brian F. Dreyer | |||||||||||||||||||
Benefit |
Voluntary | For Cause | Death (1) | Disability | Without Cause | Change in Control | |||||||||||||
Cash Severance |
$ | | $ | | $ | | $ | | $ | | $ | 1,388,116 | |||||||
Cash LTIP Award |
$ | | $ | | $ | | $ | | $ | | $ | 107,874 | |||||||
Equity (2) |
|||||||||||||||||||
Restricted Stock |
$ | | $ | | $ | 1,081,500 | $ | 1,081,500 | $ | | $ | 1,081,500 | |||||||
Unexercisable Options |
| | 312,401 | 312,401 | | 312,401 | |||||||||||||
Total |
$ | | $ | | $ | 1,393,901 | $ | 1,393,901 | $ | | $ | 1,393,901 | |||||||
Retirement Benefits (3) |
|||||||||||||||||||
DB Plan (4) |
$ | 134,447 | $ | 134,447 | $ | 61,004 | (5) | $ | 134,447 | $ | 134,447 | $ | 135,832 | ||||||
Deferred Compensation Plan |
$ | 43,602 | $ | | $ | | $ | 43,602 | $ | 43,602 | $ | 43,602 | |||||||
Other Benefits |
|||||||||||||||||||
Health & Welfare |
$ | | $ | | $ | | $ | | $ | | $ | 8,091 | |||||||
Tax Gross-Ups |
36,993 | | | 36,993 | 36,993 | 36,993 | |||||||||||||
Total |
$ | 36,993 | $ | | $ | | $ | 36,993 | $ | 36,993 | $ | 45,084 | |||||||
Grand Total |
$ | 215,042 | $ | 134,447 | $ | 1,454,905 | $ | 1,608,943 | $ | 215,042 | $ | 3,006,535 |
(1) | Does not include the proceeds from any employer-paid life insurance policies. |
(2) | Based on the closing price of Peoples Bank common stock on December 29, 2006 ($44.62). |
(3) |
Some of the benefits payable to executive officers under Peoples Banks defined benefit retirement plan may be paid from the Enhanced Senior Pension Plan. Retirement benefits payable under the Enhanced Senior Pension Plan will be |
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reduced by the amount, if any, the executive is entitled to receive from any qualified defined benefit plan maintained by an executive officers previous employer(s). The amounts set forth in the table above do not reflect any such possible reductions. |
(4) | Annual accrued benefit for single life annuity at age 65 calculated as of the measurement date for the defined benefit retirement plan (September 30, 2006) assuming payments would have commenced on October 1, 2006. In the event of a change in control, each executive officers benefits under the retirement plan are immediately vested and the officer is credited with an additional three years of service. |
(5) | Death benefit is calculated based on age and years of service at date of death. |
William T. Kosturko | |||||||||||||||||||
Benefit |
Voluntary | For Cause | Death (1) | Disability | Without Cause | Change in Control | |||||||||||||
Cash Severance |
$ | | $ | | $ | | $ | | $ | | $ | 1,440,523 | |||||||
Cash LTIP Award |
$ | | $ | | $ | | $ | | $ | | $ | 97,371 | |||||||
Equity (2) |
|||||||||||||||||||
Restricted Stock |
$ | | $ | | $ | 894,185 | $ | 894,185 | $ | | $ | 894,185 | |||||||
Unexercisable Options |
| | 201,770 | 201,770 | | 201,770 | |||||||||||||
Total |
$ | | $ | | $ | 1,095,955 | $ | 1,095,955 | $ | | $ | 1,095,955 | |||||||
Retirement Benefits (3) |
|||||||||||||||||||
DB Plan (4) |
$ | 124,073 | $ | 124,073 | $ | 56,582 | (5) | $ | 124,073 | $ | 124,073 | $ | 124,272 | ||||||
Deferred Compensation Plan |
$ | 51,015 | $ | | $ | | $ | 51,015 | $ | 51,015 | $ | 51,015 | |||||||
Other Benefits |
|||||||||||||||||||
Health & Welfare |
$ | | $ | | $ | | $ | | $ | | $ | 17,670 | |||||||
Tax Gross-Ups |
43,283 | | | 43,283 | 43,283 | 43,283 | |||||||||||||
Total |
$ | 43,283 | $ | | $ | | $ | 43,283 | $ | 43,283 | $ | 60,953 | |||||||
Grand Total |
$ | 218,371 | $ | 124,073 | $ | 1,152,537 | $ | 1,314,326 | $ | 218,371 | $ | 2,870,089 |
(1) | Benefits payable upon retirement are not included, since none of the executive officers was eligible for normal retirement at age 65 as of December 31, 2006. |
(2) | Does not include the proceeds from any employer-paid life insurance policies. |
(3) | Based on the closing price of Peoples Bank common stock on December 29, 2006 ($44.62). |
(4) | Some of the benefits payable to executive officers under Peoples Banks defined benefit retirement plan may be paid from the Enhanced Senior Pension Plan. Retirement benefits payable under the Enhanced Senior Pension Plan will be reduced by the amount, if any, the executive is entitled to receive from any qualified defined benefit plan maintained by an executive officers previous employer(s). The amounts set forth in the table above do not reflect any such possible reductions. |
(5) | Annual accrued benefit for single life annuity at age 65 calculated as of the measurement date for the defined benefit retirement plan (September 30, 2006) assuming payments would have commenced on October 1, 2006. In the event of a change in control, each executive officers benefits under the retirement plan are immediately vested and the officer is credited with an additional three years of service. |
(6) | Death benefit is calculated based on age and years of service at date of death. |
Director Compensation
Peoples Bank has compensated its directors for their services and expects to continue this practice. Information relating to the compensation of Peoples Banks directors during 2006 is set forth below.
Director Compensation (1)
Fees Earned or
($) (2) (3) |
Stock Awards
($) (4) |
Total ($) |
||||
Collin P. Baron |
97,975 | 101,930 | 199,905 | |||
George P. Carter |
224,775 | 101,930 | 326,705 | |||
Jerry Franklin |
141,175 | 101,930 | 243,105 | |||
Eunice S. Groark |
60,225 | 101,930 | 162,155 | |||
Janet M. Hansen |
60,175 | 101,930 | 162,105 | |||
Richard M. Hoyt |
95,075 | 101,930 | 197,005 | |||
Jeremiah J. Lowney |
75,125 | 101,930 | 177,055 | |||
Jack E. McGregor |
79,225 | 101,930 | 181,155 | |||
James A. Thomas |
120,875 | 101,930 | 222,805 |
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(1) | The columns disclosing option awards, non-equity incentive plan compensation, changes in pension value and nonqualified deferred compensation earnings, and other forms of compensation have been omitted from the table because no director earned any compensation during 2006 or in prior years of a type required to be disclosed in those columns. |
(2) | Includes annual cash retainer, Committee chair retainer (if any) and per meeting fees. For Mr. Carter, includes fees paid for service as lead director and fees paid for non-meeting related services as Chairman of the Banks Audit Committee. For Mr. Franklin, includes fees paid for non-meeting related services as a member of Peoples Banks Audit Committee. |
(3) | For Messrs. Baron, Carter, Franklin, Hoyt and Thomas, includes cash compensation paid by Peoples Mutual Holdings, as detailed below. |
(4) | Reflects three months of compensation expense attributable to shares awarded in April 2005 and nine months of compensation expense attributable to shares awarded in April 2006. Each director was awarded 2,797 shares of Peoples Bank common stock on April 20, 2006 with a fair value as of that date of $94,902. As of December 31, 2006, each non-employee director owned 11,797 shares of common stock awarded pursuant to the Peoples Bank Directors Equity Compensation Plan for which transfer restrictions had not yet lapsed. For each director, those shares had a value of $526,382 based on the closing price of Peoples Bank common stock on December 29, 2006 (the last business day of the year). |
Compensation of the Board of Directors of Peoples Bank is established by the board, upon recommendation of the Human Resources Committee. Directors who are employed by Peoples Bank are not entitled to additional compensation for board or committee service. Directors who are not employed by Peoples Bank receive compensation according to the following table:
Annual Fees: |
|||
Cash Retainer (all members) |
$ | 24,000 | |
Equity Compensation (all members) |
95,000 | ||
Vice Chairman/ Lead Director |
65,000 | ||
Committee Chairman: |
|||
Audit Committee |
10,500 | ||
Loan Review Committee |
8,000 | ||
All Other Committees |
4,000 | ||
Per-Meeting Attendance Fees : |
|||
Board meetings (all members) |
$ | 950 | |
Committee meetings |
|||
Audit Committee |
|||
Chairman |
1,450 | ||
Other Audit Committee members |
1,200 | ||
Loan Review Committee Chairman |
1,150 | ||
Members of all Committees (except Audit) |
950 |
Following the conversion, all annual fees except for fees payable to the Chairman of the Loan Review, Operational Risk, Treasury and Finance, and Trust Committees, respectively, will be paid by Peoples United Financial and will no longer be paid by Peoples Bank. In addition, no separate compensation will be paid to a director of Peoples Bank who attends a board or committee meeting that is held jointly with a board or committee meeting of Peoples United Financial and who is compensated for that meeting by Peoples United Financial.
A director who, by invitation, attends a meeting of a committee of which he or she is not a regular member will be paid the same attendance fee as is payable to members of that committee. From time to time, Mr. Carter performs certain additional services in his capacity as Chairman of the Audit Committee without a meeting of the Audit Committee (for example, meetings with representatives of Peoples Banks independent registered public accountants). In such cases, he receives an amount equal to the Chairmans regular Audit Committee meeting attendance fee. In addition, Mr. Franklin periodically participates in the review of Peoples Banks regulatory filings with the Office of Thrift Supervision. Mr. Franklin receives an amount equal to his regular Audit Committee meeting attendance fee for participation in each such review.
In addition to cash fees, non-employee directors also receive compensation in the form of Peoples Bank common stock under the Peoples Bank Directors Equity Compensation Plan. Under the Peoples Bank Directors Equity Compensation
167.1
Plan, each director who is not an employee is granted an annual award of shares of Peoples Bank common stock based on a target dollar value of $95,000. These grants are made immediately following each annual meeting of stockholders. A person appointed as a director between annual meetings is eligible for a full or partial grant of an annual award at the time of his or her appointment, in the discretion of the Human Resources Committee.
Cash dividends payable with respect to shares of common stock issued to directors under the Peoples Bank Directors Equity Compensation Plan are paid in the same amount and at the same time as dividends are paid to stockholders generally. Stock dividends, stock splits and similar transactions will have the same effect on shares of stock issued pursuant to the Peoples Bank Directors Equity Compensation Plan as on all other shares of Peoples Bank common stock outstanding.
Shares of common stock issued under the Peoples Bank Directors Equity Compensation Plan vest immediately but are generally not transferable by a director until the third anniversary of the grant date or, if earlier, at the time he or she ceases to be a Peoples Bank director. In the event of a directors death, shares of common stock held in his or her name will be issued to his or her beneficiary. All transfer restrictions will lapse upon a change in control, as that term is defined in the plan.
As part of the conversion, Peoples United Financial will assume the Peoples Bank Directors Equity Compensation Plan, which will cease to exist as a plan maintained by Peoples Bank. Awards will be made in Peoples United Financial common stock rather than Peoples Bank common stock, and will be made to directors in their capacity as directors of Peoples United Financial rather than as directors of Peoples Bank. See Management of Peoples United Financial Director and Executive Officer Compensation .
Directors who are not employees of Peoples Bank may defer all or a part of their director compensation in accordance with the terms of the Amended and Restated Deferred Compensation Plan for Directors. Under this plan, a director may defer retainer and meeting fees until such time as the director ceases to be a member of the Board of Directors. Amounts deferred under the Plan earn interest at market rates until paid. No member of the Board of Directors has deferred any fees under the Amended and Restated Deferred Compensation Plan for Directors.
In addition to compensation received from Peoples Bank, Messrs. Baron, Carter, Franklin, Hoyt and Thomas also received cash compensation from Peoples Mutual Holdings in 2006 for service on the Board of Trustees of Peoples Mutual Holdings and for service as Corporators of Peoples Mutual Holdings. Total 2006 compensation paid by Peoples Mutual Holdings to Messrs. Baron, Carter, Franklin, Hoyt and Thomas was $27,300; $29,200; $27,300; $29,200; and $31,200, respectively. These amounts are included in the column headed Fees Earned or Paid in Cash in the table above. Trustees of Peoples Mutual Holdings receive an annual cash retainer of $23,000 plus a per-meeting fee of $950 for each board or committee meeting they attend. Trustees who are also directors of Peoples Bank are not separately compensated by Peoples Mutual Holdings for board meetings that are held jointly with meetings of the Board of Directors of Peoples Bank. In addition to these fees, Mr. Thomas received a retainer of $2,000 for serving as Chairman of the Board of Trustees of Peoples Mutual Holdings in 2006.
Changes to Director Compensation in 2006. The Peoples Bank Directors Equity Compensation Plan was amended in April 2006. This amendment was approved both by the Board of Directors and by Peoples Banks stockholders. The amendment changed the basis upon which the annual award of Peoples Bank common stock is determined under the plan. The plan had previously provided for an annual award of 4,500 shares of stock to each non-employee director. This was changed to provide for an annual award to be determined based on a target dollar value of $95,000, rather than a fixed number of shares. As a result of this amendment, each non-employee director was awarded 2,797 shares of common stock under the Peoples Bank Directors Equity Compensation Plan following Peoples Banks annual meeting of stockholders in April 2006.
The directors believe that determining the number of shares to be awarded under the plan based on a target dollar value will help to ensure that the value of the directors stock-based compensation does not become excessive as the result of increases in Peoples Banks stock price.
The Board of Directors also approved an increase in the cash annual retainer paid to non-employee directors from $8,500 to $24,000. Implementation of this increase was made contingent on stockholder approval of changes to the Peoples Bank Directors Equity Compensation Plan. As the result of the amendment to the Peoples Bank Directors Equity Compensation Plan and the related increase in the annual cash retainer, each non-employee director is eligible to receive approximately $119,000 in annual compensation from these two sources for Board service. Based on the price of Peoples Bank common stock at the time these changes were made, this represented approximately $42,000 less than each non-employee director would have been eligible to receive in annual compensation from these two sources had these changes not been implemented.
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Director compensation was also impacted by the number of Board and committee meetings held in 2006. Both the Board of Directors and the Human Resources Committee met more often in 2006 than had been their practice in previous years. The increased number of meetings in 2006 reflects Board and committee consideration of issues related to Peoples Banks conversion from a state to a federal charter, as well as the proposed second step conversion of Peoples Mutual Holdings.
Stock Ownership Guidelines. The Board of Directors of Peoples Bank has adopted guidelines for stock ownership by directors in order to encourage members of the Board to increase their ownership of Peoples Banks stock over time. Under these guidelines, directors who were members of the board in 2002 were expected to own shares of common stock with a value equal to three times the value of the then-current annual cash retainer and stock award, or $357,000, as of December 31, 2005. In addition, these directors are expected to own shares of Peoples Bank common stock with a value equal to five times the value of the then-current annual cash retainer and stock award, or $595,000, as of December 31, 2008. All members of the Board except Mrs. Hansen are subject to these guidelines. The guidelines also provide that directors who join the Board after 2002 are expected to own shares of Peoples Bank common stock with a value equal to three times the then-current value of the annual cash retainer and stock award by the annual meeting following the directors third anniversary of Board service, and are expected to own shares of common stock with a value equal to five times the then-current value of the annual cash retainer and stock award by the annual meeting following the fifth anniversary of Board service. Mrs. Hansen, who joined the Board of Directors in February, 2004, is subject to these guidelines. The stock ownership of all members of the Board of Directors was in compliance with applicable guidelines as of December 31, 2006.
Compensation Committee Interlocks and Insider Participation
The Human Resources Committee of Peoples Banks Board of Directors is composed solely of individuals who are neither officers nor employees of Peoples Bank, Peoples Mutual Holdings, Peoples United Financial or any of their respective subsidiaries. The members of the Human Resources Committee are James A. Thomas (Chairman), George P. Carter, and Jerry Franklin. During the fiscal year ended December 31, 2006, there were no interlocks, as defined under the rules and regulations of the Securities and Exchange Commission, between members of the Human Resources Committee or executive officers of Peoples Bank and corporations with which such persons are affiliated.
Future Benefit Plans
Stock Option Plan. We intend to implement an additional stock option plan for our key employees, officers and directors following the conversion and offering. Applicable regulations prohibit us from implementing this plan until six months after the conversion and offering and require that we obtain the approval of the holders of a majority of the outstanding shares of Peoples United Financial.
We expect to adopt a stock option plan that will authorize the Compensation and Nominating Committee of Peoples United Financial to grant options to purchase authorized but unissued shares of up to 10% of the shares sold in the offering and issued to the charitable foundation, except that the independent members of the Board of Directors must approve any grants made to the chief executive officer, president and the executive vice presidents of Peoples United Financial. The Compensation and Nominating Committee (or the independent members of the Board, as the case may be) will decide which
167.3
employees, officers and directors will receive options and what the terms of those options will be. However, no stock option will permit its recipient to purchase shares at a price that is less than the fair market value of a share on the date such option is granted, and no option will have a term that is longer than ten years. If we implement a stock option plan before the first anniversary of the conversion and offering, applicable regulations will require that we observe the following restrictions:
|
We must limit the total number of shares that are optioned to outside directors to 30% of the shares authorized for issuance under the plan. |
|
We must also limit the number of shares that are optioned to any one outside director to 5% of the shares authorized for issuance under the plan and the number of shares that are optioned to any executive officer to 25% of the shares that are authorized for issuance under the plan. |
|
We must not permit the options to become vested at a more rapid rate than 20% per year beginning on the first anniversary of stockholder approval of the plan. |
|
We must not permit accelerated vesting for any reason other than death, disability or a change of control. |
After the first anniversary of the conversion and offering, we may amend the plan to change or remove these restrictions. If we adopt a stock option plan within one year after the conversion and offering, we expect to amend the plan later to remove these restrictions and to provide for accelerated vesting in case of retirement. We will have to recognize compensation expense for accounting purposes ratably over the vesting period, equal to the fair value of the options on the original grant date.
We expect the stock option plan will permit the Compensation and Nominating Committee (or the independent members of the Board, as the case may be) to grant either incentive stock options that qualify for special federal income tax treatment or non-qualified stock options that do not qualify for special treatment. Incentive stock options may be granted only to employees and will not create federal income tax consequences when they are granted. If they are exercised during employment or within three months after termination of employment, the exercise will not create federal income tax consequences. When the shares acquired on exercise of an incentive stock option are resold, the seller must pay federal income taxes on the amount by which the sales price exceeds the purchase price. This amount will be taxed at capital gains rates if the sale occurs at least two years after the option was granted and at least one year after the option was exercised. Otherwise, it is taxed as ordinary income.
Non-qualified stock options may be granted to either employees or non-employees such as directors. Incentive stock options that are exercised more than three months after termination of employment are treated as non-qualified stock options. Non-qualified stock options will not create federal income tax consequences when they are granted. When they are exercised, the person who exercises the options must pay federal income taxes on the amount by which the fair market value of the shares acquired by exercising the option exceeds the exercise price. When the shares acquired on exercise of a non-qualified stock option are resold, the seller must pay federal income taxes on the amount by which the sales price exceeds the exercise price plus the amount included in ordinary income when the option was exercised. This amount will be taxed at capital gains rates, which will vary depending upon the time that has elapsed since the exercise of the option.
When a non-qualified stock option is exercised, we may be allowed a federal income tax deduction for the same amount that the option holder includes in his or her ordinary income. This amount may be the same as the related compensation expense or it may be different. When an incentive stock option is exercised, there is no tax deduction unless the shares acquired are resold sooner than two years after the option was granted or one year after the option was exercised.
Recognition and Retention Plan. We intend to implement a recognition and retention plan for our key employees, officers and directors after the conversion and offering. Applicable regulations prohibit us from implementing this plan until six months after the conversion and offering and require that we obtain the approval of the holders of a majority of the outstanding shares of Peoples United Financial.
We expect to adopt a recognition and retention plan that will authorize the Compensation and Nominating Committee of Peoples United Financial to make restricted stock awards of up to 4% of the shares sold in the offering and issued to the charitable foundation, except that the independent members of the Board of Directors must approve any grants made to the chief executive officer, president and the executive vice presidents of Peoples United Financial. The Compensation and Nominating Committee (or the independent members of the Board, as the case may be) will decide which employees, officers and directors will receive restricted stock and what the terms of those awards will be. If we implement a recognition
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and retention plan before the first anniversary of the conversion, applicable regulations will require that we observe the following restrictions:
|
We must limit the total number of shares that are awarded to outside directors to 30% of the shares authorized for issuance under the plan. |
|
We must also limit the number of shares that are awarded to any one outside director to 5% of the shares authorized for issuance under the plan and the number of shares that are awarded to any executive officer to 25% of the shares that are authorized for issuance under the plan. |
|
We must not permit the awards to become vested at a more rapid rate than 20% per year beginning on the first anniversary of stockholder approval of the plan. |
|
We must not permit accelerated vesting for any reason other than death, disability or a change of control. |
After the first anniversary of the conversion and offering, we may amend the plan to change or remove these restrictions. If we adopt a recognition and retention plan within one year after the conversion, we expect to amend the plan later to remove these restrictions and to provide for accelerated vesting in case of retirement.
Restricted stock awards under this plan may feature vesting restrictions that require (1) continued employment, (2) the achievement of specified corporate or individual performance goals or (3) a combination of employment and performance requirements. Awards will not be vested unless the specified employment restrictions and performance goals are met. Pending vesting, the award recipient may have voting and dividend rights. When an award becomes vested, the recipient must include the current fair market value of the vested shares in his or her income for federal income tax purposes. We may be allowed a federal income tax deduction in the same amount. Depending on the nature of the restrictions attached to the restricted stock award, we may have to recognize compensation expense for accounting purposes ratably over the vesting period or in a single charge when the performance conditions are satisfied.
Employee Stock Ownership Plan. We intend to implement a tax-qualified employee stock ownership plan in connection with the offering which we expect will purchase up to 6% of the sum of the shares of common stock we sell in the offering and those we issue to the charitable foundation, or 11,246,250 shares of common stock, assuming we sell 185,437,500 shares, the maximum of the number of shares being offered. We expect that this employee stock ownership plan will, with prior Office of Thrift Supervision approval, purchase these shares in the open market following the offering using funds borrowed from us. However, as a tax-qualified employee benefit plan, this plan may instead purchase shares in the subscription offering consistent with its subscription priority. The plan is a tax-qualified retirement plan for the benefit of all employees. Assuming the employee stock ownership plan purchases 11,246,250 shares, we will recognize additional compensation expense of $224.9 million over a 30-year period, assuming the shares of common stock have a fair market value of $20.00 per share for the full 30-year period. If, in the future, the shares of common stock have a fair market value greater or less than $20.00, the compensation expense will increase or decrease accordingly.
Because investment decisions for our employee stock ownership plan are subject to the discretion of an independent fiduciary, we can offer no assurance as to the amount, timing or other terms of stock purchases by this plan.
Change-in-Control Employee Severance Plan . Upon consummation of the conversion, Peoples Bank intends to establish the Peoples Bank Change-in-Control Employee Severance Plan, referred to as the severance plan, which will provide eligible employees with severance pay benefits in the event of a change in control, as defined in the severance plan, of Peoples Bank or Peoples United Financial.
Generally, all employees, other than executive officers with individual employment or change in control agreements, who are employed at Peoples Bank as of the date of the conversion will be eligible to participate in the severance plan. Once a change in control occurs, the severance plan vests in each participant a contractual right to the benefits such participant is entitled to thereunder. Under the severance plan, in the event of a change in control, eligible employees who are terminated or, in certain cases, terminate their employment (for reasons specified in the severance plan), will be entitled to receive a severance payment, the amount of such payment depending on the participants position as of the date of termination and the number of full years of service with Peoples Bank. The participant will be entitled to a cash severance payment equal to between 1/26 th and 1/13 th of the participants total compensation, as defined in the severance plan, depending on the participants position with Peoples Bank, for each full year of service with Peoples Bank. The maximum severance payment under the severance plan for employees whose management position under Peoples Banks internal position
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description is a Director level and above is 200% of total compensation; the maximum severance payment for other management-level employees is 150% of total compensation; and the maximum for all other employees is 100% of total compensation. The minimum payment for employees who are management Director level and above is 50% of their total compensation. The minimum payment for all other employees is 3/13 th of their total compensation. Total compensation is defined as normal straight time earnings, overtime earnings, commissions and annual performance incentives (but not long-term incentive compensation) earned by the employee during the calendar year immediately preceding the calendar year in which the date of termination occurs.
In addition, the severance plan provides that Peoples Bank will maintain medical and dental plan coverage for a period of six months following the employees date of termination, or until comparable benefits are provided by a new employer, whichever occurs first, at no greater cost to the employee than the employee is paying as of the date of termination.
Certain Transactions with Members of Our Board of Directors and Executive Officers
Peoples Bank engages in banking transactions (including loans and other extensions of credit) in the ordinary course of business with various business organizations which have directors or executive officers of Peoples Bank as their officers, partners, members and stockholders. Peoples Bank also extends credit to its directors and executive officers to the extent it is permitted to do so under applicable laws and regulations. Such transactions are made in the ordinary course of business; are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans with persons not affiliated with Peoples Bank; and do not involve more than the normal risk of collectibility or present other unfavorable features.
Peoples Mutual Holdings has entered into a management agreement with Peoples Bank pursuant to which Peoples Bank provides certain accounting, legal, managerial, administrative and investment management functions for Peoples Mutual Holdings. For 2005, Peoples Mutual Holdings paid Peoples Bank approximately $606,000 for providing such services, together with out-of-pocket costs incurred by Peoples Bank on behalf of Peoples Mutual Holdings. It is intended that Peoples United Financial will enter into a similar management agreement with Peoples Bank upon completion of the conversion.
Mr. Baron, a director of Peoples Bank, is a member of the law firm of Pullman & Comley, LLC. This firm routinely represents Peoples Bank in connection with a variety of legal matters. Mr. Barons membership interest in Pullman & Comley is less than 10%. For fiscal year 2006, Peoples Bank paid a total of $1,546,200 to the firm (approximately 5% of the firms total revenues for that year). Pullman & Comley maintains a $1,000,000 line of credit with Peoples Bank. The rate of interest payable on the line of credit is Peoples Banks prime rate (8.25% at December 31, 2006). The line of credit was not drawn upon by the firm during 2006, there was no outstanding balance as of December 31, 2006, and no principal or interest was paid during 2006. Peoples Bank has also issued a standby letter of credit for Pullman & Comleys account, for which the firm pays a 2% annual fee ($8,517 in fiscal year 2006). The amount of the letter of credit is reduced each year by $60,000, and at December 31, 2006 the remaining balance was $360,000. Each of the line of credit and standby letter of credit is secured by a first lien on the business assets of the firm (primarily in the form of accounts receivable) and is guaranteed by those members of Pullman & Comley who have a membership interest in the net profits and distributions of the firm, to the extent of such interest. Peoples Capital and Leasing Corp., a subsidiary of Peoples Bank, has entered into capital lease transactions with Pullman & Comley relating to commercial equipment, furniture and leasehold improvements. During 2006, the highest outstanding commitment under these leases was $2,543,129, and at December 31, 2006 the outstanding commitment was $2,039,727. Pullman & Comley paid Peoples Capital and Leasing a total of $824,000 in principal and $176,752 in interest in 2006. The rates of interest payable on such leases range between 4.65% and 9.24%. The leases are secured by collateral consisting of the leased equipment, and a second position lien to Peoples Bank on the firms business assets. Pullman & Comley also leases office space from Peoples Bank. In 2006, Peoples Bank was paid $875,970 in lease payments from the firm.
Mrs. Groark is a director of Peoples Bank. Her husband is of counsel to the law firm of Day Pitney LLP, which has been retained by Peoples Bank from time to time on various legal matters. For fiscal year 2006, Peoples Bank paid a total of $130,581 to Day Pitney. However, Mr. Groark did not represent Peoples Bank in connection with any matter during 2006 and, therefore, as a result of his of counsel position would not receive any direct or indirect benefit from Peoples Banks relationship with that firm.
170
Mr. McGregor, a director of Peoples Bank, is of counsel to the law firm of Cohen and Wolf, P.C., which occasionally performs legal services for Peoples Bank. For fiscal year 2006, Peoples Bank paid less than $10,000 to this firm. Mr. McGregor did not represent Peoples Bank in connection with any matter during 2006 and, therefore, as a result of his of counsel position would not receive any direct or indirect benefit from Peoples Banks relationship with Cohen and Wolf, P.C. Mr. McGregor is also a managing member of the investment firm of Black Rock Investors, LLC. Black Rock Investors, LLC was formed to participate in various projects designed to stimulate the redevelopment of areas of the City of Bridgeport and other urban areas in the region. Black Rock Investors, LLCs participation in redevelopment projects may take various forms, including equity investments in projects, acting as project manager for developers, providing project funding advice and establishing and managing a fund for the purchase of potential project sites. Peoples Bank may provide financing for one or more of the projects in which Black Rock Investors, LLC is a participant. To date Peoples Bank has not provided financing for any such project.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners
As reflected in the following table, as of September 30, 2006, Peoples Mutual Holdings beneficially owned 82,012,500 shares of Peoples Bank common stock. Peoples Mutual Holdings is a mutual form bank holding company currently governed by an 11 member Board of Trustees. Six members of Peoples Bank Board of Directors also serve as trustees of Peoples Mutual Holdings.
Peoples Mutual Holdings is the only person known to or believed by Peoples Bank to be the beneficial owner of more than five percent of the common stock of Peoples Bank. Peoples Mutual Holdings has sole voting and investment power with respect to the shares owned by it.
Title of Class |
Name and Address of Beneficial Owner |
Amount and
Nature of Beneficial Ownership |
Percent of
Class |
||||
Common |
Peoples Mutual Holdings Bridgeport Center 850 Main Street Bridgeport, Connecticut 06604 |
82,012,500 | 57.7 | % |
Security Ownership of Peoples Banks Management
The following table sets forth, as of September 30, 2006, the beneficial ownership of Peoples Bank common stock by each director, each named executive officer who is not also a director, and by all directors and executive officers as a group. Except as indicated in the notes following the table, each person has sole voting and investment power with respect to the shares listed as being beneficially owned by such person.
Common Stock | ||||||
Amount and Nature of
Beneficial Ownership |
Percent of
Class |
|||||
Directors |
||||||
Collin P. Baron |
42,735 | (a) | * | |||
George P. Carter |
40,171 | (a) | * | |||
Jerry Franklin |
23,851 | (a) | * | |||
Eunice S. Groark |
29,347 | (a) | * | |||
Janet M. Hansen |
11,797 | (a) | * | |||
Richard M. Hoyt |
31,099 | (a) | * | |||
John A. Klein |
626,014 | (b) | * | |||
Jeremiah J. Lowney, Jr. |
32,047 | (a) | * | |||
Jack E. McGregor |
15,822 | (a) | * | |||
James A. Thomas |
18,571 | (a) | * | |||
Named Executive Officers |
||||||
Robert R. DAmore |
156,746 | (b) | * | |||
Brian F. Dreyer |
126,341 | (b)(c) | * | |||
William T. Kosturko |
192,993 | (b) | * | |||
Philip R. Sherringham |
84,271 | (b) | * | |||
All Directors and Executive Officers as a Group (18 persons) |
1,800,802 | 1.26 | % |
* | Denotes beneficial ownership of less than one percent of the outstanding shares of Peoples Bank common stock. |
(a) | Includes 11,797 shares of Peoples Bank common stock awarded under the Peoples Bank Directors Equity Compensation Plan, which are subject to restrictions on transfer for a specified period of time. |
(b) | Includes shares of common stock subject to restrictions, held indirectly through benefit plans, or subject to acquisition within 60 days, as follows: |
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Shares listed in the following table are subject to forfeiture if certain conditions are not satisfied:
Name |
Shares | |
John A. Klein |
63,180 | |
Robert R. DAmore |
29,238 | |
Brian F. Dreyer (c) |
26,947 | |
William T. Kosturko |
20,040 | |
Philip R. Sherringham |
40,857 | |
All Directors and Executive Officers as a Group (18 persons) |
233,507 |
Shares listed in the following table are allocated under the 401(k) Employee Savings Plan to the participants listed below who have 401(k) Employee Savings Plan balances invested in Peoples Bank common stock:
Name |
Shares | |
John A. Klein |
46,048 | |
Robert R. DAmore |
19,722 | |
Brian F. Dreyer (c) |
6,577 | |
William T. Kosturko |
725 | |
Philip R. Sherringham |
2,857 | |
All Directors and Executive Officers as a Group (18 persons) |
100,063 |
The persons listed in the following table have the right to acquire the listed number of shares within 60 days from September 30, 2006, whether upon the exercise of stock options or otherwise. In December 2005, Peoples Bank accelerated the vesting of all outstanding, unvested stock options previously awarded to employees. Shares of Peoples Bank common stock acquired pursuant to the exercise of any options which became vested on an accelerated basis may not be sold or otherwise transferred until the earlier of (1) the date the option would have vested under the terms on which it was initially awarded, or (2) termination of the optionholders employment with Peoples Bank. Shares that would be subject to these restrictions appear in the column headed Restricted.
Name |
Right to Acquire | |||
Unrestricted | Restricted | |||
John A. Klein |
336,375 | 97,560 | ||
Robert R. DAmore |
26,212 | 32,513 | ||
Brian F. Dreyer (c) |
21,263 | 40,670 | ||
William T. Kosturko |
46,728 | 28,322 | ||
Philip R. Sherringham |
0 | 40,557 | ||
All Directors and Executive Officers as a Group (18 persons) |
506,592 | 349,142 |
(c) | Includes shares of Peoples Bank common stock held by Mr. Dreyers spouse which are subject to restrictions (2,709 shares), held indirectly through benefit plans (6,447 shares), or subject to acquisition within 60 days (no shares unrestricted, 8,157 shares restricted). |
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PROPOSED PURCHASES OF COMMON STOCK BY MANAGEMENT
The following table presents, for each of our directors and executive officers: (1) the number of shares of Peoples United Financial common stock to be received in the share exchange pursuant to the exchange ratio at the midpoint of the offering, based upon each individuals beneficial ownership of Peoples Bank common stock as of September 30, 2006; (2) the proposed purchases of shares of Peoples United Financial common stock in the subscription offering; and (3) the total number of shares of Peoples United Financial common stock to be held upon consummation of the conversion and offering. We have assumed that a sufficient number of shares will be available to satisfy each individuals subscription order. The amounts with respect to each director and executive officer include shares that may be purchased through individual retirement accounts, through the 401(k) Employee Savings Plan, and by associates of such individual. Collectively, our directors and executive officers and their associates expect to purchase a total of 387,500 shares in the offering, representing approximately 0.2% of the total shares available for sale in the offering (assuming the midpoint of the offering range and including shares issued to the charitable foundation). The number of shares that our directors and executive officers expect to purchase in the offering does not include shares that may be awarded or issued in the future under any of our stock benefit plans. The shares purchased by our directors and executive officers and their associates will be included in calculating whether the minimum number of shares necessary to close the offering have been sold.
Name |
Title |
Number of Shares
of Peoples United Financial Common Stock To Be Received In The Share Exchange (1) |
Proposed Purchase of
Conversion Stock |
Total Shares of
Peoples United Financial Common Stock to be Held |
|||||||
Amount |
Number
of Shares |
Number of Shares (1) |
|||||||||
John A. Klein |
President, Chief Executive Officer and Chairman of the Board | 1,230,869 | $ | 2,000,000 | 100,000 | 1,330,869 | |||||
Collin P. Baron |
Director | 84,026 | 200,000 | 10,000 | 94,026 | ||||||
George P. Carter |
Vice Chairman of the Board and Lead Director | 78,984 | 250,000 | 12,500 | 91,484 | ||||||
Jerry Franklin |
Director | 46,896 | 200,000 | 10,000 | 56,896 | ||||||
Eunice S. Groark |
Director | 57,702 | 200,000 | 10,000 | 67,702 | ||||||
Janet M. Hansen |
Director | 23,195 | 250,000 | 12,500 | 35,695 | ||||||
Richard M. Hoyt |
Director | 61,147 | 200,000 | 10,000 | 71,147 | ||||||
Jeremiah J. Lowney, Jr. |
Director | 63,011 | 200,000 | 10,000 | 73,011 | ||||||
Jack E. McGregor |
Director | 31,109 | 200,000 | 10,000 | 41,109 | ||||||
James A. Thomas |
Director | 36,514 | 200,000 | 10,000 | 46,514 | ||||||
Jacinta A. Coleman |
Executive Vice President and Chief Information Officer | 166,930 | 500,000 | 25,000 | 191,930 | ||||||
Robert R. DAmore |
Executive Vice President, Marketing and Regional Banking | 308,194 | 450,000 | 22,500 | 330,694 | ||||||
Brian F. Dreyer |
Executive Vice President, Commercial Banking | 248,412 | 500,000 | 25,000 | 273,412 | ||||||
Bryan J. Huebner |
Executive Vice President, Consumer Financial Services | 149,801 | 400,000 | 20,000 | 169,801 | ||||||
William T. Kosturko |
Executive Vice President and General Counsel | 379,463 | 500,000 | 25,000 | 404,463 | ||||||
Henry R. Mandel |
Executive Vice President, Organization Effectiveness | 233,567 | 400,000 | 20,000 | 253,567 | ||||||
Philip R. Sherringham |
Executive Vice President and Chief Financial Officer | 165,694 | 600,000 | 30,000 | 195,694 | ||||||
Mark K. Vitelli |
Executive Vice President, Direct Banking and Operations | 175,226 | 500,000 | 25,000 | 200,226 | ||||||
All directors and executive officers as a group |
3,540,737 | $ | 7,750,000 | 387,500 | 3,928,237 |
(1) | The number of additional shares to be received in the share exchange is based on the exchange ratio of 1.9662 at the midpoint of the offering range. Includes stock options exercisable within 60 days of September 30, 2006, but excludes |
stock options and awards that may be granted under the existing long-term incentive plans or stock options which are currently outstanding but are not exercisable within 60 days of September 30, 2006. The total shares of Peoples United Financial common stock to be held upon completion of the conversion and offering include shares indicated as beneficially owned in the table under Security Ownership of Certain Beneficial Owners and Management Security Ownership of Management. |
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The Board of Trustees of Peoples Mutual Holdings and the Board of Directors of Peoples Bank adopted the plan of conversion on September 19, 2006, and amended and restated the plan of conversion on October 26, 2006. The plan of conversion must also be approved by the depositors and stockholders of Peoples Bank. A special meeting of the depositors and a special meeting of stockholders has been called for this purpose on April 5, 2007. The Office of Thrift Supervision has conditionally approved the plan of conversion; however, such approval does not constitute a recommendation or endorsement of the plan of conversion by that agency.
General
Pursuant to the plan of conversion, our organization will convert from the mutual holding company form of organization, which is 42.3% owned by public stockholders, to the full stock form, which will be 100% owned by public stockholders. Peoples Mutual Holdings, the mutual holding company parent of Peoples Bank, will convert from a federally chartered mutual holding company to a federally chartered interim stock savings bank (Interim A) and simultaneously merge with and into Peoples Bank, with Peoples Bank as the surviving entity; thereafter, Peoples Mutual Holdings will no longer exist as a separate entity. The common stock of Peoples Bank held by Peoples Mutual Holdings will be canceled and a liquidation account will be established for the benefit of the depositors of Peoples Bank as of specified dates. Immediately thereafter, Peoples United Financial, a newly formed Delaware-chartered stock corporation and wholly owned subsidiary of Peoples Bank, will form a federally chartered interim stock savings bank as a wholly owned subsidiary (Interim B), which will merge with and into Peoples Bank, with Peoples Bank as the surviving entity. The shares of common stock of Interim B held by Peoples United Financial will be converted, on a one-to-one basis, into shares of common stock of Peoples Bank. The public stockholders of Peoples Bank will exchange their shares of the common stock of Peoples Bank for shares of the common stock of Peoples United Financial, based on an exchange ratio. See The Share Exchange of Peoples Bank Common Stock for Peoples United Financial Common Stock.
As a result, all of the common stock of Peoples Bank will be owned by Peoples United Financial and the public stockholders will own approximately the same percentage of the common stock of Peoples United Financial as the percentage of the common stock of Peoples Bank owned by them prior to the conversion, exclusive of their purchase of additional shares of Peoples United Financial common stock in the offering and their receipt of cash in lieu of fractional shares. In connection with the conversion, shares of common stock of Peoples United Financial representing the 57.7% ownership interest of Peoples Mutual Holdings will be offered for sale in the offering. In addition, the plan of conversion provides for the establishment of The Peoples Community Foundation and our funding of this charitable foundation with 2,000,000 shares of Peoples United Financial common stock and $20.0 million in cash from the offering proceeds. The establishment and funding of The Peoples Community Foundation is subject to a separate vote of Peoples Banks depositors and stockholders.
When the conversion and offering are completed, all of the capital stock of Peoples Bank will be owned by Peoples United Financial and all of the common stock of Peoples United Financial will be owned by public stockholders, including the charitable foundation. A diagram of our corporate structure before and after the conversion is set forth in the Summary section of this prospectus.
Peoples United Financial intends to contribute 50% of the net proceeds of the offering to Peoples Bank. We also intend to lend our employee stock ownership plan cash to enable the plan to buy up to 6% of the sum of the shares sold in the offering and those issued to the charitable foundation. Peoples United Financial will retain the balance of the net proceeds minus the cash contribution to the charitable foundation. The conversion will be completed only upon completion of the issuance of at least the minimum number of shares of Peoples United Financial common stock to be offered pursuant to the plan of conversion.
The plan of conversion provides that Peoples United Financial will offer shares of its common stock in the subscription offering in the order of priority listed below:
(1) | Depositors with accounts at Peoples Bank with aggregate balances of at least $50 on June 30, 2005; |
(2) | Our tax-qualified employee stock benefit plans; |
(3) | Depositors with accounts at Peoples Bank with aggregate balances of at least $50 on December 31, 2006; and |
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(4) | Peoples Banks depositors as of February 5, 2007. |
The shares of common stock not purchased in the subscription offering will be offered to the general public on a best efforts basis by Morgan Stanley & Co. Incorporated, acting as sole book-running manager, by Keefe, Bruyette & Woods, Inc., Lehman Brothers and Ryan Beck & Co., Inc., as joint lead managers and Sandler ONeill & Partners, L.P., as co-manager in a syndicated offering through a syndicate of selected dealers.
We have the right to accept or reject orders received in the syndicated offering at our sole discretion. The syndicated offering may begin at any time following the commencement of the subscription offering and must be completed within 45 days after the completion of the subscription offering unless otherwise extended by us, with approval of the Office of Thrift Supervision. Alternatively, we may sell any remaining shares in an underwritten public offering, which would be conducted on a firm commitment basis. See Syndicated Offering/Underwritten Public Offering.
We determined the number of shares of common stock to be offered in the offering based upon an independent appraisal of the estimated pro forma market value of our common stock, giving effect to the conversion, the purchase price per share and Peoples Mutual Holdings 57.7% ownership interest in Peoples Bank. All shares of common stock to be sold in the offering will be sold at $20.00 per share. No commission will be charged to purchasers. The independent valuation will be updated and the final number of the shares to be issued in the offering will be determined at the completion of the offering. See Stock Pricing and Number of Shares to be Issued for more information as to the determination of the estimated pro forma market value of our common stock.
The following is a brief summary of the conversion, which is qualified in its entirety by reference to the provisions of the plan of conversion. A copy of the plan of conversion is available for inspection at each branch office of Peoples Bank and at the Northeast Regional and the Washington, D.C. offices of the Office of Thrift Supervision. The plan of conversion is also filed as an exhibit to the application to convert from mutual to stock form of which this prospectus is a part, copies of which may be obtained from the Office of Thrift Supervision. See Where You Can Find Additional Information .
Reasons for the Conversion
The conversion and offering are intended to provide us with substantially greater access to capital resources than is available to us under the mutual holding company structure. We believe that the conversion and offering will result in a more active and liquid trading market for the common stock of Peoples United Financial than currently exists for the common stock of Peoples Bank. In addition, the stock holding company structure will provide us with more flexibility in structuring mergers and acquisitions.
The net proceeds raised in the offering will allow us to:
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finance de novo expansion and support organic growth both inside and outside of the state of Connecticut; |
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acquire other financial institutions, branches or other businesses related to banking, although there is no specific agreement with any institution at this time; |
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increase lending to support continued growth in our commercial banking loan portfolios; |
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form a charitable foundation to benefit the communities we serve; and |
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use the additional capital for other general corporate purposes. |
Since its mutual holding company reorganization in 1988, Peoples Bank has gained experience as a public company complying with the Securities Exchange Act of 1934, as amended, and in conducting stockholder meetings and other stockholder matters, such as communications, press releases, stock repurchases and dividend payments. For all the foregoing reasons, and after considering the relative merits of the conversion and offering, as well as applicable fiduciary duties, the Board of Trustees of Peoples Mutual Holdings and the Board of Directors of Peoples Bank approved the conversion and offering as being in the best interests of each such institution, the communities they serve and the depositors, stockholders and employees of Peoples Bank.
Approvals Required
The affirmative vote of a majority of the total number of votes eligible to be cast by the depositors of Peoples Bank at the special meeting of depositors is required to approve the plan of conversion and the establishment and funding of the
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charitable foundation. By their approval of the plan of conversion, the depositors of Peoples Bank will also be approving the various transactions required to accomplish the conversion, including the formation of the interim institutions and the mergers of the interim institutions with and into Peoples Bank. The affirmative vote of the holders of a majority of the outstanding shares of Peoples Bank common stock entitled to vote at a meeting of stockholders of Peoples Bank and the affirmative vote of a majority of the outstanding shares of Peoples Bank common stock, excluding shares held by Peoples Mutual Holdings, are also required to approve the plan of conversion and the establishment and funding of the charitable foundation. The plan of conversion and the establishment and funding of the charitable foundation also must both be approved by the Office of Thrift Supervision.
The Share Exchange of Peoples Bank Common Stock for Peoples United Financial Common Stock
Office of Thrift Supervision regulations provide that, in a conversion of a mutual holding company to fully stock form, the public stockholders will exchange their existing shares of common stock for shares issued in the conversion by the new holding company, provided that the mutual holding company demonstrates to the satisfaction of the Office of Thrift Supervision that the basis for the share exchange is fair and reasonable. Each share of Peoples Bank common stock outstanding as of the date of completion of the conversion (other than shares held by Peoples Mutual Holdings, which will be canceled as a result of the conversion of Peoples Mutual Holdings to a federal interim stock savings bank and simultaneous merger into Peoples Bank) will be subject to the exchange, pursuant to which each stockholder will automatically be entitled to exchange his or her shares of Peoples Bank common stock for shares of Peoples United Financial common stock, pursuant to an exchange ratio.
Shares of Peoples Bank common stock held by stockholders as of the date of completion of the conversion and offering will be canceled and exchanged for new shares of Peoples United Financial common stock. The number of shares received will be based on an exchange ratio which will be determined as of the date of completion of the conversion and offering and will be based on the percentage of Peoples Bank common stock held by the public prior to the conversion, the final independent appraisal of Peoples United Financial common stock prepared by RP Financial and the number of shares of common stock sold in the offering. The exchange ratio will ensure that existing public stockholders of Peoples Bank common stock will own approximately the same percentage of Peoples United Financial common stock after the conversion and offering as they owned of Peoples Bank common stock immediately prior to completion of the conversion and offering, exclusive of the effect of their purchase of additional shares in the offering and the receipt of cash in lieu of fractional shares. The exchange ratio does not depend on the market price of Peoples Bank common stock.
The following table shows how many shares a hypothetical owner of Peoples Bank common stock would receive in the share exchange, based on the number of shares sold in the offering.
Shares to be sold in this offering |
Shares to be exchanged for shares of Peoples Bank common stock |
Shares to be issued to the foundation |
Total shares of common stock to be outstanding after the conversion |
Exchange ratio |
Equivalent per share current market price (1) |
Shares that would be exchanged per 100 shares of Peoples Bank common stock |
||||||||||||||||||
Amount | Percent | Amount | Percent | Amount | Percent | |||||||||||||||||||
Minimum |
137,062,500 | 57.22 | % | 100,491,584 | 41.95 | % | 2,000,000 | 0.83 | % | 239,554,084 | 1.6712 | $ | 33.42 | 167 | ||||||||||
Midpoint |
161,250,000 | 57.29 | % | 118,225,393 | 42.00 | % | 2,000,000 | 0.71 | % | 281,475,393 | 1.9662 | $ | 39.32 | 196 | ||||||||||
Maximum |
185,437,500 | 57.34 | % | 135,959,202 | 42.04 | % | 2,000,000 | 0.62 | % | 323,396,702 | 2.2611 | $ | 45.22 | 226 | ||||||||||
Maximum, as adjusted |
213,253,125 | 57.39 | % | 156,353,083 | 42.07 | % | 2,000,000 | 0.54 | % | 371,606,208 | 2.6003 | $ | 52.01 | 260 |
(1) | Represents the value of shares of Peoples United Financial common stock and cash in lieu of fractional shares received in the share exchange by a holder of one share of Peoples Bank common stock at the exchange ratio, assuming a market price of $20.00 per share. |
For example, at the midpoint shown in the preceding table a stockholder owning 100 shares of stock would receive 196 shares plus $12.40 in cash.
No fractional shares of our common stock will be issued. For each fractional share that would otherwise be issued, we will pay by check an amount equal to the product obtained by multiplying the fractional share interest to which the holder
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would otherwise be entitled by the $20.00 per share purchase price. Holders with shares held in street name will receive these funds in their brokerage accounts. Holders with certificated shares and shares held in book-entry form will receive checks.
All shares of Peoples United Financial common stock issued in exchange for existing shares of Peoples Bank common stock will be considered to have been issued in full satisfaction of all rights pertaining to such shares, subject, however, to our obligation to pay any dividends or make any other distributions with a record date prior to the effective date of the conversion and offering, which may have been declared by us on or prior to the effective date and which remain unpaid at the effective date.
We also will convert options previously awarded under the Peoples Bank 1998 Long-Term Incentive Plan into options to purchase Peoples United Financial common stock. At September 30, 2006, there were outstanding options to purchase 1,435,055 shares of Peoples Bank common stock. The number of outstanding options and related per share exercise prices will be adjusted based on the exchange ratio. The aggregate exercise price, term and vesting period of the outstanding options will remain unchanged. If any options are exercised before we complete the offering, the number of shares of Peoples Bank common stock outstanding will increase and the exchange ratio could be adjusted. If all currently outstanding options are exercised, stockholders will experience dilution of approximately 1.00% in their ownership interest in Peoples Bank common stock.
Effects of the Conversion
Continuity. While the conversion is being accomplished, the normal business of Peoples Bank of accepting deposits and making loans will continue without interruption. Peoples Bank will continue to be a federally chartered savings bank and will continue to be regulated by the Office of Thrift Supervision. After the conversion, Peoples Bank will continue to offer existing services to depositors, borrowers and other customers. Directors and officers of Peoples Bank prior to the conversion will continue to serve as directors and officers of Peoples Bank after the conversion. Directors and certain officers of Peoples Bank prior to the conversion will serve as directors and officers of Peoples United Financial after the conversion. Corporators of Peoples Mutual Holdings will cease to hold such office following the conversion; Peoples United Financial will not have a Board of Corporators. Trustees of Peoples Mutual Holdings who are not directors of Peoples Bank will become Advisory Board members of Peoples Bank.
Effect on Deposit Accounts . Under the plan of conversion, each depositor in Peoples Bank at the time of the conversion will automatically continue as a depositor after the conversion, and the deposit balance, interest rate and other terms of such deposit accounts will not change as a result of the conversion. Each such account will be insured by the Federal Deposit Insurance Corporation to the same extent as before the conversion. Depositors will continue to hold their existing certificates, passbooks and other evidences of their accounts.
Effect on Loans. No loan outstanding from Peoples Bank will be affected by the conversion, and the amount, interest rate, maturity and security for each loan will remain as it was contractually fixed prior to the conversion.
Effect on Voting Rights of Depositors. At present, depositors of Peoples Bank have no voting rights in Peoples Mutual Holdings, except as provided in the plan of conversion. Upon completion of the conversion, Peoples Mutual Holdings will cease to exist as a separate entity and depositors, in their capacity as such, will have no voting rights in Peoples United Financial or Peoples Bank. Upon completion of the conversion, all voting rights in Peoples Bank shall be held and exercised exclusively by Peoples United Financial, as the sole stockholder of Peoples Bank. The stockholders of Peoples United Financial will possess exclusive voting rights with respect to Peoples United Financial common stock.
Tax Effects. We will receive an opinion of counsel or tax advisor with regard to federal and state income taxation to the effect that the conversion will not be taxable for federal or state income tax purposes to Peoples Mutual Holdings, Peoples Bank, Peoples United Financial, the public stockholders of Peoples Bank and Peoples United Financial (except to the extent of any cash received in lieu of a fractional share interest in Peoples United Financial), depositors of Peoples Bank, eligible account holders, or supplemental eligible account holders. See Tax Aspects and United States Federal Tax Considerations Applicable to Non-U.S. Holders of the Common Stock.
Effect on Liquidation Rights . Each qualifying depositor in Peoples Bank has both a deposit account in Peoples Bank and a pro rata ownership interest in the net worth of Peoples Mutual Holdings based upon the balance in his or her account. This ownership interest is tied to the depositors account and has no tangible market value separate from the deposit account.
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This interest may only be recognized in the unlikely event of a complete liquidation of Peoples Mutual Holdings and Peoples Bank. Any depositor who opens a qualifying deposit account in Peoples Bank obtains a pro rata ownership interest in Peoples Mutual Holdings without any additional payment beyond the amount of the deposit. A depositor who reduces or closes his or her account receives a portion or all of the balance in the deposit account but nothing for his or her ownership interest in the net worth of Peoples Mutual Holdings, which is extinguished to the extent that the balance in the account is reduced or closed.
Consequently, depositors in a stock subsidiary savings bank of a mutual holding company normally have no way of realizing the value of their ownership interest, which has realizable value only in the unlikely event that Peoples Mutual Holdings and Peoples Bank are liquidated. If this occurs, the depositors of record at that time would share pro rata in any residual surplus and reserves of Peoples Mutual Holdings after other claims, including claims of depositors to the amounts of their deposits, are paid.
In the unlikely event that Peoples Bank were to liquidate after the conversion, all claims of creditors, including those of depositors, would be paid first, followed by distribution of the liquidation account to depositors as of June 30, 2005 and December 31, 2006 who continue to maintain their deposit accounts as of the date of liquidation, with any assets remaining thereafter distributed to Peoples United Financial as the holder of Peoples Banks capital stock. See Liquidation Rights.
Effect on Existing Equity-Based Compensation Plans . Following the conversion, Peoples Banks existing 1998 Long-Term Incentive Plan and Directors Equity Compensation Plan will continue in accordance with their terms as then in effect, except that the Peoples Bank Directors Equity Compensation Plan will be assumed by Peoples United Financial. Upon completion of the conversion, the number of shares of Peoples Bank common stock currently reserved for or held by these benefit plans will be exchanged for shares of Peoples United Financial common stock based upon the exchange ratio. All outstanding grants and awards will be adjusted pursuant to customary anti-dilution provisions.
Stock Pricing and Number of Shares to be Issued
The plan of conversion requires that the aggregate purchase price of the Peoples United Financial common stock to be sold in the offering must be based on the appraised pro forma market value of our common stock, as determined on the basis of an independent valuation. We have retained RP Financial, LC., an appraisal firm experienced in appraisals of financial institutions, to prepare an independent valuation appraisal. There has been no material relationship between Peoples Bank and RP Financial for the past two years. RP Financials fees for its services in preparing this appraisal are estimated to be $900,000. We have agreed to indemnify RP Financial and its employees and affiliates against specified losses (including any losses in connection with claims under the federal securities laws) arising out of its services as independent appraiser, except where RP Financials liability results from its negligence or bad faith.
Consistent with Office of Thrift Supervision appraisal guidelines, the independent appraisal applied three primary methodologies to estimate the pro forma market value of our common stock: the pro forma price-to-book value approach applied to both reported book value and tangible book value; the pro forma price-to-earnings approach applied to reported and estimated core earnings; and the pro forma price-to-assets approach. The market value ratios applied in the three methodologies were based upon the current market valuations of a peer group of companies considered by RP Financial to be comparable to us, subject to valuation adjustments applied by RP Financial to account for differences between Peoples Bank and the peer group. The peer group analysis conducted by RP Financial included a total of 12 publicly-traded financial institutions with assets of more than $4.0 billion and market capitalizations of at least $400 million. The peer group is comprised of six publicly-traded thrifts and six publicly-traded commercial banks, all selected based on asset size, market area (two Connecticut institutions are included) and operating strategy. In preparing its appraisal, RP Financial placed the greatest emphasis on the price-to-earnings approach and placed lesser emphasis on the price-to-book and price-to-assets approaches in estimating pro forma market value.
RP Financial prepared the independent valuation in reliance upon the information contained in this prospectus, including the consolidated financial statements of Peoples Bank. RP Financial also considered the following factors, among others:
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our present and projected operating results and financial condition and proposed use of proceeds; |
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the economic and demographic conditions in our existing market area; |
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historical, financial and other information relating to us; |
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a comparative evaluation of our operating and financial characteristics with those of other similarly situated publicly-traded banks and savings institutions; |
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the aggregate size of the offering of the common stock; |
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the impact of the conversion and offering on our equity and earnings potential; |
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our proposed dividend policy; and |
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the trading market for securities of comparable institutions and general conditions in the market for such securities. |
RP Financials independent valuation also utilized certain assumptions as to the pro forma earnings of Peoples United Financial after the offering. These assumptions included estimated expenses, an assumed after-tax rate of return on the net offering proceeds, and expenses related to the stock-based benefit plans of Peoples United Financial, including the employee stock ownership plan, the recognition and retention plan and the stock option plan. The employee stock ownership plan and recognition and retention plan are assumed to purchase 6% and 4%, respectively, of the sum of the shares sold in the offering and those issued to the charitable foundation. The stock option plan is assumed to grant options to purchase the equivalent of 10% of the sum of the shares sold in the offering and those issued to the charitable foundation. See Pro Forma Data for additional information concerning these assumptions. The use of different assumptions may yield different results.
RP Financial also considered that we intend to contribute cash and issue shares of common stock to The Peoples Community Foundation, a charitable foundation that will be established in connection with the conversion. The intended contribution of cash and shares of common stock to the charitable foundation has the effect of reducing the estimated size of the offering of our common stock. See Comparison of Valuation and Pro Forma Information With and Without the Charitable Foundation .
RP Financial prepared an original valuation dated October 16, 2006. RP Financial subsequently prepared an updated valuation dated January 18, 2007, taking into account recent developments through December 31, 2006 and updated stock prices. Based on their updated independent valuation dated January 18, 2007, RP Financial has advised us that, as of January 18, 2007, the estimated pro forma market value, or valuation range, of our common stock, including offering shares, exchange shares and shares issued to the charitable foundation, ranged from a minimum of $4.791 billion to a maximum of $6.468 billion, with a midpoint of $5.630 billion. The Board of Trustees of Peoples Mutual Holdings and the Board of Directors of Peoples Bank have decided to offer the shares for a price of $20.00 per share. RP Financial has advised us that, as of January 18, 2007, the exchange ratio ranged from a minimum of 1.6712 to a maximum of 2.2611, with a midpoint of 1.9662, shares of Peoples United Financial common stock per share of Peoples Bank common stock. The aggregate offering price of the shares of common stock will be equal to the valuation range net of the value of the shares issued to the charitable foundation multiplied by the 57.7% ownership interest that Peoples Mutual Holdings has in Peoples Bank. The number of shares offered will be equal to the aggregate offering price divided by the price per share. Based on the valuation range, the value of shares issued to the charitable foundation, the percentage of Peoples Bank common stock owned by Peoples Mutual Holdings and the $20.00 price per share, the minimum of the offering range is 137,062,500 shares, the midpoint of the offering range is 161,250,000 shares, the maximum of the offering range is 185,437,500 shares and 15% above the maximum of the offering range is 213,253,125 shares. RP Financials independent valuation will be updated before we complete our offering.
The Board of Directors of Peoples Bank and the Board of Trustees of Peoples Mutual Holdings reviewed the independent valuation and, in particular, considered the following:
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Peoples Banks financial condition and results of operations; |
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comparison of financial performance ratios of Peoples Bank to those of other financial institutions of similar size; |
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market conditions generally and in particular for financial institutions; |
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the historical trading price of the publicly held shares of Peoples Bank common stock; and |
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comparison of Peoples United Financials pro forma pricing multiples to the average and median pricing multiples of the peer group companies. |
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All of these factors are set forth in the independent valuation. The Board of Trustees of Peoples Mutual Holdings and the Board of Directors of Peoples Bank also reviewed the methodology and the assumptions used by RP Financial in preparing the independent valuation and the Board of Trustees and the Board of Directors believe that such assumptions are reasonable. The offering range may be amended with the approval of the Office of Thrift Supervision, if required, as a result of subsequent developments in our financial condition or market conditions generally. In the event the independent valuation is updated to amend the pro forma market value of our common stock, including offering shares, exchange shares and shares issued to the charitable foundation, to less than $4.791 billion or more than $7.432 billion, the appraisal will be filed with the Securities and Exchange Commission by a post-effective amendment to our registration statement.
The following table presents a summary of selected pricing ratios for the peer group companies used by RP Financial in its independent appraisal report and the resulting pricing ratios for Peoples United Financial reflecting the pro forma impact of the offering, as calculated in the table in the section of this prospectus entitled Pro Forma Data . Compared to the median pricing ratios of the peer group, Peoples United Financials pro forma pricing ratios at the midpoint of the offering range indicated a premium of 88% on a price-to-earnings basis and discounts of 34% on a price-to-book basis and 45% on a price-to-tangible book value basis. The estimated appraised value and the resulting premiums or discounts took into consideration the potential financial impact of the conversion and offering.
Price to | ||||||||
Earnings
Multiple (1) |
Book
Value Ratio |
Tangible
Book Value Ratio |
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Peoples United Financial (pro forma) (2) : |
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Minimum |
27.27x | 128.12 | % | 131.84 | % | |||
Midpoint |
30.00x | 135.50 | % | 138.99 | % | |||
Maximum |
32.61x | 141.44 | % | 144.82 | % | |||
Maximum, as adjusted |
35.71x | 147.17 | % | 150.26 | % | |||
All publicly-traded thrifts as of January 18, 2007: |
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Average |
18.27x | 139.71 | % | 163.83 | % | |||
Median |
15.84x | 131.62 | % | 144.78 | % | |||
All publicly-traded banks as of January 18, 2007: |
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Average |
17.05x | 187.80 | % | 231.22 | % | |||
Median |
16.03x | 179.90 | % | 221.20 | % | |||
Valuation of peer group as of January 18, 2007 (3) : |
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Average |
17.53x | 209.12 | % | 269.15 | % | |||
Median |
15.96x | 205.31 | % | 250.45 | % |
(1) | Multiples calculated by RP Financial in the January 18, 2007 appraisal are based on an estimate of core, or recurring, earnings for the 12 months ended December 31, 2006 and on total pro forma outstanding shares of common stock, including all shares owned by our employee stock ownership plan, whether or not allocated to participants and including shares issued to the charitable foundation, and equal 24.86, 27.75, 30.38 and 33.10, respectively, at the minimum, midpoint, maximum and adjusted maximum of the offering range. Because this is a different method than used by us in calculating the numbers included in this table and in the pro forma information included under Pro Forma Data , the pro forma price-to-earnings multiples in the table do not correspond to the multiples in the appraisal. See note 1 to the pro forma information included under Pro Forma Data for more information on our treatment of shares owned by our employee stock ownership plan for purposes of this calculation. |
(2) | Based on Peoples Banks financial data as of and for the nine months ended September 30, 2006. Price-to-earnings multiples for Peoples United Financial are shown on an annualized basis. |
(3) | Reflects earnings for the most recent 12-month period for which data were publicly available. |
The independent valuation prepared by RP Financial is not intended, and must not be construed, as a recommendation of any kind as to the advisability of purchasing shares of our common stock. RP Financial did not independently verify the consolidated financial statements and other information provided by Peoples Bank, nor did RP Financial value independently the assets or liabilities of Peoples Bank. The independent valuation considers Peoples Bank as a going concern and should not be considered as an indication of the liquidation value of Peoples
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Bank. Moreover, because the valuation is necessarily based upon estimates and projections of a number of matters, all of which are subject to change from time to time, no assurance can be given that persons purchasing Peoples United Financial common stock in the offering will thereafter be able to sell their shares at prices at or above the $20.00 purchase price.
Following commencement of the subscription offering, the maximum of the valuation range may be increased by up to 15% to up to $7.432 billion, as a result of regulatory considerations, demand for the shares or changes in market conditions, which would result in a corresponding increase of up to 15% in the maximum of the offering range to up to 213,253,125 shares and of the exchange ratio to 2.6003 shares of Peoples United Financial common stock per share of Peoples Bank common stock. The price of $20.00 per share will remain fixed.
If the update to the independent valuation at the conclusion of the offering results in an increase in the maximum of the valuation range to more than $7.432 billion and a corresponding increase in the offering range to more than 213,253,125 shares, or a decrease in the minimum of the valuation range to less than $4.791 billion and a corresponding decrease in the offering range to fewer than 137,062,500 shares, then, after consulting with the Office of Thrift Supervision, we may terminate the plan of conversion, cancel all deposit account withdrawal authorizations and promptly return by check all funds received in the subscription offering with interest at Peoples Banks passbook savings rate of interest calculated from the date of receipt of the stock order. Alternatively, we may hold a new offering or establish a new offering range, extend the offering period and commence a resolicitation of subscribers or take other actions as permitted by the Office of Thrift Supervision in order to complete the conversion and offering. If a resolicitation is commenced, we will notify all subscribers, and subscribers will have the right to change (increase or decrease) or rescind their purchase orders during a resolicitation period. If we do not receive a response from a subscriber to any resolicitation, the subscribers order will be rescinded, all withdrawal authorizations will be canceled and all funds received will be returned promptly with interest at Peoples Banks passbook savings rate.
An increase in the number of shares to be issued in the offering would decrease both a purchasers ownership interest and our pro forma earnings and stockholders equity on a per share basis while increasing pro forma earnings and stockholders equity on an aggregate basis. A decrease in the number of shares to be issued in the offering would increase both a purchasers ownership interest and our pro forma earnings and stockholders equity on a per share basis, while decreasing pro forma earnings and stockholders equity on an aggregate basis. For a presentation of the effects of these changes, see Pro Forma Data .
We are also offering for sale to the general public in a syndicated offering through a syndicate of selected dealers any shares of our common stock not subscribed for by our depositors in the subscription offering. We may begin the syndicated offering at any time following the commencement of the subscription offering. Alternatively, we may sell any remaining shares in an underwritten public offering. See Syndicated Offering/Underwritten Public Offering.
Copies of the independent valuation appraisal report of RP Financial, including any amendments thereto, and the detailed memorandum of RP Financial setting forth the method and assumptions for the appraisal are available for inspection at our administrative offices and as specified under Where You Can Find Additional Information .
Subscription Offering and Subscription Rights
In accordance with the plan of conversion, non-transferable rights to subscribe for shares of common stock in the subscription offering have been granted in the following descending order of priority. The filling of subscriptions that we receive will depend on the availability of common stock after satisfaction of all subscriptions of all persons having prior rights in the subscription offering and to the maximum, minimum and overall purchase limitations set forth in the plan of conversion and as described below under Limitations on Common Stock Purchases . Orders will not be filled in the syndicated offering unless and until all properly submitted subscriptions are filled.
Priority 1: Eligible Account Holders. Each Peoples Bank depositor with aggregate deposit account balances of $50 or more on June 30, 2005 is an eligible account holder and will receive, without payment therefor, nontransferable subscription rights to purchase up to 100,000 shares of common stock, subject to the overall purchase limitations. See Limitations on Common Stock Purch ases.
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If there are not sufficient shares available to satisfy all subscriptions from eligible account holders, available shares will first be allocated so as to permit each subscribing eligible account holder to purchase a number of shares sufficient to make his or her total allocation equal to the lesser of 100 shares or the number of shares for which he or she subscribed. Thereafter, unallocated shares will be allocated to each subscribing eligible account holder whose subscription remains unfilled in the proportion that the amount of his or her qualifying deposit bears to the total amount of qualifying deposits of all subscribing eligible account holders whose subscriptions remain unfilled. Any shares then remaining shall be reallocated among those eligible account holders whose subscriptions are not fully satisfied until all available shares have been allocated.
To ensure proper allocation of stock, each eligible account holder must list on his or her stock order form all deposit accounts in which he or she had an ownership interest on June 30, 2005. In the event of oversubscription, failure to list an account could result in fewer shares being allocated than if all accounts had been disclosed. The subscription rights of eligible account holders who are also our trustees, directors or officers and their associates will be subordinated to the subscription rights of other eligible account holders to the extent attributable to increased deposits in the twelve months preceding June 30, 2005.
Priority 2: Tax-Qualified Employee Stock Benefit Plans . Our tax-qualified employee stock benefit plans, including our employee stock ownership plan, will receive, as a second priority and without payment therefor, nontransferable subscription rights to purchase in the aggregate up to 8.0% of the shares of common stock sold in the offering and issued to the charitable foundation, including any increase in the number of shares of common stock after the date hereof as a result of an increase of up to 15% in the maximum of the offering range. Our employee stock ownership plan, which is a tax-qualified employee stock benefit plan, expects to purchase an amount equal to up to 6% of the sum of the shares of common stock we sell in the offering and those that we issue to the charitable foundation in the open market following the offering (with prior Office of Thrift Supervision approval) using funds borrowed from us, but may instead purchase all or a portion of the shares in the offering, pursuant to the subscription right granted to our tax-qualified employee stock benefit plan. Shares purchased by our employee stock ownership plan will not be aggregated with shares of common stock purchased directly by or which are otherwise attributable to any other participants in the offering, including our officers, trustees, directors or employees or their associates.
Priority 3: Supplemental Eligible Account Holders. To the extent that there are sufficient shares remaining after satisfaction of subscriptions by eligible account holders and our tax-qualified employee stock benefit plans, each Peoples Bank depositor, except the directors and certain officers of Peoples Bank and their associates, with aggregate deposit account balances of $50 or more on December 31, 2006, who is not an eligible account holder is a supplemental eligible account holder; provided, however, that any director or officer of Peoples Bank employed, appointed or elected for the first time to such office after June 30, 2005 shall not be precluded from being a supplemental eligible account holder solely by reason of holding such office. Each supplemental eligible account holder will be deemed a supplemental eligible account holder and will receive, without payment therefor, nontransferable subscription rights to purchase up to 100,000 shares of common stock, subject to the overall purchase limitations. See Limitations on Common Stock Purchases .
If there are not sufficient shares available to satisfy all subscriptions, available shares will first be allocated so as to permit each subscribing supplemental eligible account holder to purchase a number of shares sufficient to make his or her total allocation equal to the lesser of 100 shares or the number of shares for which he or she subscribed. Thereafter, unallocated shares will be allocated to each subscribing supplemental eligible account holder whose subscription remains unfilled in the proportion that the amount of his or her qualifying deposit bears to the total amount of qualifying deposits of all subscribing supplemental eligible account holders whose subscriptions remain unfilled. Any shares then remaining shall be reallocated among those supplemental eligible account holders whose subscriptions are not fully satisfied until all available shares have been allocated.
To ensure proper allocation of common stock, each supplemental eligible account holder must list on his or her stock order form all deposit accounts in which he or she has an ownership interest on December 31, 2006. In the event of oversubscription, failure to list an account could result in fewer shares being allocated than if all accounts had been disclosed.
Priority 4: Other Depositors. To the extent that there are sufficient shares remaining after satisfaction of subscriptions by eligible account holders, our tax-qualified employee stock benefit plans, and supplemental eligible account holders, each Peoples Bank depositor as of February 5, 2007 who is not an eligible account holder or a supplemental eligible account holder will be deemed an other depositor and will receive, without payment therefor, nontransferable subscription rights to
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purchase up to 100,000 shares of common stock, subject to the overall purchase limitations. See Limitations on Common Stock Purchases.
If there are not sufficient shares available to satisfy all subscriptions, available shares will first be allocated so as to permit each subscribing other depositor to purchase a number of shares sufficient to make his or her total allocation equal to the lesser of 100 shares or the number of shares for which he or she subscribed. Thereafter, unallocated shares will be allocated to each subscribing other depositor whose subscription remains unfilled in the proportion that the amount of his or her qualifying deposit bears to the total amount of qualifying deposits of all subscribing other depositors whose subscriptions remain unfilled. Any shares then remaining shall be reallocated among those other depositors whose subscriptions are not fully satisfied until all available shares have been allocated.
To ensure proper allocation of common stock, each other depositor must list on his or her stock order form all deposit accounts in which he or she has an ownership interest on February 5. In the event of oversubscription, failure to list an account could result in fewer shares being allocated than if all accounts had been disclosed.
Other Potential Investors. Persons who do not otherwise qualify as eligible account holders, supplemental eligible account holders or other depositors will not have subscription rights to purchase shares in the subscription offering. Such persons may be able to purchase shares in the syndicated offering or underwritten public offering, but the opportunity to purchase shares in the syndicated or public offering is subject to our right, in our sole discretion, to reject orders, in whole or in part, either at the time of receipt of an order or as soon as practicable following the conclusion of the offering.
Persons in Non-qualified States or Foreign Countries . We will make reasonable efforts to comply with the securities laws of all jurisdictions in the United States in which persons entitled to subscribe for stock pursuant to the plan of conversion reside. However, no person who resides in a foreign country or in a jurisdiction of the United States with respect to which any of the following apply will be offered or receive stock in the subscription offering: (a) there are few persons otherwise eligible to subscribe for shares under the plan of conversion who reside in such jurisdiction; (b) the granting of subscription rights or the offer or sale of shares of our stock to such persons would require us or our trustees, directors and officers, under the laws of such jurisdiction, to register as a broker-dealer, salesman or selling agent or to register or otherwise qualify our stock for sale in such jurisdiction, or we would be required to qualify as a foreign corporation or file a general consent to service of process in such jurisdiction; or (c) such registration, qualification or filing in our judgment would be impracticable or unduly burdensome for reasons of cost or otherwise.
You May Not Sell Or Transfer Your Subscription Rights
Office of Thrift Supervision regulations prohibit you from transferring your subscription rights. Your subscription rights may only be exercised by you for your own account. Common stock may also be registered in the name of a trust for which you are the sole beneficiary or sole income beneficiary. For this purpose, an individual retirement account that is held as a custodial account is deemed to be a trust. When completing your stock order form, you should not add the name(s) of persons who do not have subscription rights or who qualify in a lower subscription priority than you do. If you do so, you will lose your subscription rights. If you order shares of common stock in the subscription offering, you will be required to certify on the stock order form that you are purchasing shares solely for your own account and that you have no agreement or understanding to sell or transfer your subscription rights or the shares of common stock to be issued upon their exercise. The regulations also prohibit any person from offering or making an announcement of an offer or intent to make an offer to purchase subscription rights or shares of common stock to be issued upon their exercise. We will pursue any and all legal and equitable remedies in the event we become aware of the transfer of subscription rights. We will not honor orders that we believe involve the transfer of subscription rights. In addition, if you attempt to sell or otherwise transfer your subscription rights, you may be subject to criminal prosecution and/or other sanctions.
Deadline for Ordering Stock in the Subscription Offering
The subscription offering will expire at 11:00 a.m., Eastern Time, on March 22, 2007, unless extended by us for up to 45 days or such additional periods with the approval of the Office of Thrift Supervision, if necessary. We may decide to extend the expiration date of the subscription offering for any reason, whether or not subscriptions have been received for shares at the minimum, midpoint, maximum or adjusted maximum of the offering range. We may extend the expiration date without notice to you until [ ], unless the Office of Thrift Supervision approves a later date, which will not be beyond May 6, 2007. Subscription rights which have not been exercised prior to the expiration date will become void.
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If We Do Not Sell the Minimum Number of Shares
We will not execute orders until at least the minimum number of shares of common stock have been sold in the subscription and syndicated offerings. If at least 137,062,500 shares have not been sold by May 6, 2007 and the Office of Thrift Supervision has not consented to an extension, all funds delivered to us to purchase shares of common stock in the subscription offering will be returned promptly to the subscribers with interest at Peoples Banks passbook savings rate and all deposit account withdrawal authorizations will be canceled. If an extension beyond May 6, 2007 is granted by the Office of Thrift Supervision, we will notify each person who subscribed for common stock in the subscription offering, indicating that each person may increase, decrease, or rescind their subscription within the resolicitation period. If we do not receive a response from a subscriber to any resolicitation, the subscribers order will be rescinded, all withdrawal authorizations will be canceled and all funds received will be returned promptly with interest at Peoples Banks passbook savings rate.
The conversion must be completed by April 5, 2009, which is two years after the special meeting of depositors of Peoples Bank to vote on the conversion.
We reserve the right in our sole discretion to terminate the offering at any time and for any reason, in which case we will cancel all deposit account withdrawal authorizations and return by check all funds submitted in the subscription offering, plus interest at Peoples Banks passbook savings rate from the date of receipt.
Syndicated Offering/Underwritten Public Offering
The plan of conversion provides that shares of common stock not purchased in the subscription offering will be offered for sale to the general public in a syndicated offering through a syndicate of selected dealers. Morgan Stanley & Co. Incorporated will act as sole book-running manager, Keefe, Bruyette & Woods, Inc., Lehman Brothers and Ryan Beck & Co., Inc. will act as joint lead managers, and Sandler ONeill & Partners, L.P. will act as co-manager for the syndicated offering, and each firm will assist us in selling our common stock in the syndicated offering on a best efforts basis. Alternatively, we may sell any remaining shares in an underwritten public offering. None of Morgan Stanley & Co. Incorporated, Ryan Beck & Co., Inc. or any other member of the syndicate is required to purchase any shares of the common stock in the syndicated offering. The syndicated offering will terminate no later than 45 days after the expiration of the subscription offering, unless extended by us, with approval of the Office of Thrift Supervision.
The opportunity to purchase shares of common stock in the syndicated offering is subject to our right, in our sole discretion, to reject orders, in whole or part, either at the time of receipt of an order or as soon as practicable following the conclusion of the offering. If your order is rejected in part, you will not have the right to cancel the remainder of your order.
Purchasers in the syndicated offering or underwritten public offering are eligible to purchase up to 100,000 shares of common stock, subject to the overall purchase limitations. See Limitations on Common Stock Purchases . We may begin the syndicated offering at any time following the commencement of the subscription offering.
The syndicated offering will be conducted in accordance with certain Securities and Exchange Commission rules applicable to best efforts underwritings. Generally, under those rules, members of the syndicate will promptly deposit any funds they receive from interested investors prior to closing into one or more separate non-interest bearing accounts established by the syndicate at a bank other than Peoples Bank. The closing of the syndicated offering is subject to conditions set forth in the agency agreement among us, Peoples Mutual Holdings and Peoples Bank on the one hand and the members of the syndicate on the other hand. These conditions include, among others, the continuous effectiveness of the registration statement of which this prospectus forms a part, the nonoccurrence of certain material events and the receipt by the members of the syndicate of opinions, certificates and other documents. If and when all the conditions for the closing are met, funds for shares of common stock sold by the syndicate in the syndicated offering, less fees and commissions payable by us, will be promptly delivered to us. If the offering closes, but some or all of an interested investors funds are not accepted by us, those funds will be returned to the interested investor promptly after the closing, without interest. If the offering does not close, funds in the account will be promptly returned, without interest, to the potential investor. Normal customer ticketing will be used for order placement. Stock order forms will not be used.
Any underwritten public offering will be conducted on a firm commitment basis. In such case, the underwriters will purchase all shares of common stock not sold in the subscription offering or any syndicated offering, if any such shares are
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purchased. The aggregate price paid to us by or through the underwriters for the shares of common stock will be the number of shares sold multiplied by the $20.00 price per share, less the amount of an underwriting discount as negotiated between us and the underwriters and approved by the Office of Thrift Supervision and the National Association of Securities Dealers.
Other Purchase Arrangements
If we are unable to find purchasers from the general public for unsubscribed shares up to the minimum of the offering range, we may make other purchase arrangements, if feasible. Other purchase arrangements must be approved by the Office of Thrift Supervision and may provide for purchases by trustees, directors, officers, their associates and other persons in excess of the limitations provided in the plan of conversion and in excess of the proposed purchases discussed under Proposed Purchases of Common Stock by Management , although no such additional purchases are currently planned. If other purchase arrangements cannot be made, we may do any of the following: terminate the offering and promptly return all funds or cancel deposit account withdrawals, as the case may be, set a new offering range, notify all subscribers and give them the opportunity to increase, decrease or rescind their orders or take such other actions as may be permitted by the Office of Thrift Supervision.
Limitations on Common Stock Purchases
The plan of conversion includes the following limitations on the number of shares of common stock that may be purchased during the offering:
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You may not purchase fewer than 25 shares ($500). |
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You may not purchase more than $2 million of common stock (100,000 shares). If you are purchasing shares in the subscription offering, this limit applies to you together with any persons with whom you are exercising subscription rights through a single qualifying deposit account held jointly. |
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Our tax-qualified employee stock benefit plans, including our employee stock ownership plan, may purchase in the aggregate up to 6.0% of the shares sold in the offering and issued to the charitable foundation, including shares issued in the event of an increase in the offering range of up to 15%. |
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You, together with your associates or persons acting in concert with you, may not purchase more than $2 million of common stock (100,000 shares) in all categories of the offering combined, including the syndicated offering. More information on the meaning of associate and acting in concert is provided below. |
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Current stockholders of Peoples Bank are subject to an additional ownership limitation. As previously described, current stockholders will receive shares of Peoples United Financial common stock in exchange for their Peoples Bank common stock. The number of shares that a stockholder may purchase in the offering, individually and together with associates or persons acting in concert with such stockholder, when combined with the shares that the stockholder and his or her associates and persons acting in concert with him or her will own after the share exchange, may not exceed 5% of the total shares of the Peoples United Financial common stock to be issued and outstanding at the completion of the conversion and offering. However, current stockholders will not have to sell any Peoples Bank common stock or be limited in receiving shares of Peoples United Financial common stock in the share exchange even if their ownership of Peoples United Financial common stock after the share exchange would exceed an applicable purchase limitation. |
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The maximum number of shares of common stock that may be purchased in the offering by our officers, trustees, and directors and their associates, in the aggregate, may not exceed 25% of the total number of shares sold in the offering. |
Depending upon market or financial conditions, Peoples Mutual Holdings Board of Trustees and Peoples Banks Board of Directors, with the approval of the Office of Thrift Supervision and without further approval of the depositors of Peoples Bank may decrease or increase the purchase and ownership limitations, provided that the maximum purchase limitations may not be increased to a percentage in excess of 5% of the total shares sold in the offering. If a purchase limitation is increased, we will resolicit subscribers in the subscription offering who order the maximum amount and so indicate on their stock order forms, in order to determine if they wish to increase their subscriptions up to the then-applicable limit. If the maximum purchase limitation is increased to 5% of the total shares sold in the offering, we may, with the approval of the Office of Thrift Supervision, allow persons who have subscribed for 5% of the total shares sold in the offering to purchase between 5% and 10% of that total number of shares, as long as the aggregate amount that such persons
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purchase does not exceed 10% of the total shares sold in the offering. Requests to purchase additional shares of our common stock in the event the purchase limitation is so increased will be accepted by us in our sole discretion.
In the event of an increase in the total number of shares offered in the offering, due to an increase in the offering range of up to 15%, shares will be allocated in the following order of priority in accordance with the plan of conversion:
(1) | to fill our tax-qualified employee stock benefit plans subscriptions for up to 8.0% of the total number of shares sold in the offering and issued to the charitable foundation in the event such plans submit subscription orders; and then |
(2) | in the event that there is an oversubscription at the eligible account holder, supplemental eligible account holder or other depositor levels, to fill unfulfilled subscriptions of these subscribers according to their respective priorities. |
With prior Office of Thrift Supervision approval, our employee stock ownership plan may elect to fill part or all of its stock order in the open market, after completion of the offering, whether or not its entire order could be filled in the subscription offering.
You will not be allowed to purchase any stock if that purchase would be illegal under any federal or state law or regulation or would violate regulations or policies of the National Association of Securities Dealers. We and/or our representatives may ask for an acceptable legal opinion from you regarding the legality of the purchase and may refuse to honor any purchase order if that opinion is not timely furnished.
We have the right to reject your order if we believe your representations are untrue or if we believe you are violating, circumventing or intend to violate, evade or circumvent the terms and conditions of the plan of conversion, either alone or acting in concert with others.
The term associate means:
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any corporation or organization, other than Peoples Mutual Holdings, Peoples Bank, Peoples United Financial or a majority-owned subsidiary of Peoples Bank or Peoples United Financial, of which you are a senior officer or partner or are directly or indirectly the beneficial owner of 10% or more of any class of equity securities; |
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any trust or other estate in which you have a substantial beneficial interest or serve as a trustee or in a similar fiduciary capacity, but excluding (1) any employee stock benefit plan in which you have a substantial beneficial interest or serve as trustee or in a similar fiduciary capacity, and (2) any other person who has a substantial beneficial interest or serves as a trustee or in a similar fiduciary capacity for any such employee stock benefit plan, solely as a result of having such interest or serving in such capacity; and |
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your spouse or a relative of you or your spouse, who either has the same home as you or who is a trustee, director or officer of Peoples Mutual Holdings, Peoples Bank, Peoples United Financial or any of the subsidiaries of the foregoing. |
The term acting in concert means:
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knowing participation in a joint activity or interdependent conscious parallel action towards a common goal whether or not pursuant to an express agreement; or |
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a combination or pooling of voting or other interests in the securities of an issuer for a common purpose pursuant to any contract, understanding, relationship, agreement or other arrangement, whether written or otherwise. |
Any persons or companies having the same address on an account or stock order form are considered to be acting in concert. A person or company which acts in concert with another person or company (other party) shall also be deemed to be acting in concert with any person or company who is also acting in concert with that other party, except that any tax-qualified employee stock benefit plan will not be deemed to be acting in concert with its trustee or a person who serves in a similar capacity solely for the purpose of determining whether common stock held by the trustee and common stock held by the employee stock benefit plan will be aggregated, and participants or beneficiaries of the employee stock benefit plan will not be deemed to be acting in concert solely as a result of their common interest as participants or beneficiaries. We will presume that certain persons are acting in concert based upon various facts, including the fact that persons have joint account relationships or the fact that such persons have filed joint Schedules 13D with the Securities and Exchange Commission with respect to other companies. We reserve the right to make an independent investigation of any facts or circumstances brought
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to our attention that indicate that one or more persons acting independently or as a group acting in concert may be attempting to violate or circumvent the regulatory prohibition on the transferability of subscription rights. We have the right, in our sole discretion, to determine whether prospective purchasers are associates or acting in concert. Our trustees, directors, officers and employees are not treated as associates of each other solely because of their capacity as such.
Common stock purchased in the offering will be freely transferable except for shares purchased by executive officers and directors of Peoples Bank and except as described below. Any purchases made by any associate of Peoples Bank for the explicit purpose of meeting the minimum number of shares of common stock required to be sold in order to complete the offering shall be made for investment purposes only and not with a view toward redistribution. For a further discussion of limitations on purchases of our shares of common stock at the time of conversion and thereafter, see You May Not Sell Or Transfer Your Subscription Rights and Restrictions on Acquisition of Peoples United Financial and Peoples Bank .
Procedure for Purchasing Shares in the Subscription Offering
Delivery of Prospectus. To ensure that each purchaser receives a prospectus at least 48 hours before the expiration date of the offering in accordance with Rule 15c2-8 of the Securities Exchange Act of 1934, as amended, no prospectus will be mailed any later than five days prior to the expiration date or hand delivered any later than two days prior to the expiration date. Stock order forms will be distributed only if accompanied or preceded by a prospectus. We will make reasonable attempts to provide a prospectus and offering materials to all holders of subscription rights. The subscription offering and all subscription rights are expected to expire at 11:00 a.m., Eastern Time on March 22, 2007, however, whether or not we have been able to locate each person entitled to subscription rights.
Use of Stock Order Forms. In order to purchase shares of common stock in the subscription offering, you must complete a stock order form and remit payment. Incomplete stock order forms or stock order forms that are not signed are not required to be accepted. We will not be required to accept orders submitted on photocopied or facsimiled stock order forms. If a stock order form is undeliverable and is returned to us by the U.S. Postal Service, or is not mailed pursuant to a no mail order placed in effect by the account holder, the subscription rights for that person will lapse as though that person failed to return the completed stock order form within the time period specified. All stock order forms must be received by us (not postmarked) prior to 11:00 a.m., Eastern Time, on March 22, 2007. We are not required to accept stock order forms that are not received by that time, are executed defectively or are received without full payment or without appropriate deposit account withdrawal instructions. We are not required to notify subscribers of incomplete or improperly executed stock order forms, and we have the right to waive or permit the correction of incomplete or improperly executed stock order forms. We do not represent, however, that we will do so. You may submit your stock order form and payment by mail using the return envelope provided, by overnight delivery to the indicated address on the front of the stock order form or by hand to a secure drop box located in the lobby of Peoples Banks headquarters, 850 Main Street, Bridgeport, Connecticut. Stock order forms may not be delivered to banking or other offices of Peoples Bank. Once tendered, a stock order form cannot be modified or revoked. On the stock order form, you must represent that you are purchasing shares for your own account and that you have no agreement or understanding with any person for the sale or transfer of the shares. Our interpretation of the terms and conditions of the plan of conversion and of the acceptability of the stock order forms will be final.
By signing the stock order form, you will be acknowledging that the common stock is not a deposit or savings account that is federally insured or otherwise guaranteed by Peoples Bank or the federal government, and that you received a copy of this prospectus. However, signing the stock order form will not result in you waiving your rights under the Securities Act of 1933 or the Securities Exchange Act of 1934, as amended.
Payment for Shares. Payment for all shares of common stock will be required to accompany all completed stock order forms for the purchase to be valid. Payment for shares may be made by:
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personal check, bank check or money order, made directly payable to Peoples United Financial, Inc.; or |
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authorization of withdrawal from the types of Peoples Bank deposit accounts provided for on the stock order form. |
Appropriate means for authorizing withdrawals from deposit accounts at Peoples Bank are outlined on the stock order form. The funds designated must be available in the account(s) at the time the stock order form is received. A hold will be placed on these funds, making them unavailable to the depositor for any reason. Funds authorized for withdrawal will continue to earn interest within the account at the contract rate until the offering is completed, at which time the designated withdrawal will be made. Interest penalties for early withdrawal applicable to certificates of deposit will not apply to
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withdrawals authorized for the purchase of shares of common stock in the offering; however, if a withdrawal results in a certificate of deposit with a balance less than the applicable minimum balance requirement, the certificate will be canceled at the time of withdrawal without penalty and the remaining balance will earn interest at the current passbook savings rate subsequent to the withdrawal. You may not authorize withdrawal from Peoples Bank retirement accounts or Peoples Bank accounts with check-writing privileges. If you wish to use funds from an account with check-writing privileges, please make payment by a check drawn on such account. Personal checks will be cashed upon receipt; therefore, these funds must be available in the account(s) at the time we receive your order. Checks and money orders will be cashed upon receipt and the funds placed in a segregated escrow account at Peoples Bank or, at our discretion, another insured financial institution, and interest will be paid at the passbook savings rate from the date payment is received until completion or termination of the conversion. Cash, wire transfers, third party checks and Peoples Bank equity line of credit checks and funds drawn on Peoples Bank personal credit lines may not be remitted as payment for your purchase. Once we receive your executed stock order form, it may not be modified or rescinded.
Regulations prohibit Peoples Bank from lending funds or extending credit to any persons to purchase shares of common stock in the offering.
Using Retirement Account Funds . You may not purchase shares of Peoples United Financial common stock in your Peoples Bank retirement account (IRAs and Keogh accounts). Therefore, if you wish to use some or all of the funds that are currently in a Peoples Bank retirement account, you may not designate on the stock order form that you wish funds to be withdrawn from the account for the purchase of common stock. Before your order is placed, the funds you wish to use for the purchase of common stock will have to be transferred to a brokerage firm or other type of independent trustee other than Peoples Securities, Inc. There will be no early withdrawal or Internal Revenue Service interest penalties for these properly executed transfers. Depositors interested in using funds in a retirement account at Peoples Bank or elsewhere to purchase common stock should contact our Stock Information Center as soon as possible, preferably at least two weeks prior to the March 22, 2007 end of the offering period, because processing such transactions takes additional time, and whether such funds can be used may depend on timing constraints and limitations imposed by the institutions where the funds are currently held. We cannot guarantee that you will be able to use retirement funds held with Peoples Bank or elsewhere toward this purchase.
Delivery of Shares. Shares of Peoples United Financial common stock to be issued in the subscription offering will be issued in certificate form. Certificates representing shares of common stock will be mailed to persons entitled to the certificates at the certificate registration address noted by them on the stock order form as soon as practicable following consummation of the offering. Any certificates returned as undeliverable will be held by our transfer agent until claimed by the persons legally entitled to the certificates, or will be otherwise disposed of in accordance with applicable law. Until certificates for common stock are available and delivered to purchasers, they may not be able to sell their shares, even though trading of the common stock will have commenced.
Other Restrictions. Notwithstanding any other provision of the plan of conversion, no person is entitled to purchase any shares of common stock to the extent the purchase would be illegal under any federal or state law or regulation, including state blue sky registrations, or would violate regulations or policies of the National Association of Securities Dealers, particularly those regarding free riding and withholding. We may ask for an acceptable legal opinion from any purchaser as to the legality of his or her purchase and we may refuse to honor any purchase order if an opinion is not timely furnished.
Stock Information Center
If you have any questions regarding the offering or the conversion, please call our Stock Information Center, at (800) 867-5295, from 10:00 a.m. to 4:00 p.m., Eastern Time, Monday through Friday. The Stock Information Center is closed on weekends and bank holidays. Our banking and other offices will not have offering materials and cannot accept completed stock order forms or proxy cards.
Plan of Distribution; Selling Agent Compensation
Subscription Offering
Offering materials have been distributed by mail to those with subscription rights at the last known address based on Peoples Banks records. Subscription rights expire whether or not eligible subscribers can be located. The subscription offering is not being made to depositors residing outside the United States.
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Under the terms of an agency agreement, which is filed as an exhibit to the registration statement relating to this prospectus, we have retained Ryan Beck & Co., Inc. to assist us with the subscription offering. The agency agreement provides that Ryan Beck & Co., Inc. will assist us on a best efforts basis in the marketing of our common stock in the subscription offering, including by:
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acting as our financial advisor for the subscription offering; |
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providing administrative services and managing the Stock Information Center; and |
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targeting our sales efforts, including assisting in the preparation of marketing materials and soliciting orders for common stock. |
For these services, Ryan Beck & Co., Inc. will receive a marketing fee equal to 1.0% of the dollar amount of common stock sold in the subscription offering, subject to a maximum marketing fee of $12.0 million. No marketing fee will be payable to Ryan Beck & Co., Inc. with respect to shares sold in the subscription offering to officers, trustees, directors and employees, the immediate families of such officers, trustees, directors or employees or employee benefit plans.
Morgan Stanley & Co. Incorporated will also provide us with advisory services in connection with the subscription offering. In the event the gross proceeds from the subscription offering equal or exceed $1.75 billion, Morgan Stanley & Co. Incorporated will receive an advisory fee equal to $5 million. In the event the gross proceeds from the subscription offering equal or exceed $2.5 billion, Peoples Bank may, in its sole discretion, pay Morgan Stanley & Co. Incorporated an additional advisory fee of $2.5 million.
The following table shows the estimated commissions to be paid by us to Ryan Beck & Co., Inc. in the subscription offering, both on a per share basis and on an aggregate basis, assuming (1) that 60,000,000 shares of common stock are sold in the subscription offering and between 67,500,000 and 112,500,000 shares are sold in the syndicated offering and (2) that our officers, trustees, directors, employees and their immediate families purchase 387,500 shares in the subscription offering and our employee benefit plans do not purchase any shares in the subscription offering. We are unable to determine the exact fees and commissions because these amounts will depend on the allocation of the shares sold in the subscription offering and in the syndicated offering, among other factors. See Pro Forma Data .
Per Share | Total | |||||
Marketing fee |
$ | 0.199 | $ | 11,922,500 |
Solicitation by Trustees, Directors, Officers and Employees
Some of our trustees, directors and executive officers may participate in the solicitation of offers to purchase common stock. These persons will be reimbursed for their reasonable out-of-pocket expenses incurred in connection with the solicitation. Other of our regular, full-time employees may assist in the offering, but only in ministerial capacities, and may perform clerical work in effecting a sales transaction. These employees have been instructed not to solicit offers for purchases of common stock or provide advice regarding the purchase of common stock. No offers or sales may be made by tellers or at the teller counters. All sales activity will be apart from the area accessible to the general public. We will rely on Rule 3a4-1 under the Securities Exchange Act of 1934, as amended, so as to permit officers, trustees, directors and employees to participate in the sale of common stock. None of our officers, trustees, directors or employees will be compensated in connection with their participation in the offering.
Syndicated Offering
General. The agency agreement provides that Morgan Stanley & Co. Incorporated, Ryan Beck & Co., Inc. and the other agents named therein will assist us in the marketing of our common stock in the syndicated offering, including by managing a syndicate of selected dealers to offer the common stock in the syndicated offering. Morgan Stanley & Co. Incorporated will serve as global coordinator and sole book-running manager, Keefe, Bruyette & Woods, Inc., Lehman Brothers and Ryan Beck & Co., Inc. will act as joint lead managers, and Sandler ONeill & Partners, L.P. will act as co-manager for the syndicated offering. The syndicated offering is being made on a best efforts basis, and accordingly none of Morgan Stanley & Co. Incorporated, Ryan Beck & Co., Inc. or any other member of the syndicate is required to purchase any shares of the common stock in the syndicated offering.
In connection with the syndicated offering, we will pay Morgan Stanley & Co. Incorporated and Ryan Beck & Co., Inc. an aggregate management fee equal to 1.0% of the aggregate dollar amount received in exchange for shares sold in the
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syndicated offering. In addition, we will pay to the syndicate, which will include Morgan Stanley & Co. Incorporated and Ryan Beck & Co., Inc., a sales concession equal to 3.0% of the aggregate dollar amount received in exchange for shares sold in the syndicated offering. The members of the syndicate will allow a concession not in excess of $[ ] per share to other members of the syndicate. The members of the syndicate may allow, and the other dealers may reallow, a discount not in excess of $[ ] per share to other dealers.
In the event that we sell common stock in an underwritten public offering, we have agreed that Morgan Stanley & Co. Incorporated will have the right to serve as sole book-running manager and Ryan Beck & Co., Inc. will have the right to act as joint lead manager for the offering. We will pay underwriters (which we expect would include Morgan Stanley & Co. Incorporated and Ryan Beck & Co., Inc.) that sell shares of our common stock in such offering an underwriting discount, to be negotiated by us prior to such an offering. If we determine to sell stock in an underwritten public offering, the terms of such offering, including the names of the underwriters participating in such offering, will be described in a supplement to this prospectus.
The following table shows the estimated fees and commissions to be paid by us to Morgan Stanley & Co. Incorporated, Ryan Beck & Co., Inc. and the other members of the syndicate in the syndicated offering, both on a per share basis and on an aggregate basis, assuming that 60,000,000 shares of common stock are sold in the subscription offering and between 77,062,500 and 125,437,500 shares are sold in the syndicated offering. We are unable to determine the exact fees and commissions because these amounts will depend on the allocation of the shares sold in the subscription offering and in the syndicated offering, among other factors. See Pro Forma Data .
Total | |||||||||||||||
Per Share |
Minimum of the
Offering Range (77,062,500 shares sold in syndicated offering) |
Midpoint of the
Offering Range (101,250,000 shares sold in syndicated offering) |
Maximum of the
Offering Range (125,437,500 shares sold in syndicated offering) |
15% Above the
Maximum of the Offering Range (153,253,125 shares sold in syndicated offering) |
|||||||||||
Management fee to Morgan Stanley & Co. Incorporated and Ryan Beck & Co., Inc. |
$ | 0.20 | $ | 15,412,500 | $ | 20,250,000 | $ | 25,087,500 | $ | 30,650,625 | |||||
Sales concession to syndicate |
$ | 0.60 | $ | 46,237,500 | $ | 60,750,000 | $ | 75,262,500 | $ | 91,951,875 |
We estimate that the expenses of the offering, not including the fees and commissions described above or under Subscription Offering , will be approximately $10.0 million. These expenses will be payable by us.
Indemnification . We have agreed to indemnify Morgan Stanley & Co. Incorporated and Ryan Beck & Co., Inc., as well as the other members of the syndicate, against liabilities and expenses relating to the offering, including liabilities under the Securities Act of 1933, or to contribute to payments that Morgan Stanley & Co. Incorporated, Ryan Beck & Co., Inc. and such other members of the syndicate may be required to make for these liabilities.
Lock-up Agreements . We and our directors and executive officers have agreed not to directly or indirectly offer, sell, pledge or otherwise dispose of any shares of our common stock or any securities convertible into or exchangeable for our common stock without the prior written consent of Morgan Stanley & Co. Incorporated and Ryan Beck & Co., Inc. for a period commencing on the date of this prospectus and continuing until 90 days after the closing of the conversion and the offering.
Electronic Distribution . A prospectus in electronic format may be made available on the Internet sites or through other online services maintained by Morgan Stanley & Co. Incorporated, Ryan Beck & Co., Inc. or one or more other members of the syndicate, or by their respective affiliates. In those cases, prospective investors may view offering terms online and, depending upon the syndicate member, prospective investors may be allowed to place orders online. The members of the syndicate may agree with us to allocate a specific number of shares for sale to online brokerage account holders. Any such allocation for online distributions will be made on the same basis as other allocations.
Other than the prospectus in electronic format, the information on the Internet sites referenced in the preceding paragraph and any information contained in any other Internet site maintained by any member of the syndicate is not part of this prospectus or the registration statement of which this prospectus forms a part, has not been approved and/or endorsed by us or by Morgan Stanley & Co. Incorporated, Ryan Beck & Co., Inc. or any other member of the syndicate in its capacity as selling agent or syndicate member and should not be relied upon by investors.
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Offers and Sales in Canada. This prospectus is not, and under no circumstances is it to be construed as, an advertisement or a public offering of shares in Canada or any province or territory thereof. Any offer or sale of shares in Canada will be made only under an exemption from the requirements to file a prospectus with the relevant Canadian securities regulators and only by a dealer properly registered under applicable provincial securities laws or, alternatively, pursuant to an exemption from the dealer registration requirement in the relevant province or territory of Canada in which such offer or sale is made.
European Economic Area. In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive, each of Morgan Stanley & Co. Incorporated, Ryan Beck & Co. Inc. and any other agent in the offering has represented and agreed that with effect from and including the date on which the Prospectus Directive is implemented in that Member State it has not made and will not make an offer of shares to the public in that Member State, except that it may, with effect from and including such date, make an offer of shares to the public in that Member State:
(a) at any time to legal entities which are authorized or regulated to operate in the financial markets or, if not so authorized or regulated, whose corporate purpose is solely to invest in securities;
(b) at any time to any legal entity which has two or more of (1) an average of at least 250 employees during the last financial year; (2) a total balance sheet of more than 43,000,000; and (3) an annual net turnover of more than 50,000,000, as shown in its last annual or consolidated accounts; or
(c) at any time in any other circumstances which do not require the publication by us of a prospectus pursuant to Article 3 of the Prospectus Directive.
For the purpose of the above, the expression an offer of shares to the public in relation to any shares in any Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the shares to be offered so as to enable an investor to decide to purchase or subscribe for the shares, as the same may be varied in that Member State by any measure implementing the Prospectus Directive in that Member State and the expression Prospectus Directive means Directive 2003/71/EC and includes any relevant implementing measure in that Member State.
United Kingdom. Each of Morgan Stanley & Co. Incorporated, Ryan Beck & Co. Inc. and any other agent in the offering has represented and agreed that it has only communicated or caused to be communicated and will only communicate or cause to communicate an invitation or inducement to engage in investment activity (within the meaning of Section 21 of the Financial Services and Markets Act 2000) in connection with the issue of the shares in circumstances in which Section 21(1) of such Act does not apply to us and it has complied and will comply with all applicable provisions of such Act with respect to anything done by it in relation to any shares in, from or otherwise involving the United Kingdom.
Offers and Sales in Other Foreign Countries. We may also offer shares in other foreign countries, including, but not limited to, Ireland, France, Germany, Italy, Spain, the Netherlands, Belgium, Norway, Sweden, Denmark and Switzerland. The final determination of whether to offer shares in foreign countries and, if shares are so offered, in which countries the shares will be offered will be made at the time of the offering, based on market conditions existing at that time. Any offer or sale of shares in a foreign country will be made only under an exemption from any requirements to register the shares for public sale in such country.
Stamp Taxes. Purchasers of our common stock in the syndicated offering or any underwritten public offering may be required to pay stamp taxes and other charges under the laws and practices of the country of purchase, in addition to the offering price listed on the cover of this prospectus. Accordingly, we urge you to consult a tax advisor with respect to whether you may be required to pay those taxes or charges, as well as any other tax consequences that may arise under the laws of the country of purchase.
Relationships. Morgan Stanley & Co. Incorporated, Ryan Beck & Co., Inc., some of the other members of the syndicate and their respective affiliates have performed investment banking and financial advisory services for us for which they have received customary fees and reimbursements of expenses and may in the future provide additional services for which it is anticipated they will receive compensation.
Certain Restrictions on Purchase or Transfer of Our Shares After Conversion
Common stock purchased in the offering or issued in the share exchange will be freely transferable except for shares purchased by directors and executive officers of Peoples Bank as described below. All shares of common stock purchased in
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the offering by our directors or executive officers generally may not be sold for a period of one year following the closing of the conversion, except in the event of the death of the director or executive officer. Each certificate (if any) for shares purchased by such persons in the offering will bear a legend giving notice of this restriction on transfer, and instructions will be issued to the effect that any transfer within this time period of any certificate or record ownership of the shares other than as provided above is a violation of the restriction. Any shares of common stock issued at a later date as a stock dividend, stock split or otherwise with respect to the shares purchased by such persons in the offering will be similarly restricted. Our directors and executive officers also will be restricted by the insider trading rules promulgated pursuant to the Securities Exchange Act of 1934, as amended.
Purchases of shares of our common stock by our directors and executive officers and their associates during the three-year period following the closing of the conversion may be made only through a broker or dealer registered with the Securities and Exchange Commission, except with the prior written approval of the Office of Thrift Supervision. This restriction does not apply, however, to negotiated transactions involving more than 1% of our outstanding common stock or to purchases of our common stock pursuant to our stock option plan or any of our tax-qualified employee stock benefit plans or non-tax-qualified employee stock benefit plans, including any recognition and retention plans or restricted stock plans.
We have filed with the Securities and Exchange Commission a registration statement under the Securities Act of 1933 for the registration of the common stock to be sold in the offering. This registration does not cover the resale of such shares. Shares of common stock owned or purchased by persons who are not affiliates of Peoples United Financial may be resold without registration. Shares owned (including shares received in exchange for shares of Peoples Bank common stock) or purchased by affiliates of Peoples United Financial will be subject to resale restrictions under Rule 144 of the Securities Act of 1933. If we meet the current public information requirements of Rule 144, each of our affiliates who complies with the other conditions of Rule 144, including those that require the affiliates sale to be aggregated with those of certain other persons, would be able to sell in the public market, without registration, a number of shares not to exceed, in any three-month period, the greater of 1% of our outstanding shares or the average weekly volume of trading in the shares during the preceding four calendar weeks. Provision may be made in the future to permit our affiliates to register their shares for sale under the Securities Act of 1933 under certain circumstances.
Liquidation Rights
In the unlikely event of a complete voluntary liquidation of Peoples Mutual Holdings in its present mutual form, depositors of Peoples Bank would receive a pro rata share of any assets of Peoples Mutual Holdings remaining after payment of claims of all creditors. Each depositors pro rata share of such remaining assets would be in the same proportion as the value of his or her deposit account was to the total value of all deposit accounts in Peoples Bank at the time of liquidation. After the conversion and offering, each depositor, in the event of a complete liquidation of Peoples Bank, would have a claim as a creditor of the same general priority as the claims of all other general creditors of Peoples Bank. However, except as described below, each claim would be solely in the amount of the balance in the deposit account(s) plus accrued interest. The depositor would not have an interest in the value or assets of Peoples Bank or Peoples Mutual Holdings above that amount.
The plan of conversion provides for the establishment, following the conversion of Peoples Mutual Holdings from a federally chartered mutual holding company to a federally chartered interim stock savings bank and simultaneous merger with and into Peoples Bank, of a special liquidation account for the benefit of eligible account holders and supplemental eligible account holders in an amount equal to Peoples Banks total stockholders equity as reflected in its latest statement of financial condition contained in this prospectus. The liquidation account will be established and maintained by Peoples Bank. In the unlikely event of a complete liquidation of Peoples Bank after the completion of the conversion at a time when Peoples Bank has a positive net worth (and only in such event), each eligible account holder and supplemental eligible account holder would be entitled, upon a complete liquidation of Peoples Bank after the conversion and offering, to an interest in the liquidation account prior to any liquidation distribution with respect to the capital stock of Peoples Bank. Each eligible account holder and supplemental eligible account holder would have an initial interest in such liquidation account for each deposit account, including passbook accounts, transaction accounts such as checking accounts, money market deposit accounts and certificates of deposit, held in Peoples Bank at the close of business on June 30, 2005 or December 31, 2006, as the case may be. Each eligible account holder and supplemental eligible account holder will have a pro rata interest in the total liquidation account for each of his or her deposit accounts based on the proportion that the balance of each such deposit account on June 30, 2005 or December 31, 2006, as the case may be, bore to the balance of all deposit accounts in Peoples Bank on such date.
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If, however, on any December 31 annual closing date of Peoples Bank, commencing December 31, 2007, the amount in any deposit account is less than the amount that was in such deposit account on June 30, 2005 or December 31, 2006, as the case may be, or any other annual closing date, then the interest in the liquidation account relating to such deposit account would be reduced by the proportion of any such reduction, and such interest will cease to exist if such deposit account is closed. In addition, no interest in the liquidation account would ever be increased despite any subsequent increase in the related deposit account.
Any assets remaining after the above liquidation rights of eligible account holders and supplemental eligible account holders are satisfied would be distributed to Peoples United Financial as the sole stockholder of Peoples Bank.
Pursuant to the rules and regulations of the Office of Thrift Supervision, a post-conversion merger, consolidation, sale of bulk assets or similar combination or transaction with another insured savings institution would not be considered a liquidation and, in such a transaction, the liquidation account would be assumed by the surviving institution, except to the extent otherwise approved by the Office of Thrift Supervision.
Accounting Consequences
The conversion will be accounted for at historical cost in accordance with accounting principles generally accepted in the United States. Accordingly, the carrying value of the assets, liabilities, and capital of Peoples Bank and Peoples Mutual Holdings will be unaffected by the conversion and offering and will be reflected in our consolidated financial statements based on their historical amounts.
Tax Aspects
Completion of the conversion is conditioned upon prior receipt of either a ruling from the Internal Revenue Service or an opinion of counsel with respect to federal income tax laws and either a ruling from the State of Connecticut or an opinion of our independent tax advisor with respect to Connecticut income tax laws, substantially to the effect that consummation of the transactions qualifies as a tax-free transaction for federal income tax purposes and will not result in any adverse federal or Connecticut state income tax consequences before or after the conversion, except to the extent, if any, that subscription rights are deemed to have fair market value on the date such rights are issued. We believe that the tax opinions summarized below address all material federal and state income tax consequences that are generally applicable to the primary parties and the persons receiving subscription rights.
Thacher Proffitt & Wood LLP has issued an opinion to us to the effect that, for federal income tax purposes:
(1) | the conversion of Peoples Mutual Holdings from a federally chartered mutual holding company to a federally chartered interim stock savings bank (Interim A) will qualify as a reorganization within the meaning of Section 368(a)(1)(F) of the Internal Revenue Code, and no gain or loss will be recognized by Peoples Mutual Holdings by reason of such conversion; |
(2) | the merger of Interim A with and into Peoples Bank will qualify as a reorganization within the meaning of Section 368(a)(1)(A) of the Internal Revenue Code, and no gain or loss will be recognized by Interim A or Peoples Bank by reason of such merger; |
(3) | the merger of the federally chartered interim stock savings bank, newly formed as a wholly owned subsidiary of Peoples United Financial (Interim B), with and into Peoples Bank pursuant to which shares of Peoples Bank will be converted into shares of common stock of Peoples United Financial, will qualify as a reorganization within the meaning of Section 368(a)(2)(E) or Section 351 of the Internal Revenue Code, and no gain or loss will be recognized by Interim B, Peoples Bank or Peoples United Financial by reason of such merger; |
(4) | no gain or loss will be recognized by the current stockholders of Peoples Bank upon the receipt of shares of common stock of Peoples United Financial pursuant to the share exchange, except to the extent of any cash received in lieu of a fractional share interest in Peoples United Financial; |
(5) | the aggregate tax basis of the shares of Peoples United Financial common stock held by the current stockholders of Peoples Bank after the share exchange will be equal to the aggregate tax basis of Peoples Bank common stock held immediately before the share exchange, reduced by the basis allocable to a fractional share interest in Peoples United Financial for which cash is received; |
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(6) | the holding period of the shares of Peoples United Financial common stock to be received by the current stockholders of Peoples Bank in the share exchange will include the holding period of the shares of Peoples Bank common stock held immediately before the share exchange, provided that Peoples Bank common stock was held as a capital asset on the date of the share exchange; |
(7) | a holder of shares of Peoples United Financial who receives cash in lieu of a fractional share of Peoples United Financial common stock in the share exchange will recognize gain or loss equal to the difference between the amount of cash received and the portion of such holders tax basis of the shares of Peoples Bank allocable to the fractional share; such gain or loss will be capital gain or loss if such shares were held as a capital asset as of the date of the share exchange, and will be long-term capital gain or loss if such holders holding period in the shares of Peoples Bank common stock is more than one year on the date of the share exchange; |
(8) | no gain or loss will be recognized by Peoples United Financial upon the sale of shares of common stock in the offering; |
(9) | no gain or loss will be recognized by depositors of Peoples Bank upon the issuance to them of interests in the liquidation account in Peoples Bank established pursuant to the merger of Interim A with and into Peoples Bank; |
(10) | it is more likely than not that the fair market value of the nontransferable subscription rights to purchase shares of common stock of Peoples United Financial to be issued to eligible account holders, supplemental eligible account holders and other depositors is zero and accordingly, that no income will be recognized by eligible account holders, supplemental eligible account holders and other depositors upon the issuance to them of subscription rights or upon the exercise of the subscription rights; |
(11) | it is more likely than not that the tax basis to the holders of shares of Peoples United Financial common stock purchased in the offering pursuant to the exercise of subscription rights will be the amount paid therefor, and that the holding period for such shares of common stock will begin on the date of the completion of the offering; and |
(12) | the holding period for shares of common stock of Peoples United Financial purchased in the syndicated offering will begin on the day after the date of purchase. |
The opinions set forth in (10) and (11), above, are based on the position that the subscription rights do not have any market value at the time of distribution or at the time they are exercised. Whether subscription rights have a market value for federal income tax purposes is a question of fact, depending upon all relevant facts and circumstances. According to our counsel, the Internal Revenue Service will not issue rulings on whether subscription rights have a market value. Counsel has also advised us that they are unaware of any instance in which the Internal Revenue Service has taken the position that nontransferable subscription rights issued by a converting financial institution have a market value. Counsel also noted that the subscription rights will be granted at no cost to the recipients, will be nontransferable and of short duration, and will afford the recipients the right only to purchase common stock of Peoples United Financial at a price equal to its estimated fair market value, which will be the same price as the purchase price for the unsubscribed shares of common stock. Counsel believes that it is more likely than not (i.e., there is a more than a 50% likelihood) that the subscription rights have no market value for federal income tax purposes. Such conclusion of counsel is supported by a letter from RP Financial furnished to us which states that the subscription rights do not have any value when they are distributed or exercised. If the subscription rights are found to have a market value greater than zero, income may be recognized by various recipients of the subscription rights (whether or not the rights are exercised) and Peoples United Financial may be taxed on the distribution of the subscription rights. Participants are encouraged to consult with their own tax advisor as to the tax consequences in the event that the subscription rights are deemed to have an ascertainable value.
PricewaterhouseCoopers LLP has issued an opinion to us to the effect that, for Connecticut State income tax purposes, and assuming that the federal income tax consequences described above are correct in all material respects:
(1) | the conversion of Peoples Mutual Holdings from a federally chartered mutual holding company to a federally chartered interim stock savings bank (Interim A) should be treated as a tax-free reorganization for Connecticut state income tax purposes; |
(2) | the merger of Interim A with and into Peoples Bank, should be treated as a tax-free reorganization for Connecticut state income tax purposes; |
(3) |
the merger of the federally chartered interim stock savings bank, newly formed as a wholly owned subsidiary of Peoples United Financial (Interim B), with and into Peoples Bank, pursuant to which shares of Peoples Bank |
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will be converted into shares of common stock of Peoples United Financial, should be treated as a tax-free reorganization or as a tax-free contribution for Connecticut state income tax purposes; |
(4) | no gain or loss should be recognized by the current stockholders of Peoples Bank upon the receipt of shares of common stock of Peoples United Financial pursuant to the share exchange, except to the extent of any cash received in lieu of a fractional share interest in Peoples United Financial; |
(5) | the aggregate tax basis of the shares of Peoples United Financial common stock held by the current stockholders of Peoples Bank after the share exchange should be equal to the aggregate tax basis of Peoples Bank common stock held immediately before the share exchange, reduced by the basis allocable to a fractional share interest in Peoples United Financial for which cash is received; |
(6) | the holding period of the shares of Peoples United Financial common stock to be received by the current stockholders of Peoples Bank in the share exchange should include the holding period of the shares of Peoples Bank common stock held immediately before the share exchange; |
(7) | a holder of shares of Peoples United Financial who receives cash in lieu of a fractional share of Peoples United Financial common stock in the share exchange should recognize gain or loss equal to the difference between the amount of cash received and the portion of such holders tax basis of the shares of Peoples Bank allocable to the fractional share; |
(8) | no gain or loss should be recognized by Peoples United Financial upon the sale of shares of common stock in the offering; |
(9) | no gain or loss should be recognized by depositors of Peoples Bank upon the issuance to them of interests in the liquidation account in Peoples Bank established pursuant to the merger of Interim A with and into Peoples Bank; |
(10) | it is more likely than not that the fair market value of the nontransferable subscription rights to purchase shares of common stock of Peoples United Financial to be issued to eligible account holders and supplemental eligible account holders is zero and accordingly, that no income will be recognized by eligible account holders and supplemental eligible account holders upon the issuance to them of subscription rights or upon the exercise of the subscription rights; |
(11) | it is more likely than not that the tax basis to the holders of shares of Peoples United Financial common stock purchased in the offering pursuant to the exercise of subscription rights will be the amount paid therefor, and that the holding period for such shares of common stock will begin on the date of the completion of the offering; and |
(12) | the holding period for shares of common stock of Peoples United Financial purchased in the syndicated offering should begin on the day after the date of purchase. |
Unlike private rulings, an opinion is not binding on the Internal Revenue Service or the Connecticut Department of Revenue Services, and the Internal Revenue Service or the Connecticut Department of Revenue Services could disagree with the conclusions reached therein. In the event of such disagreement, there can be no assurance that the Internal Revenue Service or the Connecticut Department of Revenue Services would not prevail in a judicial or administrative proceeding. If the Internal Revenue Service or the Connecticut Department of Revenue Services determines that the tax effects of the transactions contemplated by the plan of conversion are to be treated differently from those presented in the opinions, we may be subject to adverse tax consequences as a result of the conversion.
United States Federal Tax Considerations Applicable to Non-U.S. Holders of the Common Stock
The following discusses the material United States federal income and estate tax consequences of the ownership and disposition of common stock applicable to Non-U.S. Holders who are beneficial owners of Peoples United Financial common stock and who acquire and own such common stock as a capital asset within the meaning of section 1221 of the Internal Revenue Code. A Non-U.S. Holder is a holder of common stock other than (1) an individual citizen or resident of the United States; (2) a corporation, or an entity treated as a corporation for United States federal income tax purposes, that is created or organized in or under the laws of the United States or of any state thereof or the District of Columbia; (3) an estate, the income of which is subject to United States federal income taxation regardless of its source; or (4) a trust if (a) a court within the United States is able to exercise primary supervision over the administration of the trust and one or more United States persons have the authority to control all substantial decisions of the trust; or (b) it has a valid election in effect under applicable Treasury regulations to be treated as a United States person.
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The following discussion does not consider specific facts and circumstances that may be relevant to a particular Non-U.S. Holders tax position. For example, the discussion does not address United States federal income and estate tax rules applicable to any person who holds common stock through entities treated as partnerships for United States federal income tax purposes or who holds common stock through entities which are disregarded for United States federal income tax purposes. The discussion does not address any tax consequences arising under the laws of any state, local or tax jurisdiction outside the United States. Further, the discussion does not consider Non-U.S. Holders to whom special tax rules may apply (including controlled foreign corporations, passive foreign investment companies, banks or other financial institutions, insurance companies, dealers in securities or foreign currencies, common trust funds, holders who hold common stock as part of a straddle, hedge, or conversion transaction, tax-exempt organizations and United States expatriates).
The following discussion is based on provisions of the Internal Revenue Code, United States Treasury regulations, Internal Revenue Service rulings and pronouncements, and judicial interpretations as of the date hereof, all of which are subject to change, possibly on a retroactive basis. Any change could affect the continuing validity of this discussion. We have not sought any ruling from the Internal Revenue Service or an opinion of counsel with respect to the federal tax consequences discussed below and there can be no assurance that the Internal Revenue Service or a court will not take a position contrary to the federal tax consequences discussed herein or that any such contrary position taken by the Internal Revenue Service or a court would not be sustained.
The description set forth below is included for general information only and may not be applicable to a prospective Non-U.S. Holders particular situation. Prospective Non-U.S. Holders are urged to consult their own tax advisor with respect to the United States Federal tax consequences of owning and disposing of common stock, as well as any tax consequences that may arise under the laws of any state, local or non-United States taxing jurisdiction or under any applicable tax treaty.
For purposes of the following discussion, dividends and gain on the sale or other disposition of common stock will be considered to be U.S. trade or business income if such income or gain is (1) effectively connected with the conduct of a United States trade or business; and (2) in the case of a treaty resident, attributable to a permanent establishment in the United States.
Dividends. Distributions on Peoples United Financial common stock will constitute dividends for United States federal income tax purposes to the extent of Peoples United Financials current or accumulated earnings and profits as determined for United States federal income tax purposes.
In general, dividends paid to a Non-U.S. Holder that do not constitute U.S. trade or business income will be subject to withholding of United States federal income tax at a 30% rate unless such rate is reduced by an applicable income tax treaty. In order to obtain a reduced rate of withholding under an income tax treaty, a Non-U.S. Holder generally will be required to provide a properly completed and executed Internal Revenue Service Form W-8BEN (or successor form) to us or our paying agent, or similar appropriate documentation or substitute form, certifying the Non-U.S. Holders entitlement to benefits under an applicable income tax treaty. A Non-U.S. Holder that is eligible for a reduced rate of United States withholding tax pursuant to an income tax treaty generally may obtain a refund of any excess amounts withheld by filing an appropriate claim for a refund with the IRS.
Dividends that do constitute U.S. trade or business income generally will not be subject to withholding of United States federal income tax if the Non-U.S. Holder provides a properly completed and executed Internal Revenue Service Form W-8ECI (or successor form) to us or our paying agent, or similar appropriate documentation or substitute form, certifying that the dividends are U.S. trade or business income. Instead, dividends that are U.S. trade or business income generally will be subject to United States federal income tax on a net income basis at the regular graduated United States federal income tax rates. Any dividends that constitute U.S. trade or business income received by a Non-U.S. Holder that is a corporation may also, under certain circumstances, be subject to an additional branch profits tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty.
Sale or Other Disposition. A Non-U.S. Holder generally will not be subject to United States federal income tax on the sale or other disposition of common stock unless:
(1) |
such gain is U.S. trade or business income, in which case the Non-U.S. Holder would be taxed on the net gain derived from the sale or other disposition under the regular graduated United States federal income tax rates (in |
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addition, a Non-U.S. Holder that is a corporation may be subject to an additional branch profits tax at a rate of 30% or a lower rate as may be specified by an applicable income tax treaty); |
(2) | the Non-U.S. Holder is a non-resident alien individual who holds the common stock as a capital asset, is present in the United States for 183 days or more during the taxable year of the disposition, and certain other conditions are present, in which case such Non-U.S. Holder generally will be subject to a flat 30% tax on the gain derived from the sale or other disposition of the common stock; or |
(3) | Peoples United Financial has been a United States real property holding corporation within the meaning of section 897(c) (2) of the Internal Revenue Code. |
Peoples United Financial believes that it has not been, is not currently, and is not likely to become in the future, a United States real property holding corporation within the meaning of section 897(c) (2) of the Internal Revenue Code.
Federal Estate Tax. Common stock owned or treated as owned by an individual who is not a citizen or resident of the United States for United States federal tax purposes at the time of death (or common stock previously held by such an individual who transferred such stock subject to certain retained rights or powers) will be included in such individuals gross estate for United States federal estate tax purposes and may be subject to U.S. federal estate tax, unless otherwise provided by an applicable estate tax treaty.
Information Reporting and Backup Withholding. In general, backup withholding will not apply to dividends on common stock paid by Peoples United Financial or by Peoples United Financials paying agent, in its capacity as such, to a Non-U.S. Holder if the holder has provided the required certification that it is not a United States person and neither Peoples United Financial nor Peoples United Financials paying agent has actual knowledge or reason to know that the holder is a United States person. If a Non-U.S. Holder fails to provide the required certification, dividends on common stock may be subject to backup withholding in certain circumstances. Nevertheless, Peoples United Financial must report annually to the Internal Revenue Service and to each Non-U.S. Holder any dividend income that is subject to withholding, or that is exempt from United States withholding tax pursuant to a tax treaty. Copies of these information returns may also be made available, under the provisions of a specific treaty or agreement, to the tax authorities of the country in which the Non-U.S. Holder resides.
In general, backup withholding and information reporting will not apply to the proceeds from the disposition of common stock paid to a Non-U.S. Holder if the holder has provided the required certification that it is not a United States person and neither the broker nor other paying agent has actual knowledge or reason to know that the holder is a United States person. If a non-corporate Non-U.S. Holder fails to provide the required certification proceeds from the disposition of common stock may be subject to backup withholding and information reporting in certain circumstances.
The backup withholding rate is currently 28%. Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules from a payment to a Non-U.S. Holder will be allowed as a refund or a credit against such Non-U.S. Holders United States federal income tax liability provided the requisite procedures are followed.
Interpretation, Amendment and Termination
All interpretations of the plan of conversion by Peoples Mutual Holdings Board of Trustees or Peoples Banks Board of Directors will be final, subject to the authority of the Office of Thrift Supervision. The plan of conversion provides that, if deemed necessary or desirable by Peoples Mutual Holdings Board of Trustees or Peoples Banks Board of Directors, the plan of conversion may be substantively amended by a majority vote of the Board of Trustees or the Board of Directors as a result of comments from regulatory authorities or otherwise, at any time prior to submission of definitive proxy materials to depositors of Peoples Bank and stockholders of Peoples Bank. Amendment of the plan of conversion thereafter requires the concurrence of the Office of Thrift Supervision. The plan of conversion may be terminated by a majority vote of the Board of Trustees or the Board of Directors at any time prior to the date of the special meeting of depositors of Peoples Bank and the annual meeting of stockholders of Peoples Bank, and may be terminated at any time thereafter with the concurrence of the Office of Thrift Supervision. The plan of conversion shall be terminated if the conversion and offering is not completed within 24 months from the date on which the depositors of Peoples Bank approve the plan of conversion, and may not be further extended by us or the Office of Thrift Supervision.
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THE PEOPLES COMMUNITY FOUNDATION
General
In furtherance of our commitment to our local community, the plan of conversion provides that we will establish The Peoples Community Foundation as a non-stock Delaware corporation in connection with the conversion and offering. The charitable foundation will be funded with our common stock and cash from the offering proceeds, as described below. By further enhancing our visibility and reputation in our local community, we believe that the charitable foundation will enhance the long-term value of our community banking franchise. The conversion and offering presents us with a unique opportunity to provide a substantial and continuing benefit to our community and to receive the associated tax benefits.
Purpose of the Charitable Foundation
Although we intend to continue to emphasize community lending and community activities following the offering, such activities are not our sole corporate purpose. The Peoples Community Foundation will be dedicated completely to community activities and the promotion of charitable causes, and may be able to support such activities in manners that are not presently available to us. We believe that The Peoples Community Foundation will enable us to assist the communities within our market area in areas beyond community development and lending and will enhance our current activities under the Community Reinvestment Act.
We further believe that the funding of The Peoples Community Foundation with our common stock and cash from the offering proceeds will allow our community to share in our potential growth and success long after the offering. The Peoples Community Foundation will accomplish that goal by providing for continued ties between it and us, thereby forming a partnership with the communities in which we operate.
While it is expected that Peoples Bank will engage in limited charitable activities in the future, it is also expected that The Peoples Community Foundation will undertake the majority of such activities in the future. In connection with the closing of the conversion, we intend to contribute to The Peoples Community Foundation 2,000,000 shares of our common stock and $20.0 million in cash from the offering proceeds. The common stock contributed to the charitable foundation is in addition to the shares being offered for sale and will not be included in determining whether the minimum number of shares of common stock has been sold in order to complete the offering. The shares issued to the charitable foundation would have a value of $40 million, based on the stock price of $20.00 per share.
Structure of the Charitable Foundation
The Peoples Community Foundation will be incorporated under Delaware law as a non-stock corporation. The Peoples Community Foundations Certificate of Incorporation will provide that The Peoples Community Foundation is organized exclusively for charitable purposes as set forth in Section 501(c)(3) of the Internal Revenue Code. The Certificate of Incorporation will further provide that no part of the net earnings of the charitable foundation will inure to the benefit of, or be distributable to, its directors, officers or members.
We will select one of our current directors and two officers of Peoples Bank to serve on the initial Board of Directors of the charitable foundation. As required by Office of Thrift Supervision regulations, we also will select one additional person to serve on the initial Board of Directors of the charitable foundation who will not be one of our officers, directors or employees and who will have experience with local charitable organizations and grant making. While there are no plans to change the size of the initial Board of Directors during the year following the completion of the conversion and offering, following the first anniversary of the conversion and offering, the charitable foundation may alter the size and composition of its Board of Directors. For five years after the conversion, one seat on the charitable foundations Board of Directors will be reserved for a person from our local community who has experience with local community charitable organizations and grant making and who is not one of our or any of our affiliates officers, directors or employees, and one seat on the charitable foundations Board of Directors will be reserved for one of our directors.
The Board of Directors of The Peoples Community Foundation will be responsible for establishing its grant and donation policies, consistent with the purposes for which it was established. As directors of a nonprofit corporation, directors of The Peoples Community Foundation will always be bound by their fiduciary duty to advance the charitable foundations charitable goals, to protect its assets and to act in a manner consistent with the charitable purposes for which the charitable
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foundation is established. The directors of The Peoples Community Foundation also will be responsible for directing the activities of the charitable foundation, including the management and voting of the common stock held by the charitable foundation. However, as required by Office of Thrift Supervision regulations, all shares of common stock of Peoples United Financial held by The Peoples Community Foundation must be voted in the same ratio as all other shares of the common stock on all proposals considered by Peoples United Financials stockholders.
The Peoples Community Foundations place of business will be located at our administrative office. The Board of Directors of The Peoples Community Foundation will appoint such officers and employees as may be necessary to manage its operations. To the extent applicable, we will comply with the affiliates restrictions set forth in Sections 23A and 23B of the Federal Reserve Act and the Office of Thrift Supervision regulations governing transactions between us and the charitable foundation.
The Peoples Community Foundation will receive working capital from the initial cash contribution of $20.0 million and:
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any dividends that may be paid on our common stock in the future; |
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within the limits of applicable federal and state laws, loans collateralized by the common stock; |
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the proceeds of the sale of any of the common stock in the open market from time to time; or |
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other investment income. |
As a private foundation under Section 501(c)(3) of the Internal Revenue Code, The Peoples Community Foundation will be required to distribute annually in grants or donations a minimum of 5% of the average fair market value of its net investment assets. One of the conditions imposed on the gift of common stock by us is that the amount of common stock that may be sold by The Peoples Community Foundation in any one year shall not exceed 5% of the average market value of the assets held by The Peoples Community Foundation, except where the Board of Directors of the charitable foundation determines that the failure to sell an amount of common stock greater than such amount would result in a long-term reduction of the value of its assets and/or would otherwise jeopardize its capacity to carry out its charitable purposes.
Tax Considerations
Our independent tax advisor has advised us that an organization created for the above purposes should qualify as a Section 501(c)(3) exempt organization under the Internal Revenue Code and should be classified as a private foundation. The Peoples Community Foundation will submit a timely request to the Internal Revenue Service to be recognized as an exempt organization. As long as The Peoples Community Foundation files its application for tax-exempt status within 15 months from the date of its organization, and provided the Internal Revenue Service approves the application, its effective date as a Section 501(c)(3) organization will be the date of its organization. Our independent tax advisor, however, has not rendered any advice on whether The Peoples Community Foundations tax exempt status will be affected by the regulatory requirement that all shares of Peoples United Financial common stock held by The Peoples Community Foundation must be voted in the same ratio as all other outstanding shares of common stock on all proposals considered by our stockholders.
We are authorized under federal law to make charitable contributions. We believe that the offering presents a unique opportunity to establish and fund a charitable foundation given the substantial amount of additional capital being raised. In making such a determination, we considered the dilutive impact of the contribution of common stock to The Peoples Community Foundation on the amount of common stock to be sold in the offering. See Capitalization, Bank Regulatory Capital Compliance, and Comparison of Valuation and Pro Forma Information With and Without the Charitable Foundation. The amount of the contribution will not adversely impact our financial condition. We therefore believe that the amount of the charitable contribution is reasonable given our pro forma capital position and does not raise safety and soundness concerns.
We will receive an opinion from our independent tax advisor that the contribution of cash and our stock to The Peoples Community Foundation should not constitute an act of self-dealing and that we should be entitled to a deduction in the amount of the cash contributed and the fair market value of the stock at the time of the contribution less the nominal amount that The Peoples Community Foundation is required to pay us for such stock. We are permitted to deduct only an amount equal to 10% of our annual taxable income in any one year. We are permitted under the Internal Revenue Code to carry the excess contribution over the five-year period following the contribution to The Peoples Community Foundation. We
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estimate that substantially all of the contribution should be deductible over the six-year period. However, we do not have any assurance that the Internal Revenue Service will grant tax-exempt status to the charitable foundation. Furthermore, even if the contribution is deductible, we may not have sufficient earnings to be able to use the deduction in full. We do not expect to make any further contributions to The Peoples Community Foundation within the first five years following the initial contribution, unless such contributions would be deductible under the Internal Revenue Code. Any such decisions would be based on an assessment of, among other factors, our financial condition at that time, the interests of our stockholders and depositors, and the financial condition and operations of the charitable foundation.
Although we have received an opinion from our independent tax advisor that we should be entitled to a deduction for the charitable contribution, there can be no assurances that the Internal Revenue Service will recognize The Peoples Community Foundation as a Section 501(c)(3) exempt organization or that the deduction will be permitted. In such event, our contribution to The Peoples Community Foundation would be expensed without tax benefit, resulting in a reduction in earnings in the year in which the Internal Revenue Service makes such a determination.
As a private foundation, earnings and gains, if any, from the sale of common stock or other assets are exempt from federal and state income taxation. However, investment income, such as interest, dividends and capital gains, is generally taxed at a rate of 2.0%. Within four and one-half months after the close of its fiscal year, The Peoples Community Foundation will be required to make its annual return available for public inspection. The annual return for a private foundation includes, among other things, an itemized list of all grants made or approved, showing the amount of each grant, the recipient, any relationship between a grant recipient and the charitable foundations managers and a concise statement of the purpose of each grant.
Regulatory Conditions Imposed on the Charitable Foundation
Office of Thrift Supervision regulations will impose the following conditions on the establishment of The Peoples Community Foundation:
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the Office of Thrift Supervision can examine the charitable foundation; |
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the charitable foundation must comply with all supervisory directives imposed by the Office of Thrift Supervision; |
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the charitable foundation must provide annually to the Office of Thrift Supervision a copy of the annual report that the charitable foundation submits to the Internal Revenue Service; |
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the charitable foundation must operate according to written policies adopted by its Board of Directors, including a conflict of interest policy; |
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the charitable foundation may not engage in self-dealing and must comply with all laws necessary to maintain its tax-exempt status under the Internal Revenue Code; and |
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the charitable foundation must vote its shares of Peoples United Financial in the same ratio as all of the other shares voted on each proposal considered by Peoples United Financials stockholders. |
In addition, within six months of completing the conversion, The Peoples Community Foundation must submit to the Office of Thrift Supervision a three-year operating plan.
Additionally, the establishment and funding of The Peoples Community Foundation must be separately approved by at least a majority of the total number of votes eligible to be cast by depositors of Peoples Bank at the special meeting of depositors and must be separately approved by at least a majority of the outstanding shares of Peoples Bank common stock entitled to vote at a meeting of stockholders of Peoples Bank and the affirmative vote of a majority of the outstanding shares of Peoples Bank common stock, excluding shares held by Peoples Mutual Holdings. Peoples Bank, excluding Peoples Mutual Holdings. If the establishment and funding of The Peoples Community Foundation is not approved by Peoples Bank stockholders and depositors, the foundation will not be established.
Consummation of the conversion and related offering of common stock is not conditioned upon depositors and stockholders approval of the charitable foundation. Failure to approve the charitable foundation may, however, materially increase our pro forma market value. See Comparison of Valuation and Pro Forma Information With and Without the Charitable Foundation.
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RESTRICTIONS ON ACQUISITION OF PEOPLES UNITED FINANCIAL
AND PEOPLES BANK
General
The principal federal regulatory restrictions which affect the ability of any person, firm or entity to acquire Peoples United Financial or shares of Peoples United Financial capital stock are described below. Also discussed are certain provisions in Peoples United Financials Certificate of Incorporation and Bylaws which may be deemed to affect the ability of a person, firm or entity to acquire us.
Peoples United Financial Certificate of Incorporation and Bylaws
Peoples United Financials Certificate of Incorporation and Bylaws contain a number of provisions, relating to corporate governance and certain rights of stockholders, that might discourage future takeover attempts. As a result, stockholders who might desire to participate in such transactions may not have an opportunity to do so. In addition, such provisions will also render the removal of the Board of Directors or management more difficult.
The following description is necessarily general and qualified by reference to the Certificate of Incorporation and Bylaws. See Where You Can Find Additional Information as to how to obtain a copy of these documents.
Classified Board; Power of Directors to Fill Vacancies . The Board of Directors is required by the Certificate of Incorporation to be divided into three classes which are as equal in size as is possible. One of the three classes of directors is required to be elected annually by the stockholders for a three-year term. A classified board promotes continuity and stability of management but makes it more difficult for stockholders to change a majority of the Board of Directors because it generally takes at least two annual elections of directors for this to occur. In addition, any vacancy occurring on the Board of Directors, including a vacancy created by an increase in the number of directors or resulting from death, resignation, retirement, disqualification, removal from office or other cause, shall be filled for the remainder of the unexpired term exclusively by the directors then in office.
Removal of Directors . The Certificate of Incorporation provides that a director may be removed from the Board of Directors prior to the expiration of his or her term only for cause and upon the affirmative vote of at least two-thirds of the outstanding shares of voting stock. In the absence of these provisions, the vote of the holders of a majority of Peoples United Financials shares could remove the entire Board of Directors, with cause, and replace it with persons of such holders choice.
Votes of Stockholders. The Certificate of Incorporation provides that any action required or permitted to be taken by stockholders may be taken only at an annual or special meeting and prohibits stockholder action by written consent in lieu of a meeting.
Authorized but Unissued Shares of Capital Stock . Following the offering, Peoples United Financial will have authorized but unissued shares of preferred stock and common stock. The board may authorize the issuance of one or more series of preferred stock without stockholder approval. See Description of Capital Stock of Peoples United Financial . These shares could be used by the Board of Directors to make it more difficult or to discourage an attempt to obtain control of Peoples United Financial through a merger, tender offer, proxy contest or otherwise.
Stockholder Vote Required to Approve Business Combinations with Interested Shareholders . The Certificate of Incorporation requires the approval of the holders of at least two-thirds of Peoples United Financials outstanding shares of voting stock, together with the affirmative vote of at least 50% of the outstanding shares of voting stock not beneficially owned by an Interested Shareholder (defined below) to approve certain Business Combinations and related transactions. Under Delaware law, absent this provision, Business Combinations, which include mergers, consolidations and sales of all or substantially all of the assets of a corporation must, subject to certain exceptions, be approved by the vote of the holders of only a majority of the outstanding shares of common stock and any other affected class of stock.
Approval of the holders of at least two-thirds of Peoples United Financials shares is required in connection with any transaction involving an Interested Shareholder except (1) in cases where the proposed transaction has been approved in
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advance by a majority of those members of the Board of Directors who are unaffiliated with the Interested Shareholder and were directors prior to the time when the Interested Shareholder became an Interested Shareholder or (2) if the proposed transaction meets certain conditions set forth therein which are designed to afford the stockholders a fair price in consideration for their shares in which case, if a stockholder vote is required, approval of only a majority of the outstanding shares of voting stock would be sufficient.
The term Interested Shareholder is defined to include any individual, corporation, partnership or other entity (other than Peoples United Financial or its subsidiaries or any employee benefit plan maintained by Peoples United Financial or its subsidiaries) which owns beneficially or controls, directly or indirectly, 15% or more of the outstanding shares of Peoples United Financial voting stock.
A Business Combination means:
(1) | any merger or consolidation of Peoples United Financial or any of its subsidiaries with or into any Interested Shareholder or its affiliate; |
(2) | any sale, lease, exchange, mortgage, pledge, transfer, or other disposition to or with any Interested Shareholder or its affiliate of 10% or more of Peoples United Financials assets or combined assets of Peoples United Financial and its subsidiaries; |
(3) | the issuance or transfer to any Interested Shareholder or its affiliate by Peoples United Financial (or any subsidiary) of any of Peoples United Financials securities other than on a pro rata basis to all stockholders; |
(4) | the adoption of any plan for our liquidation or dissolution proposed by or on behalf of any Interested Shareholder or its affiliate; |
(5) | any reclassification of securities, recapitalization, merger or consolidation of Peoples United Financial which has the effect of increasing the proportionate share of common stock or any class of Peoples United Financials equity or convertible securities owned directly or indirectly by an Interested Shareholder or its affiliate; and |
(6) | the acquisition by Peoples United Financials subsidiaries of any securities of an Interested Shareholder or its affiliates or associates. |
Evaluation of Offers . The Certificate of Incorporation provides that the Board of Directors, when evaluating any offer from another party to
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make a tender or exchange offer for any outstanding equity security of Peoples United Financial; |
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merge or consolidate Peoples United Financial with another corporation or entity; or |
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purchase or otherwise acquire all or substantially all of Peoples United Financials properties and assets, |
shall in connection with the exercise of its judgment in determining what is in the best interest of Peoples United Financial and Peoples United Financials stockholders, give due consideration, to the extent permitted by law, to all relevant factors, including, without limitation, the financial and managerial resources and future prospects of the other party, the possible effects on Peoples United Financials business and its subsidiaries and on its employees, customers, suppliers and creditors and its subsidiaries, and the effects on the communities in which Peoples United Financial and Peoples United Financials subsidiaries facilities are located.
By including these standards in the Certificate of Incorporation, the Board of Directors may be in a stronger position to oppose such a transaction if it concludes that the transaction would not be in Peoples United Financials best interests, even if the price offered is significantly greater than the then market price of Peoples United Financials equity securities.
Amendment of Certificate of Incorporation and Bylaws . The Certificate of Incorporation provides that certain provisions of the Certificate of Incorporation may not be altered, amended, repealed or rescinded without the affirmative vote of either (1) not less than a majority of the authorized number of directors and, if one or more Interested Shareholders exist, by not less than a majority of the Disinterested Directors (as defined in the Certificate of Incorporation) or (2) the holders of not less than two-thirds of the total votes eligible to be cast by the holders of all outstanding shares of Peoples United Financial capital stock entitled to vote thereon and, if the alteration, amendment, repeal, or rescission is proposed by or on behalf of an Interested Shareholder or a director who is an Affiliate or Associate (each as defined in the Certificate of
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Incorporation) of an Interested Shareholder, by the affirmative vote of the holders of not less than a majority of the total votes eligible to be cast by holders of all outstanding shares entitled to vote thereon not beneficially owned by an Interested Shareholder or an Affiliate or Associate thereof. Amendment of the provision of the Certificate of Incorporation relating to Business Combinations must also be approved by either (1) a majority of the Disinterested Directors; or (2) the affirmative vote of not less than two-thirds of the total number of votes eligible to be cast by the holders of all outstanding shares of the voting stock, voting together as a single class, together with the affirmative vote of not less than fifty percent (50%) of the total number of votes eligible to be cast by the holders of all outstanding shares of the voting stock not beneficially owned by any Interested Shareholder or Affiliate or Associate thereof, voting together as a single class.
Furthermore, the Certificate of Incorporation provides that provisions of the Bylaws that contain supermajority voting requirements may not be altered, amended, repealed or rescinded without a vote of the Board of Directors or holders of capital stock entitled to vote thereon that is not less than the super-majority specified in such provision. Absent these provisions, the Delaware General Corporation Law provides that a corporations certificate of incorporation and bylaws may be amended by the holders of a majority of the corporations outstanding capital stock. The Certificate of Incorporation also provides that the Board of Directors is authorized to make, alter, amend, rescind or repeal any of the Bylaws in accordance with the terms thereof. Except for circumstances specifically provided for in the Delaware General Corporation Law, this provision applies to Bylaws whether initially adopted or amended by the Board of Directors or by the Stockholders. This authorization neither divests the stockholders of their right, nor limits their power, to adopt, amend, rescind or repeal any Bylaw under the Delaware General Corporation Law. These provisions could have the effect of discouraging a tender offer or other takeover attempt where the ability to make fundamental changes through Bylaw amendments is an important element of the takeover strategy of the acquiror.
Stockholder Nominations and Proposals. The Certificate of Incorporation requires a stockholder who intends to nominate a candidate for election to the Board of Directors at an annual stockholders meeting to give approximately 120 days notice in advance of the annual stockholders meeting to the Secretary. This advance notice provision requires a stockholder who wishes to nominate any person for election as a director to provide certain information to Peoples United Financial concerning the nominee and the proposing stockholder. Similarly, the Bylaws require a stockholder who intends to raise new business at an annual meeting to give approximately 90 days notice in advance of the anniversary of the prior years stockholders meeting to the Secretary. This advance notice provision requires a stockholder who desires to raise new business to provide certain information to Peoples United Financial concerning the nature of the new business, the stockholder and the stockholders interest in the matter.
Anti-Takeover Effects of Our Certificate of Incorporation and Bylaws
The provisions described above are intended to reduce Peoples United Financials vulnerability to takeover attempts and certain other transactions which have not been negotiated with and approved by members of the Board of Directors. The provisions also will assist Peoples United Financial in the orderly deployment of the conversion proceeds into productive assets during the initial period after the conversion. The Board of Directors believes these provisions are in the best interests of Peoples United Financial and its stockholders. An unsolicited non-negotiated proposal can seriously disrupt the business and management of a corporation and cause it great expense. Accordingly, the Board of Directors believes it is in the best interests of Peoples United Financial and its stockholders to encourage potential acquirors to negotiate directly with management and the Board of Directors and that these provisions will encourage such negotiations and discourage non-negotiated takeover attempts. It is also the Board of Directors view that these provisions should not discourage persons from proposing a merger or other transaction at a price that reflects the true value of Peoples United Financial and that otherwise is in the best interests of all stockholders.
Delaware Corporate Law
Delaware has a statute designed to provide Delaware corporations with additional protection against hostile takeovers. The takeover statute, which is codified in Section 203 of the Delaware General Corporation Law, is intended to discourage certain takeover practices by impeding the ability of a hostile acquiror to engage in certain transactions with the target company.
In general, Section 203 provides that a Person who owns 15% or more of the outstanding voting stock of a Delaware corporation may not consummate a merger or other business combination transaction with such corporation at any time during the three-year period following the date such Person acquired 15% of the outstanding voting stock. The term business combination is defined broadly to cover a wide range of corporate transactions including mergers, sales of assets, issuances of stock, transactions with subsidiaries and the receipt of disproportionate financial benefits.
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The statute exempts the following transactions from the requirements of Section 203:
(1) | any business combination if, prior to the date a person acquired 15% of the outstanding voting stock, the Board of Directors approved either the business combination or the transaction which resulted in the stockholder acquiring 15%; |
(2) | any business combination involving a person who acquired at least 85% of the outstanding voting stock in the same transaction in which 15% of the outstanding voting stock was acquired (with the number of shares outstanding calculated without regard to those shares owned by the corporations directors who are also officers and by certain employee stock plans); |
(3) | any business combination that is approved by the board of directors and by a two-thirds vote of the outstanding voting stock not owned by the interested party; and |
(4) | certain business combinations that are proposed after the receipt by the corporation of certain other acquisition proposals which are approved or not opposed by a majority of certain continuing members of the board of directors. |
A corporation may exempt itself from the requirement of the statute by adopting an amendment to its certificate of incorporation or bylaws electing not to be governed by Section 203 of the Delaware General Corporation Law. At the present time, the Board of Directors does not intend to propose any such amendment.
Regulatory Restrictions
Conversion Regulations . Office of Thrift Supervision regulations provide that for a period of three years following the date of the completion of the conversion, no person may, directly or indirectly, acquire or offer to acquire the beneficial ownership of more than 10% of any class of Peoples United Financials equity securities without the prior written approval of the Office of Thrift Supervision. If any person violates this prohibition, the securities beneficially owned by such person in excess of 10% will not be voted by any person or counted as voting shares in connection with any matter submitted to the stockholders for a vote, and will not be counted as outstanding for purposes of determining the affirmative vote necessary to approve any matter submitted to the stockholders for a vote.
Change of Control Regulations. The Change in Bank Control Act provides that no person, acting directly or indirectly or through or in concert with one or more other persons, may acquire control of a savings institution unless the Office of Thrift Supervision has been given 60 days prior written notice. The Home Owners Loan Act provides that no company may acquire control of a savings institution without the prior approval of the Office of Thrift Supervision. Any company that acquires such control becomes a savings and loan holding company subject to registration, examination and regulation by the Office of Thrift Supervision. Pursuant to federal regulations, control of a savings institution is conclusively deemed to have been acquired by, among other things, the acquisition of more than 25% of any class of voting stock of the institution or the ability to control the election of a majority of the directors of an institution. Moreover, control is presumed to have been acquired, subject to rebuttal, upon the acquisition of more than 10% of any class of voting stock, or of more than 25% of any class of stock of a savings institution, where certain enumerated control factors are also present in the acquisition.
The Office of Thrift Supervision may prohibit an acquisition of control if:
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it would result in a monopoly or substantially lessen competition; |
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the financial condition of the acquiring person might jeopardize the financial stability of the institution; or |
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the competence, experience or integrity of the acquiring person indicates that it would not be in the interest of the depositors or of the public to permit the acquisition of control by such person. |
These restrictions do not apply to the acquisition of a savings institutions capital stock by one or more tax-qualified employee stock benefit plans, provided that the plans do not have beneficial ownership of more than 25% of any class of equity security of the savings institution.
DESCRIPTION OF CAPITAL STOCK OF PEOPLES UNITED FINANCIAL
General
We will be authorized to issue 1.95 billion shares of common stock, par value $0.01 per share and 50,000,000 shares of preferred stock, par value $0.01 per share. We currently expect to sell up to 185,437,500 shares of common stock (or
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213,253,125 shares in the event of an increase of 15% in the estimated valuation range) in the offering and issue up to 135,959,202 shares of common stock (or 156,353,083 shares in the event of an increase of 15% in the estimated valuation range) in the share exchange. We also expect to issue 2,000,000 shares of common stock to The Peoples Community Foundation. We will not issue any shares of preferred stock in the offering. Except as discussed above in Restrictions on Acquisition of Peoples United Financial and Peoples Bank , each share of Peoples United Financial common stock will have the same relative rights as, and will be identical in all respects with, every other share of common stock. Upon payment of the purchase price for the common stock in accordance with the plan of conversion, all such stock will be duly authorized, fully paid and non-assessable.
The shares of Peoples United Financial common stock:
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are not deposit accounts and are subject to investment risk; |
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are not insured or guaranteed by the Federal Deposit Insurance Corporation, or any other government agency; and |
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are not guaranteed by Peoples United Financial or Peoples Bank. |
Common Stock
Dividends. We can pay dividends out of statutory surplus or from net profits if, as and when declared by the Board of Directors. The payment of dividends is subject to limitations which are imposed by law. See Our Policy Regarding Dividends and Regulation of Peoples Bank and Peoples United Financial . The holders of Peoples United Financial common stock will be entitled to receive and share equally in such dividends as may be declared by the Board of Directors out of funds legally available therefor. If Peoples United Financial issues preferred stock, the holders of the preferred stock may have a priority over the holders of the common stock with respect to dividends.
Voting Rights . Upon the effective date of the conversion and offering, the holders of Peoples United Financial common stock will possess exclusive voting rights in Peoples United Financial. They will elect the Board of Directors and act on such other matters as are required to be presented to them under Delaware law or the Certificate of Incorporation or as are otherwise presented to them by the Board of Directors. Each holder of common stock will be entitled to one vote per share and will not have any right to cumulate votes in the election of directors. Also, the Board of Directors is divided into three classes which are as equal in size as is possible and only one class is required to be elected annually by the stockholders. If Peoples United Financial issues preferred stock, holders of the preferred stock may also possess voting rights. Certain matters, including the removal of directors, the approval of business combinations and amending the Certificate of Incorporation or Bylaws, may require a two-thirds stockholder vote. See Restrictions on Acquisition of Peoples United Financial and Peoples Bank .
Liquidation. In the event of any liquidation, dissolution or winding up of Peoples Bank, we, as sole owner of Peoples Banks capital stock, would be entitled to receive, after payment or provision for payment of all debts and liabilities of Peoples Bank (including all deposit accounts and accrued interest thereon) and after distribution of the balance in the special liquidation account to eligible account holders and supplemental eligible account holders (see The Conversion and OfferingEffects of the ConversionEffect on Liquidation Rights ), all assets of Peoples Bank available for distribution. In the event of Peoples United Financials liquidation, dissolution or winding up, the holders of Peoples United Financials common stock would be entitled to receive, after payment or provision for payment of all debts and liabilities, all of Peoples United Financials assets available for distribution. If Peoples United Financial issues preferred stock, the holders thereof may have a priority over the holders of the common stock in the event of liquidation or dissolution.
Preemptive Rights; Redemption . Holders of Peoples United Financial common stock will not be entitled to preemptive rights with respect to any shares which may be issued. Peoples United Financial common stock is not subject to redemption.
Preferred Stock
Peoples United Financial will not issue any shares of authorized preferred stock in the offering. We may issue preferred stock with such preferences and designations as the Board of Directors may from time to time determine. The Board of Directors can, without stockholder approval, issue preferred stock with voting, dividend, liquidation and conversion rights which could dilute the voting strength of the holders of the common stock and may assist management in impeding an unfriendly takeover or attempted change in control.
206
The transfer agent and registrar for the common stock of Peoples Bank and Peoples United Financial is Mellon Investor Services LLC.
The legality of the issuance of the common stock being offered and certain matters relating to the conversion and offering and federal taxation will be passed upon for us by Thacher Proffitt & Wood LLP, Washington, D.C. Certain matters relating to state taxation will be passed upon for us by PricewaterhouseCoopers LLP, Boston, Massachusetts. Certain legal matters will be passed upon for Morgan Stanley & Co. Incorporated, Ryan Beck & Co., Inc. and the other members of the syndicate by Cleary Gottlieb Steen & Hamilton LLP, New York, New York.
Our consolidated financial statements as of December 31, 2005 and 2004, and for each of the years in the three-year period ended December 31, 2005, and managements assessment of the effectiveness of internal control over financial reporting as of December 31, 2005 have been included herein in reliance upon the reports of KPMG LLP, an independent registered public accounting firm, and upon the authority of said firm as experts in accounting and auditing.
RP Financial has consented to the publication in this document of a summary of its letter to us setting forth its opinion as to the estimated pro forma market value of our common stock after the conversion and offering and its letter with respect to the value of subscription rights and to the use of its name and statements with respect to it appearing in this document.
Peoples United Financials common stock is registered pursuant to Section 12(b) of the Securities Exchange Act of 1934, as amended. Peoples United Financial is subject to the information, proxy solicitation, insider trading restrictions, tender offer rules, periodic reporting and other requirements of the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended. Peoples United Financial may not deregister the common stock under the Securities Exchange Act of 1934, as amended, for a period of at least three years following the conversion and offering.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed a registration statement with the Securities and Exchange Commission under the Securities Act of 1933 with respect to the common stock offered through this prospectus. As permitted by the rules and regulations of the Securities and Exchange Commission, this prospectus does not contain all the information set forth in the registration statement. You may examine this information without charge at the public reference facilities of the Securities and Exchange Commission located at 100 F Street, N.E., Washington, D.C. 20549. You may obtain copies of the material from the Securities and Exchange Commission at prescribed rates. Please call the Securities and Exchange Commission at 1-800-SEC-0330 for further information on the Securities and Exchange Commissions public reference rooms. The registration statement also is available through the Securities and Exchange Commissions world wide web site on the internet at http://www.sec.gov.
This document contains a description of the material features of certain exhibits to the Registration Statement on Form S-1. The statements as to the contents of such exhibits, however, are, of necessity, brief descriptions and are not necessarily complete; each such statement is qualified by reference to such contract or document. Copies of Peoples United Financials Certificate of Incorporation and Bylaws, as well as the Charter and Bylaws of Peoples Bank, are available from us without charge and may be obtained by written request to Peoples United Financial, Investor Relations Department, 850 Main St., Bridgeport, CT 06604 or by calling (203) 338-7228. A copy of the plan of conversion is also available from us without charge and is also available for inspection at each branch office of Peoples Bank. A copy of the independent appraisal report of RP Financial, including any amendments made to it, and the detailed memorandum of RP Financial setting forth the method and assumptions for such appraisal are available for inspection at our administrative offices.
207
We have filed an application with the Office of Thrift Supervision with respect to the conversion and offering. This prospectus omits certain information contained in that application. You may examine the application at the principal office of the Office of Thrift Supervision, 1700 G St., NW, Washington, D.C. 20552, and at the Northeast Regional Office of the Office of Thrift Supervision, Harborside Financial Center, Plaza Five, Suite 1600, Jersey City, NJ 07311.
208
Index To Consolidated Financial Statements
The registrant, Peoples United Financial, Inc., a Delaware corporation, which was incorporated on November 2, 2006, has not yet commenced operations and has engaged in only minimal activities to date; accordingly, the financial statements of Peoples United Financial, Inc. have been omitted because of their immateriality.
Certain schedules required by OTS regulations and by Regulation S-X are not included because they are not applicable or the required information has been disclosed elsewhere.
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of Peoples Bank:
We have audited the accompanying consolidated statements of condition of Peoples Bank and subsidiaries (Peoples) as of December 31, 2005 and 2004, and the related consolidated statements of income, changes in stockholders equity, and cash flows for each of the years in the three-year period ended December 31, 2005. These consolidated financial statements are the responsibility of Peoples management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Peoples Bank and subsidiaries as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Peoples internal control over financial reporting as of December 31, 2005, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 3, 2006 expressed an unqualified opinion on managements assessment of, and the effective operation of, internal control over financial reporting.
/s/ KPMG LLP |
Stamford, Connecticut |
March 3, 2006, except for Note 20, which is dated October 30, 2006
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of Peoples Bank:
We have audited managements assessment, included in the accompanying Managements Report on Internal Control over Financial Reporting, that Peoples Bank and subsidiaries (Peoples) maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) . Peoples management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on managements assessment and an opinion on the effectiveness of Peoples internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating managements assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that Peoples maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on criteria established in Internal ControlIntegrated Framework issued by the COSO. Also, in our opinion, Peoples maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal ControlIntegrated Framework issued by the COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statements of condition of Peoples Bank and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of income, changes in stockholders equity, and cash flows for each of the years in the three-year period ended December 31, 2005, and our report dated March 3, 2006 expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP |
Stamford, Connecticut |
March 3, 2006 |
F-3
Peoples Bank and Subsidiaries
Consolidated Statements of Condition
September 30, | December 31, | |||||||||||
(in millions) |
2006 | 2005 | 2004 | |||||||||
(Unaudited) | (Audited) | |||||||||||
Assets |
||||||||||||
Cash and due from banks (note 3) |
$ | 355.8 | $ | 391.6 | $ | 309.0 | ||||||
Short-term investments (note 3) |
179.6 | 31.9 | 24.2 | |||||||||
Total cash and cash equivalents |
535.4 | 423.5 | 333.2 | |||||||||
Securities (note 4): |
||||||||||||
Trading account securities, at fair value |
29.5 | 27.3 | 11.7 | |||||||||
Securities available for sale, at fair value |
171.3 | 1,334.3 | 2,058.1 | |||||||||
Securities held to maturity, at amortized cost (fair value of $1.1 at
|
1.1 | 1.4 | 1.4 | |||||||||
Total securities |
201.9 | 1,363.0 | 2,071.2 | |||||||||
Securities purchased under agreements to resell (note 1) |
| 25.0 | | |||||||||
Loans (note 5): |
||||||||||||
Residential mortgage |
3,877.7 | 3,507.9 | 3,266.4 | |||||||||
Commercial |
2,197.4 | 2,029.2 | 1,688.9 | |||||||||
Commercial real estate finance |
1,799.3 | 1,778.3 | 1,838.1 | |||||||||
Consumer |
1,310.5 | 1,257.5 | 1,140.0 | |||||||||
Total loans |
9,184.9 | 8,572.9 | 7,933.4 | |||||||||
Less allowance for loan losses |
(74.0 | ) | (75.0 | ) | (72.5 | ) | ||||||
Total loans, net |
9,110.9 | 8,497.9 | 7,860.9 | |||||||||
Bank-owned life insurance (note 1) |
211.2 | 154.6 | 0.8 | |||||||||
Premises and equipment, net |
134.1 | 140.1 | 140.8 | |||||||||
Goodwill (note 1) |
101.5 | 101.5 | 103.5 | |||||||||
Other acquisition-related intangibles (note 1) |
3.8 | 4.6 | 6.4 | |||||||||
Other assets (note 6) |
313.3 | 222.3 | 201.1 | |||||||||
Total assets |
$ | 10,612.1 | $ | 10,932.5 | $ | 10,717.9 | ||||||
Liabilities |
||||||||||||
Deposits (note 7): |
||||||||||||
Non-interest-bearing |
$ | 2,172.4 | $ | 2,353.1 | $ | 2,227.1 | ||||||
Savings, interest-bearing checking and money market |
3,286.1 | 3,767.4 | 4,232.7 | |||||||||
Time |
3,520.1 | 2,962.1 | 2,402.2 | |||||||||
Total deposits |
8,978.6 | 9,082.6 | 8,862.0 | |||||||||
Borrowings (note 8): |
||||||||||||
Federal funds purchased |
13.6 | 269.9 | 240.8 | |||||||||
Federal Home Loan Bank advances |
| 25.0 | 100.0 | |||||||||
Total borrowings |
13.6 | 294.9 | 340.8 | |||||||||
Subordinated notes (note 9) |
108.8 | 108.6 | 121.8 | |||||||||
Other liabilities (note 21) |
159.7 | 157.8 | 193.5 | |||||||||
Total liabilities |
9,260.7 | 9,643.9 | 9,518.1 | |||||||||
Commitments and contingencies (notes 17 and 18) |
||||||||||||
Stockholders Equity (notes 11 and 12) |
||||||||||||
Common stock (without par value; 450.0 shares, 150.0 shares and
|
142.1 | 141.6 | 140.8 | |||||||||
Additional paid-in capital |
177.8 | 172.0 | 157.5 | |||||||||
Retained earnings |
1,038.6 | 998.4 | 913.7 | |||||||||
Accumulated other comprehensive loss (note 14) |
(7.1 | ) | (23.4 | ) | (12.2 | ) | ||||||
Total stockholders equity |
1,351.4 | 1,288.6 | 1,199.8 | |||||||||
Total liabilities and stockholders equity |
$ | 10,612.1 | $ | 10,932.5 | $ | 10,717.9 | ||||||
See accompanying notes to consolidated financial statements.
F-4
Peoples Bank and Subsidiaries
Consolidated Statements of Income
Nine months ended
September 30, |
Years ended December 31, |
|||||||||||||||||||
(in millions, except per share data) |
2006 | 2005 | 2005 | 2004 | 2003 | |||||||||||||||
(Unaudited) | (Audited) | |||||||||||||||||||
Interest and dividend income: |
||||||||||||||||||||
Residential mortgage |
$ | 135.2 | $ | 114.0 | $ | 154.7 | $ | 137.7 | $ | 141.7 | ||||||||||
Commercial |
107.3 | 77.7 | 108.7 | 73.3 | 66.3 | |||||||||||||||
Commercial real estate finance |
92.5 | 86.4 | 116.2 | 104.9 | 103.0 | |||||||||||||||
Consumer |
64.8 | 46.9 | 65.8 | 46.7 | 55.1 | |||||||||||||||
Total interest on loans |
399.8 | 325.0 | 445.4 | 362.6 | 366.1 | |||||||||||||||
Securities (note 4) |
27.8 | 47.4 | 60.0 | 72.4 | 84.3 | |||||||||||||||
Short-term investments |
3.1 | 1.0 | 1.5 | 2.2 | 3.8 | |||||||||||||||
Securities purchased under agreements to resell |
0.8 | 0.7 | 1.0 | | | |||||||||||||||
Total interest and dividend income |
431.5 | 374.1 | 507.9 | 437.2 | 454.2 | |||||||||||||||
Interest expense: |
||||||||||||||||||||
Deposits (note 7) |
128.0 | 82.7 | 117.5 | 86.7 | 102.5 | |||||||||||||||
Borrowings (note 8) |
9.8 | 6.6 | 9.4 | 13.6 | 69.0 | |||||||||||||||
Subordinated notes |
7.4 | 8.4 | 11.3 | 13.4 | 22.8 | |||||||||||||||
Interest allocated to discontinued operations (note 21) |
| | | (3.6 | ) | (21.7 | ) | |||||||||||||
Total interest expense |
145.2 | 97.7 | 138.2 | 110.1 | 172.6 | |||||||||||||||
Net interest income |
286.3 | 276.4 | 369.7 | 327.1 | 281.6 | |||||||||||||||
Provision for loan losses (note 5) |
2.0 | 3.3 | 8.6 | 13.3 | 16.7 | |||||||||||||||
Net interest income after provision for loan losses |
284.3 | 273.1 | 361.1 | 313.8 | 264.9 | |||||||||||||||
Non-interest income: |
||||||||||||||||||||
Fee-based revenues: |
||||||||||||||||||||
Service charges on deposit accounts |
58.4 | 52.6 | 72.4 | 69.2 | 68.7 | |||||||||||||||
Insurance revenue |
20.2 | 20.4 | 28.0 | 27.9 | 26.2 | |||||||||||||||
Brokerage commissions |
9.2 | 9.1 | 11.7 | 12.6 | 13.2 | |||||||||||||||
Other fees |
25.7 | 29.6 | 39.4 | 33.2 | 34.9 | |||||||||||||||
Total fee-based revenues |
113.5 | 111.7 | 151.5 | 142.9 | 143.0 | |||||||||||||||
Net security losses (note 4) |
(27.2 | ) | (0.1 | ) | (0.1 | ) | (4.7 | ) | (0.6 | ) | ||||||||||
Net gains on sales of residential mortgage loans (note 5) |
1.5 | 3.1 | 4.0 | 3.7 | 14.8 | |||||||||||||||
Gain on sale of branches (note 2) |
| | 8.1 | | | |||||||||||||||
Bank-owned life insurance (note 1) |
6.3 | 1.7 | 3.3 | | | |||||||||||||||
Other non-interest income |
8.0 | 4.7 | 6.5 | 9.8 | 9.1 | |||||||||||||||
Total non-interest income |
102.1 | 121.1 | 173.3 | 151.7 | 166.3 | |||||||||||||||
Non-interest expense: |
||||||||||||||||||||
Compensation and benefits (notes 15 and 16) |
153.5 | 145.8 | 195.5 | 194.3 | 187.2 | |||||||||||||||
Occupancy and equipment |
46.8 | 46.0 | 62.4 | 69.3 | 74.8 | |||||||||||||||
Liability restructuring costs (notes 8, 9 and 17) |
| | 2.7 | 133.4 | 1.2 | |||||||||||||||
Goodwill impairment charge (note 1) |
| 2.0 | 2.0 | | | |||||||||||||||
Other non-interest expense |
61.0 | 60.0 | 81.8 | 82.7 | 82.8 | |||||||||||||||
Total non-interest expense |
261.3 | 253.8 | 344.4 | 479.7 | 346.0 | |||||||||||||||
Income (loss) from continuing operations before income tax expense (benefit) |
125.1 | 140.4 | 190.0 | (14.2 | ) | 85.2 | ||||||||||||||
Income tax expense (benefit) (note 10) |
42.1 | 48.8 | 64.1 | (8.6 | ) | 22.5 | ||||||||||||||
Income (loss) from continuing operations |
83.0 | 91.6 | 125.9 | (5.6 | ) | 62.7 | ||||||||||||||
Discontinued operations (note 21): |
||||||||||||||||||||
Income from discontinued operations, net of tax |
1.7 | 4.1 | 5.0 | 6.8 | 1.1 | |||||||||||||||
Gain on sale of discontinued operations, net of tax |
| 6.2 | 6.2 | 198.5 | | |||||||||||||||
Income from discontinued operations |
1.7 | 10.3 | 11.2 | 205.3 | 1.1 | |||||||||||||||
Net income |
$ | 84.7 | $ | 101.9 | $ | 137.1 | $ | 199.7 | $ | 63.8 | ||||||||||
Earnings per common share (note 13) |
||||||||||||||||||||
Basic: |
||||||||||||||||||||
Income (loss) from continuing operations |
$ | 0.59 | $ | 0.65 | $ | 0.89 | $ | (0.04 | ) | $ | 0.45 | |||||||||
Income from discontinued operations |
0.01 | 0.07 | 0.08 | 1.47 | 0.01 | |||||||||||||||
Net income |
0.60 | 0.72 | 0.97 | 1.43 | 0.46 | |||||||||||||||
Diluted: |
||||||||||||||||||||
Income (loss) from continuing operations |
$ | 0.58 | $ | 0.65 | $ | 0.89 | $ | (0.04 | ) | $ | 0.45 | |||||||||
Income from discontinued operations |
0.01 | 0.07 | 0.08 | 1.46 | 0.01 | |||||||||||||||
Net income |
0.59 | 0.72 | 0.97 | 1.42 | 0.46 |
See accompanying notes to consolidated financial statements.
F-5
Peoples Bank and Subsidiaries
Consolidated Statements of Changes in Stockholders Equity
(Audited) (in millions, except per share data) |
Common
Stock |
Additional
Paid-In Capital |
Retained
Earnings |
Accumulated
Other Comprehensive Loss |
Total
Stockholders Equity |
|||||||||||||
Balance at December 31, 2002 |
$ | 138.9 | $ | 129.7 | $ | 736.6 | $ | (65.6 | ) | $ | 939.6 | |||||||
Net income |
| | 63.8 | | 63.8 | |||||||||||||
Other comprehensive income, net of tax (note 14) |
| | | 30.6 | 30.6 | |||||||||||||
Total comprehensive income |
94.4 | |||||||||||||||||
Cash dividends on common stock ($0.68 per share) |
| | (40.6 | ) | | (40.6 | ) | |||||||||||
Stock options and related tax benefits |
0.6 | 8.0 | | | 8.6 | |||||||||||||
Balance at December 31, 2003 |
139.5 | 137.7 | 759.8 | (35.0 | ) | 1,002.0 | ||||||||||||
Net income |
| | 199.7 | | 199.7 | |||||||||||||
Other comprehensive income, net of tax (note 14) |
| | | 22.8 | 22.8 | |||||||||||||
Total comprehensive income |
222.5 | |||||||||||||||||
Cash dividends on common stock ($0.75 per share) |
| | (45.8 | ) | | (45.8 | ) | |||||||||||
Stock options and related tax benefits |
1.3 | 19.8 | | | 21.1 | |||||||||||||
Balance at December 31, 2004 |
140.8 | 157.5 | 913.7 | (12.2 | ) | 1,199.8 | ||||||||||||
Net income |
| | 137.1 | | 137.1 | |||||||||||||
Other comprehensive loss, net of tax (note 14) |
| | | (11.2 | ) | (11.2 | ) | |||||||||||
Total comprehensive income |
125.9 | |||||||||||||||||
Cash dividends on common stock ($0.85 per share) |
| | (52.4 | ) | | (52.4 | ) | |||||||||||
Stock options and related tax benefits |
0.8 | 14.5 | | | 15.3 | |||||||||||||
Balance at December 31, 2005 |
$ | 141.6 | $ | 172.0 | $ | 998.4 | $ | (23.4 | ) | $ | 1,288.6 | |||||||
(Unaudited) For the nine months ended September 30, 2006 |
||||||||||||||||||
Balance at December 31, 2005 |
$ | 141.6 | $ | 172.0 | $ | 998.4 | $ | (23.4 | ) | $ | 1,288.6 | |||||||
Net income |
| | 84.7 | | 84.7 | |||||||||||||
Other comprehensive income, net of tax (note 14) |
| | | 16.3 | 16.3 | |||||||||||||
Total comprehensive income |
101.0 | |||||||||||||||||
Cash dividends on common stock ($0.72 per share) |
| | (44.5 | ) | | (44.5 | ) | |||||||||||
Stock options and related tax benefits |
0.5 | 5.8 | | | 6.3 | |||||||||||||
Balance at September 30, 2006 |
$ | 142.1 | $ | 177.8 | $ | 1,038.6 | $ | (7.1 | ) | $ | 1,351.4 | |||||||
See accompanying notes to consolidated financial statements.
F-6
Peoples Bank and Subsidiaries
Consolidated Statements of Cash Flows
Nine months
ended September 30, |
Years ended December 31, |
|||||||||||||||||||
(in millions) |
2006 | 2005 | 2005 | 2004 | 2003 | |||||||||||||||
(Unaudited) | (Audited) | |||||||||||||||||||
Cash Flows from Operating Activities: |
||||||||||||||||||||
Net income |
$ | 84.7 | $ | 101.9 | $ | 137.1 | $ | 199.7 | $ | 63.8 | ||||||||||
Income from discontinued operations, net of tax |
1.7 | 10.3 | 11.2 | 205.3 | 1.1 | |||||||||||||||
Income (loss) from continuing operations |
83.0 | 91.6 | 125.9 | (5.6 | ) | 62.7 | ||||||||||||||
Adjustments to reconcile net income to net cash provided by operating activities of continuing operations: | ||||||||||||||||||||
Provision for loan losses |
2.0 | 3.3 | 8.6 | 13.3 | 16.7 | |||||||||||||||
Depreciation and amortization of premises and equipment |
14.5 | 14.8 | 19.7 | 22.9 | 29.5 | |||||||||||||||
Amortization of leased equipment |
2.3 | 1.0 | 1.3 | 0.7 | 0.3 | |||||||||||||||
Goodwill impairment charge |
| 2.0 | 2.0 | | | |||||||||||||||
Amortization of other acquisition-related intangibles |
0.8 | 1.5 | 1.8 | 3.4 | 3.5 | |||||||||||||||
Deferred income tax expense (benefit) |
28.7 | 2.5 | 2.7 | 4.3 | (8.6 | ) | ||||||||||||||
Net security losses |
27.2 | 0.1 | 0.1 | 4.7 | 0.6 | |||||||||||||||
Net gains on sales of residential mortgage loans |
(1.5 | ) | (3.1 | ) | (4.0 | ) | (3.7 | ) | (14.8 | ) | ||||||||||
Originations of loans held-for-sale |
(138.4 | ) | (235.4 | ) | (316.8 | ) | (299.4 | ) | (1,050.2 | ) | ||||||||||
Proceeds from sales of loans held-for-sale |
140.4 | 243.4 | 326.2 | 308.4 | 1,057.5 | |||||||||||||||
Gain on sale of branches |
| | (8.1 | ) | | | ||||||||||||||
Net (increase) decrease in trading account securities |
(2.2 | ) | (22.3 | ) | (15.6 | ) | 6.4 | (18.1 | ) | |||||||||||
Pension plan contribution |
(91.5 | ) | (10.0 | ) | (10.0 | ) | (10.0 | ) | (9.5 | ) | ||||||||||
Net changes in other assets and liabilities |
(21.9 | ) | (25.4 | ) | (30.8 | ) | 375.5 | (63.0 | ) | |||||||||||
Net cash provided by operating activities of continuing operations |
43.4 | 64.0 | 103.0 | 420.9 | 6.6 | |||||||||||||||
Cash Flows from Investing Activities: |
||||||||||||||||||||
Purchases of securities purchased under agreements to resell |
| (25.0 | ) | (25.0 | ) | | | |||||||||||||
Proceeds from sale of securities purchased under agreements to resell |
24.7 | | | | | |||||||||||||||
Proceeds from sales of securities available for sale |
1,234.2 | 394.7 | 394.7 | 1,163.1 | 1,459.5 | |||||||||||||||
Proceeds from principal repayments of securities available for sale |
223.9 | 404.6 | 531.1 | 487.8 | 1,699.6 | |||||||||||||||
Proceeds from principal repayments of securities held to maturity |
0.3 | | | | | |||||||||||||||
Purchases of securities available for sale |
(293.3 | ) | (216.9 | ) | (216.9 | ) | (1,273.9 | ) | (2,342.5 | ) | ||||||||||
Proceeds from sales of loans |
| 3.1 | 3.8 | 18.1 | 26.9 | |||||||||||||||
Disbursements for loan originations, net of principal collections |
(451.7 | ) | (466.5 | ) | (663.7 | ) | (874.3 | ) | (477.0 | ) | ||||||||||
Purchase of loans |
(170.8 | ) | | | | | ||||||||||||||
Net cash paid in branch sale |
| | (51.0 | ) | | | ||||||||||||||
Purchase of bank-owned life insurance |
(50.0 | ) | (150.0 | ) | (150.0 | ) | | | ||||||||||||
Purchases of premises and equipment |
(8.5 | ) | (15.7 | ) | (20.6 | ) | (16.4 | ) | (11.3 | ) | ||||||||||
Purchases of leased equipment |
(15.6 | ) | | (1.5 | ) | (5.7 | ) | (1.2 | ) | |||||||||||
Net cash provided by (used in) investing activities |
493.2 | (71.7 | ) | (199.1 | ) | (501.3 | ) | 354.0 | ||||||||||||
Cash Flows from Financing Activities: |
||||||||||||||||||||
Net (decrease) increase in deposits |
(104.0 | ) | 224.0 | 281.3 | 148.0 | 287.9 | ||||||||||||||
Net decrease in borrowings with terms of three months or less |
(281.3 | ) | (70.1 | ) | (45.9 | ) | (266.1 | ) | (734.8 | ) | ||||||||||
Repayments of borrowings with terms greater than three months |
| | | (909.3 | ) | (186.3 | ) | |||||||||||||
Repurchases of subordinated notes |
| | (13.5 | ) | (132.4 | ) | | |||||||||||||
Cash dividends paid on common stock |
(44.5 | ) | (38.9 | ) | (52.4 | ) | (45.8 | ) | (40.6 | ) | ||||||||||
Proceeds from issuance of common stock |
3.4 | 13.4 | 15.3 | 19.2 | 6.0 | |||||||||||||||
Net cash (used in) provided by financing activities |
(426.4 | ) | 128.4 | 184.8 | (1,186.4 | ) | (667.8 | ) | ||||||||||||
Cash Flows from Discontinued Operations: (revised - see note 1) |
||||||||||||||||||||
Operating activities |
1.7 | 0.7 | 1.6 | (100.1 | ) | 1.1 | ||||||||||||||
Investing activities |
| | | 1,285.2 | | |||||||||||||||
Net cash provided by discontinued operations |
1.7 | 0.7 | 1.6 | 1,185.1 | 1.1 | |||||||||||||||
Net increase (decrease) in cash and cash equivalents |
111.9 | 121.4 | 90.3 | (81.7 | ) | (306.1 | ) | |||||||||||||
Cash and cash equivalents at beginning of year |
423.5 | 333.2 | 333.2 | 414.9 | 721.0 | |||||||||||||||
Cash and cash equivalents at end of year |
$ | 535.4 | $ | 454.6 | $ | 423.5 | $ | 333.2 | $ | 414.9 | ||||||||||
Supplemental Information: |
||||||||||||||||||||
Interest payments |
$ | 145.9 | $ | 98.0 | $ | 137.6 | $ | 121.3 | $ | 195.4 | ||||||||||
Income tax payments |
42.5 | 51.1 | 87.1 | 99.7 | 27.5 | |||||||||||||||
Real estate properties acquired by foreclosure |
0.4 | 0.1 | 0.6 | 1.8 | 0.3 | |||||||||||||||
See accompanying notes to consolidated financial statements.
F-7
Peoples Bank and Subsidiaries
Notes to Consolidated Financial Statements
(Information with respect to September 30, 2006 and the nine month periods ended September 30, 2006 and 2005 is unaudited)
NOTE 1 Summary of Significant Accounting Policies
Peoples Bank (Peoples) is a federally-chartered stock savings bank offering a full range of financial services to individual, corporate and municipal customers. Peoples provides traditional banking services of accepting deposits and originating loans, as well as specialized financial services through its subsidiaries, including: brokerage, financial advisory services, investment management services and life insurance through Peoples Securities, Inc. (PSI); equipment financing through Peoples Capital and Leasing Corp. (PCLC); and other insurance services through R.C. Knox and Company, Inc. (RC Knox).
Peoples converted to a federally-chartered stock savings bank from a Connecticut-chartered stock savings bank effective August 18, 2006. The Office of Thrift Supervision (OTS) is Peoples regulator under the federal charter (previously the Federal Deposit Insurance Corporation). Simultaneously with Peoples conversion, Peoples Mutual Holdings (Holdings) converted to a federally-chartered mutual holding company from a Connecticut-chartered mutual holding company. On September 20, 2006, Peoples and Holdings announced their plan to convert from a mutual holding company structure to a fully-public stock holding company structure. See Note 22 for a further discussion.
Peoples overall financial results are particularly dependent on economic conditions in the state of Connecticut, which is its primary market, although economic conditions elsewhere in the United States affect its equipment financing and national lending businesses. Deposits are insured up to applicable limits by the Deposit Insurance Fund of the Federal Deposit Insurance Corporation (FDIC).
Basis of Financial Statement Presentation
The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and include the accounts of Peoples and its subsidiaries. All significant intercompany transactions and balances are eliminated in consolidation.
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, including the classification of revenues and expenses to discontinued operations. Actual results could differ from managements current estimates, as a result of changing conditions and future events. Several 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 including other-than-temporary declines in the value of securities and the recoverability of goodwill and other intangible assets. These significant accounting policies and critical estimates, which are included in the discussion below, are reviewed with the Audit Committee of the Board of Directors.
In the opinion of management, the unaudited consolidated financial statements related to September 30, 2006 and September 30, 2005 have been prepared to reflect all normal recurring accruals necessary to present fairly the financial position, results of operations and cash flows as of those dates and for the periods shown. The results of operations for the nine months ended September 30, 2006 are not necessarily indicative of the results of operations that may be expected for the entire year or any other interim period.
For purposes of the Consolidated Statements of Cash Flows, cash equivalents include highly liquid instruments with an original maturity of three months or less, including commercial paper and money market mutual funds. These instruments are reported as short-term investments in the Consolidated Statements of Condition at amortized cost, which approximates fair value. In 2005, the cash flows attributable to the operating and investing activities provided by discontinued operations have been disclosed separately in the Consolidated Statements of Cash Flows.
In 2005, Peoples completed a three-for-two stock split, which resulted in the issuance of approximately 47.1 million additional common shares. Upon completing the stock split, $47.1 million was reclassified to the common stock account from the additional paid-in capital account. These accounts and all share and per share data for all prior years have been restated to give retroactive effect to the stock split. In 2006, Peoples shareholders approved an increase in the number of authorized shares of common stock to 450 million from 150 million.
F-8
Peoples Bank and Subsidiaries
Notes to Consolidated Financial Statements(Continued)
(Information with respect to September 30, 2006 and the nine month periods ended September 30, 2006 and 2005 is unaudited)
Certain reclassifications have been made to prior year amounts to conform to the current year presentation. These include the reclassification of equipment leased to commercial customers, with a net book value of $9.3 million and $7.7 million at December 31, 2005 and December 31, 2004, respectively, from premises and equipment to other assets in the Consolidated Statements of Condition. For the nine months ended September 30, 2005 and the years ended December 31, 2005, 2004, and 2003, revenue of $1.1 million, $1.5 million, $0.9 million and $0.3 million, respectively, and amortization expense of $1.0 million, $1.3 million, $0.7 million and $0.3 million, respectively, previously included in occupancy and equipment in the Consolidated Statements of Income, were reclassified to other non-interest income and other non-interest expense, respectively. The cash flows attributable to the operating and investing activities related to this equipment have been disclosed separately for all periods presented in the Consolidated Statements of Cash Flows. The reclassifications were not material to Peoples Consolidated Financial Statements.
Beginning with its Consolidated Statement of Cash Flows for the nine months ended September 30, 2006, Peoples classifies cash flows attributable to residential mortgage loans originated with the intent to sell as operating activities. The cash flows from the origination and sale of such loans had previously been classified as investing activities; however, in accordance with Statement of Financial Accounting Standards (SFAS) No. 102, Statement of Cash Flows Exemption of Certain Enterprises and Classification of Cash Flows from Certain Securities Acquired for Resale, these cash flows should be classified as operating activities. All prior periods presented have been reclassified to conform to the current period presentation. The reclassification had the effect of increasing subtotals of cash flows from operating activities of continuing operations by $8.0 million, $9.4 million, $9.0 million and $7.3 million for the nine months ended September 30, 2005 and for the years ended December 31, 2005, 2004 and 2003, respectively, and decreasing cash flows from investing activities by corresponding amounts. The reclassifications were not material to Peoples Consolidated Financial Statements.
Securities
Marketable equity and debt securities (other than those reported as short-term investments) are classified as either trading account securities, held to maturity securities (applicable only to debt securities) or available for sale securities. Management determines the classification of a security at the time of its purchase.
Securities purchased for sale in the near term are classified as trading account securities and reported at fair value. Unrealized gains and losses are reported in non-interest income.
Debt securities for which Peoples has the positive intent and ability to hold to maturity are classified as held to maturity securities and reported at amortized cost. All other securities are classified as available for sale and reported at fair value. Unrealized gains and losses on securities available for sale are reported on an after-tax basis in stockholders equity as accumulated other comprehensive income or loss. Premiums are amortized and discounts are accreted to interest income for debt securities, using the interest method over the remaining period to contractual maturity, adjusted for the effect of actual prepayments in the case of mortgage-backed securities, collateralized mortgage obligations (CMOs) and other asset-backed securities. Federal Home Loan Bank (FHLB) stock is a non-marketable equity security reported at cost.
Security transactions are generally recorded on the trade date. Realized gains and losses are determined using the specific identification method and reported in non-interest income. Security transactions recorded on the settlement date were limited to purchases of certain mortgage-backed securities during 2004 that had settlement dates occurring up to 30 days after the trade date. These purchases had trade and settlement dates occurring within the same quarter, and interest income began to accrue when the respective security settled. As such, there was no impact on Peoples interim or annual financial statements.
Management conducts a periodic review and evaluation of the securities portfolio to determine if the decline in fair value of any security appears to be other than temporary. If the decline is deemed to be other than temporary, the security is written down to a new cost basis and the resulting loss is reported in non-interest income. The factors considered by management in its periodic review include, but are not limited to: the length of time and extent to which the fair value has been less than cost; the financial condition and near-term prospects of the issuer; the ratings of the security; whether the decline in fair value appears to be issuer specific or, alternatively, a reflection of general market or industry conditions; and Peoples intent and ability to hold the security for a period of time sufficient to allow for a recovery in fair value.
F-9
Peoples Bank and Subsidiaries
Notes to Consolidated Financial Statements(Continued)
(Information with respect to September 30, 2006 and the nine month periods ended September 30, 2006 and 2005 is unaudited)
Securities Resale Agreements
In securities resale agreements, a counterparty transfers securities to Peoples under an agreement to resell the same or substantially the same securities at a fixed price in the future. These agreements are accounted for as a secured loan agreement transaction since the counterparty maintains effective control over the transferred securities and the transfer meets the other criteria for such accounting. The transferred securities are pledged by the counterparty as collateral and Peoples does not have the right by contract to sell or repledge that collateral. The market value of the pledged collateral approximates the recorded amount of the secured loan. Decreases in the market value of the transferred securities below an established threshold will necessitate the counterparty providing additional collateral.
Loans and Allowance for Loan Losses
Loans held for sale are reported at the lower of cost or estimated fair value in the aggregate, considering the effect of forward sales commitments, with any adjustment for net unrealized losses reported in non-interest income. All other loans are reported at amortized cost less the allowance for loan losses. Management identifies and designates as loans held for sale all newly originated fixed rate residential mortgage loans that meet certain secondary market requirements as these loans are originated with the intention to sell. From time to time, management identifies and designates certain adjustable rate residential mortgage loans held in the loan portfolio for sale, and, accordingly, these loans are transferred to loans held for sale.
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 when realized.
Management maintains the allowance for loan losses at a level that is believed to be adequate to absorb probable losses inherent in the existing loan portfolio, based on a quarterly evaluation of a variety of factors. These factors include, but are not limited to: Peoples historical loan loss experience and recent trends in that experience; risk ratings assigned by lending personnel to commercial real estate finance, commercial and PCLC loans, and the results of ongoing reviews of those ratings by Peoples independent loan review function; an evaluation of 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 management seeks to use the best available information to make these evaluations, future adjustments 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, the identification of additional problem loans and other factors.
The allowance for loan losses consists of amounts determined in accordance with SFAS No. 5, Accounting for Contingencies, and SFAS No. 114, Accounting by Creditors for Impairment of a Loan. In applying SFAS No. 5, management considers the factors listed in the preceding paragraph in order to estimate a loss allowance for (i) each homogeneous pool of smaller balance loans (residential mortgage and consumer loans) that are evaluated on a collective basis, and (ii) commercial real estate finance and commercial loans that are not considered impaired under SFAS No. 114. A loan is considered impaired when, based on current information and events, it is probable that Peoples will be unable to collect all principal and interest due according to the contractual terms of the loan. Peoples applies SFAS No. 114 to loans that are individually evaluated for collectibility in accordance with its normal loan review procedures. Under SFAS No. 114, impaired loans are reported based on one of three measures: the present value of expected future cash flows discounted at the loans effective interest rate; the loans observable market price; or the fair value of the collateral if the loan is collateral dependent. If the measure is less than an impaired loans recorded investment, an impairment loss is recognized as part of the allowance for loan losses.
Interest and Fees on Loans
Interest on loans is accrued to income monthly based on outstanding principal balances. A loan is classified as non-accrual generally when it becomes 90 days past due as to interest or principal payments. All previously accrued but
F-10
Peoples Bank and Subsidiaries
Notes to Consolidated Financial Statements(Continued)
(Information with respect to September 30, 2006 and the nine month periods ended September 30, 2006 and 2005 is unaudited)
unpaid interest on non-accrual loans is reversed from interest income in the current period. Interest payments received on non-accrual loans (including impaired loans) are generally recognized as income, although such interest payments may be applied as a reduction of principal if future collections are doubtful. A loan remains on non-accrual status until the factors that indicated doubtful collectibility no longer exist or until a loan is determined to be uncollectible and is charged off against the allowance for loan losses.
Loan origination fees and certain direct loan origination costs are deferred, and the net fee or cost is recognized in interest income as an adjustment of yield. Depending on the loan portfolio, deferred amounts are amortized using either the actual life or the estimated average life of the loan.
Fee-Based Revenues
Service charges on deposit accounts are recorded when earned. Insurance revenues represent commissions earned solely from performing broker- and agency-related services. Insurance commission revenues related to agency-billed policies are recognized at the later of the policy billing date or the policy effective date. Insurance commission revenues on premiums directly billed by insurance carriers are recognized as revenue during the period commissions are paid by the insurance carrier. Brokerage commissions are recognized on a trade-date basis. Investment management fees are accrued when earned based on total assets under management.
Bank-Owned Life Insurance
Bank-owned life insurance (BOLI) represents the cash surrender value of life insurance policies purchased on certain management-level employees. Peoples invested $150 million in a BOLI program in 2005 and made an additional $50 million investment in 2006. Increases in the cash surrender value of these policies are included in non-interest income in the Consolidated Statements of Income, while insurance proceeds received will be recorded as a reduction in the cash surrender value.
Premises and Equipment
Premises and equipment are reported at cost less accumulated depreciation and amortization, except for land, which is reported at cost. Buildings, data processing and other equipment, computer software, furniture and fixtures are depreciated using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized using the straight-line method over the shorter of the remaining lease term, the estimated useful life of the improvements or 10 years. Capitalized software development costs are amortized on a straight-line basis over the estimated useful life of the software. The estimated useful lives are as follows: buildings - 40 years; data processing and other equipment - 3 to 5 years; computer software - 3 to 5 years; and furniture and fixtures - 10 years.
Goodwill and Other Acquisition-Related Intangibles
SFAS No. 141, Business Combinations, requires, among other things, use of the purchase method to account for all business combinations and specifies criteria that acquired intangible assets must meet in order to be recognized and reported separately from goodwill. The assets and liabilities of an acquired company are recorded at fair value at the date of acquisition. Intangible assets are recognized in an amount equal to the excess of the acquisition cost over the fair value of the net assets acquired. Other acquisition-related intangibles are separately identified, where appropriate, for the estimated value of acquired customer relationships and are amortized on a straight-line basis over the estimated remaining average life of those relationships (ranging from 7 to 12 years from the respective acquisition dates). The remaining intangible asset is classified as goodwill.
SFAS No. 142, Goodwill and Other Intangible Assets, requires that goodwill be reviewed for impairment at least annually, with impairment losses charged to expense when they occur. Acquisition-related intangible assets other than goodwill are amortized to expense over their estimated useful lives and are periodically reviewed by management to assess recoverability. Impairment losses are recognized as a charge to expense if carrying amounts exceed fair values.
F-11
Peoples Bank and Subsidiaries
Notes to Consolidated Financial Statements(Continued)
(Information with respect to September 30, 2006 and the nine month periods ended September 30, 2006 and 2005 is unaudited)
SFAS No. 142 requires that goodwill be tested for impairment using a two-step approach that involves the identification of reporting units and the estimation of fair values. Goodwill shall also be tested for impairment when events occur that would more likely than not reduce the implied fair value of goodwill below its carrying value. An impairment loss is recognized as a charge to expense for any excess of the goodwill carrying amount over implied fair value.
The annual goodwill impairment analysis as of December 31, 2004 for Olson Mobeck Investment Advisors, Inc. (OMIA) was prepared on the premise that OMIA would continue to operate on a stand-alone basis. Peoples estimated the fair value using a discounted cash flow analysis of OMIA, which indicated that the reporting unit was not considered impaired at December 31, 2004.
During 2005, management decided to undertake a project to explore available strategic options for OMIA, including a sale or integration within Peoples other wealth management businesses. Given the market conditions during the second quarter of 2005, a sale of OMIA was not pursued and the decision was made to integrate OMIA within Peoples other wealth management businesses within the Consumer Financial Services segment.
As a result of the process of exploring strategic options, there were certain external indications that the fair value of OMIA may have declined below the carrying value. This change in circumstances required the preparation of a new impairment analysis.
Based on the decision to integrate OMIA within Peoples other wealth management businesses, management performed a new impairment analysis. This analysis included lower estimates of projected income caused by higher customer attrition expected to occur in response to a necessary change in custodians resulting from the contemplated integration, which had a negative impact on the estimated fair value of OMIA.
Since OMIAs estimated fair value was less than its carrying amount including goodwill, a second-step analysis was required in order to calculate the new implied fair value of the goodwill assigned to OMIA. As a result of this analysis, the implied fair value of this goodwill was determined to be lower than its carrying amount and, as a result, a goodwill impairment charge of $2.0 million was recorded in 2005, which is recorded in non-interest expense in the Consolidated Statements of Income. The remaining goodwill assigned to OMIA totaled $4.5 million at December 31, 2005.
The annual goodwill impairment evaluation, as required by SFAS No. 142, was completed by management as of December 31, 2005 using the two-step approach. It was determined that the fair value of Peoples reporting units exceeded their respective carrying amounts and, therefore, no additional impairment loss was recognized in 2005.
Peoples goodwill totaled $101.5 million at both September 30, 2006 and December 31, 2005, and $103.5 million at December 31, 2004. At September 30, 2006, goodwill was allocated to the Consumer Financial Services and Commercial Banking segments in the amounts of $96.8 million and $4.7 million, respectively.
Peoples other acquisition-related intangible assets totaled $3.8 million, $4.6 million and $6.4 million; gross carrying amounts totaled $28.1 million , $28.1 million and $28.1 million; and accumulated amortization totaled $24.3 million, $23.5 million and $21.7 million, at September 30, 2006, December 31, 2005 and December 31, 2004, respectively. Certain other acquisition-related intangible assets with original gross carrying amounts totaling $13.1 million were fully amortized by September 30, 2006. Other acquisition-related intangible assets have an original weighted-average amortization period of 11 years. Amortization expense of other acquisition-related intangible assets totaled $0.8 million for the nine months ended September 30, 2006 and $1.8 million, $3.4 million and $3.5 million for the years ended December 31, 2005, 2004 and 2003, respectively. The estimated aggregate amortization expense for the full-year of 2006 and each of the next four years for other acquisition-related intangible assets is as follows: $1.1 million in 2006 and 2007, $1.0 million in 2008 and 2009; and $0.4 million in 2010.
Real Estate Owned
Real estate owned (REO) properties acquired through foreclosure or deed-in-lieu of foreclosure are recorded initially at the lower of cost or estimated fair value less costs to sell. Any write-down of the recorded investment in the related loan is
F-12
Peoples Bank and Subsidiaries
Notes to Consolidated Financial Statements(Continued)
(Information with respect to September 30, 2006 and the nine month periods ended September 30, 2006 and 2005 is unaudited)
charged to the allowance for loan losses upon transfer to REO. Thereafter, an allowance for REO losses is established for any further declines in the propertys value. This allowance is increased by provisions charged to income and decreased by charge-offs for realized losses. Managements periodic evaluation of the adequacy of the allowance is based on an analysis of individual properties, as well as a general assessment of current real estate market conditions.
Securities Repurchase Agreements
In securities repurchase agreements, Peoples transfers securities to a counterparty under an agreement to repurchase the same or substantially the same securities at a fixed price in the future. These agreements are accounted for as secured financing transactions since Peoples maintains effective control over the transferred securities and the transfer meets the other criteria for such accounting. The transferred securities are pledged by Peoples as collateral and the counterparty has the right by contract to sell or repledge that collateral.
Income Taxes
Deferred taxes are recognized for the estimated future tax effects attributable to temporary differences and tax loss carryforwards. Temporary differences are differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. A deferred tax liability is recognized for all temporary differences that will result in future taxable income. A deferred tax asset is recognized for all temporary differences that will result in future tax deductions and for all tax loss carryforwards, subject to reduction of the asset by a valuation allowance in certain circumstances. This valuation allowance is recognized if, based on an analysis of available evidence, management determines that it is more likely than not that some portion or all of the deferred tax asset will not be realized. The valuation allowance is subject to ongoing adjustment based on changes in circumstances that affect managements judgment about the realizability of the deferred tax asset.
Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to future taxable income. The effect on deferred tax assets and liabilities of a change in tax laws or rates is recognized in income tax expense in the period that includes the enactment date of the change. Tax benefits attributable to deductions arising from the exercise of non-statutory stock options are credited to additional paid-in capital.
Earnings Per Common Share
Basic earnings per share (EPS) excludes dilution and is computed by dividing net income applicable to common stock by the weighted average number of common shares outstanding for the year. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock (such as stock options) were exercised or converted into additional common shares that would then share in the earnings of the entity. Diluted EPS is computed by dividing net income by the weighted average number of common shares outstanding for the year, plus an incremental number of common-equivalent shares computed using the treasury stock method.
Derivative Instruments and Hedging Activities
Peoples uses derivatives for market risk management purposes (principally interest rate risk) and not for trading or speculation purposes.
All derivatives are recognized as either assets or liabilities and are measured at fair value. Favorable changes in fair values result in unrealized gains that are recognized as assets, while unfavorable changes result in unrealized losses that are recognized as liabilities. Peoples hedge accounting methods vary depending on whether the derivative instrument is classified as a fair value hedge or a cash flow hedge. Hedge accounting is permitted only if specific criteria are met, including a requirement that a highly effective relationship exist between the derivative instrument and the hedged item, both at inception of the hedge and on an ongoing basis. Results of effective hedges are recognized in current earnings for fair value hedges. Changes in the fair value of effective cash flow hedges are recognized in other comprehensive income until
F-13
Peoples Bank and Subsidiaries
Notes to Consolidated Financial Statements(Continued)
(Information with respect to September 30, 2006 and the nine month periods ended September 30, 2006 and 2005 is unaudited)
earnings are affected by the variability in cash flows of the designated hedged item. Ineffective portions of hedge results are recognized in current earnings.
Peoples formally documents all relationships between the derivative instruments and the hedged items, as well as its risk management objectives and strategies for undertaking the hedge transactions. This process includes linking all derivatives that are designated as hedges to specific assets and liabilities, or to specific firm commitments or forecasted transactions. Peoples also formally assesses, both at inception of the hedge and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in the fair values or cash flows of the hedged items. If it is determined that a derivative is not highly effective or has ceased to be a highly effective hedge, Peoples would discontinue hedge accounting prospectively. In the event of a prepayment of a hedged commercial real estate finance loan, the interest rate swap hedging such loan will be terminated. Gains or losses associated with the termination of the derivative and any basis adjustment to the commercial real estate finance loan will be recorded currently in earnings.
Peoples uses the dollar offset method, regression analysis and scenario analysis to assess hedge effectiveness at inception and on an ongoing basis. Such methods are chosen based on the nature of the hedge strategy and are used consistently throughout the life of the hedging relationship.
Interest rate-lock commitments extended to borrowers relate to the origination of residential mortgage loans. To mitigate the interest rate risk inherent in these commitments, Peoples enters into mandatory delivery and best efforts contracts to sell fixed-rate residential mortgage loans. Forward commitments to sell and interest rate-lock commitments on residential mortgage loans are considered derivatives and their respective estimated fair values are adjusted based on changes in interest rates and exclude the value of mortgage servicing rights.
Stock-Based Compensation
Peoples adopted SFAS No. 123-R, Share-Based Payment, effective January 1, 2006, which replaced SFAS No. 123 Accounting for Stock-Based Compensation and superseded Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and its related interpretations. Among other things, SFAS No. 123-R requires that costs resulting from all share-based payment transactions with employees be recognized in the financial statements. As described in Note 16, in December 2005, Peoples accelerated the vesting of all outstanding unvested stock options awarded to employees.
Prior to adopting SFAS No. 123-R, Peoples accounted for stock options in accordance with APB Opinion No. 25. Accordingly, Peoples did not recognize compensation expense for fixed stock options granted with an option exercise price equal to the fair value of the underlying stock at the grant date. The fair value of restricted stock awards, measured at the grant date and based on quoted market prices, was recorded as a component of stockholders equity and amortized to compensation expense on a straight-line basis over the vesting period.
SFAS No. 123 encouraged the recognition of the fair value of all stock-based awards on the date of grant as expense over the vesting period. However, as permitted by SFAS No. 123, Peoples continued to apply the intrinsic value-based method of accounting prescribed by APB Opinion No. 25 and disclosed certain pro-forma amounts as if the fair value approach of SFAS No. 123 had been applied.
SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment of SFAS No. 123, provided alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, this standard amended the disclosure requirements of SFAS No. 123 by requiring prominent pro-forma disclosures in both annual and interim financial statements, which are included in the following table. See Note 16 for a further discussion of SFAS No. 123.
F-14
Peoples Bank and Subsidiaries
Notes to Consolidated Financial Statements(Continued)
(Information with respect to September 30, 2006 and the nine month periods ended September 30, 2006 and 2005 is unaudited)
The following table illustrates the effect on net income and earnings per common share if Peoples had applied the fair value recognition provisions of SFAS No. 123:
Compensation expense for stock price appreciation units is recognized over the vesting period. The accrued liability is based on the excess, if any, of (i) the current fair value of Peoples common stock (subject to a cap price as described in Note 16) over (ii) the base price of the units that equals the fair value of the stock at the original grant date. Changes in the accrued liability attributable to fluctuations in the fair value of Peoples common stock are recognized as a charge or credit to compensation expense. There were no stock price appreciation units outstanding at December 31, 2005.
Accounting Standards
FASB Staff Position FAS 115-1 and FAS 124-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (the FSP), was issued on November 3, 2005. The FSP addresses the determination of when an investment is considered impaired; whether the impairment is other than temporary; and how to measure an impairment loss. The FSP also addresses accounting considerations subsequent to the recognition of an other-than-temporary impairment on a debt security, and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. The FSP replaced the impairment guidance in EITF 03-1 and was effective for reporting periods beginning after December 15, 2005. The application of this FSP did not have a material effect on Peoples Consolidated Financial Statements.
In June 2006, the FASB issued FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprises financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. Peoples is currently evaluating FIN 48 to determine if it will have a material effect on its Consolidated Financial Statements.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which establishes a definition and measurement date for fair value and expands the disclosures regarding fair-value measurement. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. Peoples is currently evaluating SFAS No. 157 to determine if it will have a material effect on its Consolidated Financial Statements.
In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans. Among other things, SFAS No. 158 will require an employer to recognize the funded status of its
F-15
Peoples Bank and Subsidiaries
Notes to Consolidated Financial Statements(Continued)
(Information with respect to September 30, 2006 and the nine month periods ended September 30, 2006 and 2005 is unaudited)
pension and other postretirement benefit plans in the statement of financial position effective for fiscal years ending after December 15, 2006. SFAS No. 158 will also require the measurement of plan assets and benefit obligations as of the date of the employers fiscal year-end (eliminating the use of earlier measurement dates currently permissible), effective for fiscal years ending after December 15, 2008. Peoples is currently evaluating SFAS No. 158 to determine if it will have a material effect on its Consolidated Financial Statements.
In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) Topic 1N, Financial Statements - Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements (SAB No. 108), in order to address diversity in practice in quantifying financial statement misstatements. The techniques most commonly used in practice to accumulate and quantify misstatements are generally referred to as the rollover and iron curtain approaches. SAB No. 108 requires that errors be quantified under both the rollover and iron curtain approaches. Financial statements would require adjustment when either approach results in quantifying a misstatement that is material, after considering all relevant quantitative and qualitative factors. SAB No. 108 is effective for annual financial statements for the first fiscal year ending after November 15, 2006. SAB No. 108 is not expected to have a material impact on Peoples Consolidated Financial Statements.
NOTE 2 Sale of Branches
In the fourth quarter of 2005, Peoples sold three of its branch offices located in eastern Connecticut. Included in the sale were approximately $61 million in total deposits, $0.1 million of fixed assets and leasehold improvements, and certain other miscellaneous assets and liabilities. Peoples recorded a gain on sale of $8.1 million, which is included in non-interest income in the Consolidated Statements of Income.
NOTE 3 Cash and Short-Term Investments
Reserves in the form of deposits with the Federal Reserve Bank and vault cash totaling $112.7 million, $116.4 million and $119.5 million were maintained to satisfy federal regulatory requirements at September 30, 2006, December 31, 2005 and December 31, 2004, respectively. These amounts are included in cash and due from banks in the Consolidated Statements of Condition.
Short-term investments include the following cash equivalents:
F-16
Peoples Bank and Subsidiaries
Notes to Consolidated Financial Statements(Continued)
(Information with respect to September 30, 2006 and the nine month periods ended September 30, 2006 and 2005 is unaudited)
NOTE 4 Securities
The amortized cost, gross unrealized gains and losses, and fair value of Peoples securities are as follows:
September 30, 2006 (in millions) |
Amortized
Cost |
Gross
Unrealized Gains |
Gross
Unrealized Losses |
Fair
Value |
|||||||||
Trading account securities |
$ | 29.5 | $ | | $ | | $ | 29.5 | |||||
Securities available for sale: |
|||||||||||||
Debt securities: |
|||||||||||||
U.S. Treasury and agency |
145.4 | | | 145.4 | |||||||||
Total debt securities |
145.4 | | | 145.4 | |||||||||
Equity securities: |
|||||||||||||
FHLB stock |
25.2 | | | 25.2 | |||||||||
Other securities |
0.5 | 0.2 | | 0.7 | |||||||||
Total equity securities |
25.7 | 0.2 | | 25.9 | |||||||||
Total securities available for sale |
171.1 | 0.2 | | 171.3 | |||||||||
Securities held to maturity: |
|||||||||||||
Corporate and other |
1.1 | | | 1.1 | |||||||||
Total securities held to maturity |
1.1 | | | 1.1 | |||||||||
Total securities |
$ | 201.7 | $ | 0.2 | $ | | $ | 201.9 | |||||
December 31, 2005 (in millions) |
Amortized
Cost |
Gross
Unrealized Gains |
Gross
Unrealized Losses |
Fair
Value |
|||||||||
Trading account securities |
$ | 27.3 | $ | | $ | | $ | 27.3 | |||||
Securities available for sale: |
|||||||||||||
Debt securities: |
|||||||||||||
Mortgage-backed securities and CMOs |
1,036.7 | 0.1 | (21.9 | ) | 1,014.9 | ||||||||
U.S. Treasury and agency |
295.0 | | (7.3 | ) | 287.7 | ||||||||
Total debt securities |
1,331.7 | 0.1 | (29.2 | ) | 1,302.6 | ||||||||
Equity securities: |
|||||||||||||
FHLB stock |
30.6 | | | 30.6 | |||||||||
Other securities |
0.9 | 0.2 | | 1.1 | |||||||||
Total equity securities |
31.5 | 0.2 | | 31.7 | |||||||||
Total securities available for sale |
1,363.2 | 0.3 | (29.2 | ) | 1,334.3 | ||||||||
Securities held to maturity: |
|||||||||||||
Corporate and other |
1.3 | | | 1.3 | |||||||||
Mortgage-backed securities |
0.1 | | | 0.1 | |||||||||
Total securities held to maturity |
1.4 | | | 1.4 | |||||||||
Total securities |
$ | 1,391.9 | $ | 0.3 | $ | (29.2 | ) | $ | 1,363.0 | ||||
F-17
Peoples Bank and Subsidiaries
Notes to Consolidated Financial Statements(Continued)
(Information with respect to September 30, 2006 and the nine month periods ended September 30, 2006 and 2005 is unaudited)
December 31, 2004 (in millions) |
Amortized
Cost |
Gross
Unrealized Gains |
Gross
Unrealized Losses |
Fair
Value |
|||||||||
Trading account securities |
$ | 11.7 | $ | | $ | | $ | 11.7 | |||||
Securities available for sale: |
|||||||||||||
Debt securities: |
|||||||||||||
Mortgage-backed securities and CMOs |
1,525.0 | 1.0 | (12.0 | ) | 1,514.0 | ||||||||
U.S. Treasury and agency |
488.8 | 0.1 | (3.8 | ) | 485.1 | ||||||||
Corporate and other |
26.2 | 0.5 | | 26.7 | |||||||||
State and municipal |
0.7 | | | 0.7 | |||||||||
Total debt securities |
2,040.7 | 1.6 | (15.8 | ) | 2,026.5 | ||||||||
Equity securities: |
|||||||||||||
FHLB stock |
30.6 | | | 30.6 | |||||||||
Other securities |
0.9 | 0.1 | | 1.0 | |||||||||
Total equity securities |
31.5 | 0.1 | | 31.6 | |||||||||
Total securities available for sale |
2,072.2 | 1.7 | (15.8 | ) | 2,058.1 | ||||||||
Securities held to maturity: |
|||||||||||||
Corporate and other |
1.3 | | | 1.3 | |||||||||
Mortgage-backed securities |
0.1 | | | 0.1 | |||||||||
Total securities held to maturity |
1.4 | | | 1.4 | |||||||||
Total securities |
$ | 2,085.3 | $ | 1.7 | $ | (15.8 | ) | $ | 2,071.2 | ||||
Peoples mortgage-backed securities and CMOs had carrying values of $1.0 billion and $1.5 billion at December 31, 2005 and December 31, 2004, respectively (none at September 30, 2006). These amounts consisted of (i) securities issued or collateralized by United States government-sponsored enterprises, such as Freddie Mac and Fannie Mae, totaling $0.8 billion in 2005 and $1.2 billion in 2004, and (ii) privately-issued securities of $0.2 billion in 2005 and $0.3 billion in 2004.
Securities available for sale that were pledged as collateral for public deposits, derivatives transactions and other purposes had a total fair value of $140.4 million at September 30, 2006 and $146.8 million and $145.2 million at December 31, 2005 and December 31, 2004, respectively.
Dividend income on equity securities available for sale totaled $1.2 million and $1.7 million for the nine months ended September 30, 2006 and 2005, respectively, and $2.1 million, $1.6 million and $7.4 million for the years ended December 31, 2005, 2004 and 2003, respectively. Tax-exempt interest income totaled $0.1 million for the years ended December 31, 2004 and 2003 (none in 2005 and 2006).
F-18
Peoples Bank and Subsidiaries
Notes to Consolidated Financial Statements(Continued)
(Information with respect to September 30, 2006 and the nine month periods ended September 30, 2006 and 2005 is unaudited)
The following tables summarize the amortized cost, fair value and fully taxable equivalent (FTE) yield of debt securities. Information is shown by remaining period to contractual maturity for categories other than mortgage-backed securities and CMOs:
F-19
Peoples Bank and Subsidiaries
Notes to Consolidated Financial Statements(Continued)
(Information with respect to September 30, 2006 and the nine month periods ended September 30, 2006 and 2005 is unaudited)
The components of net security losses are summarized below. All amounts relate to securities available for sale, other than net gains (losses) on trading account securities of $0.1 million for the nine months ended September 30, 2006, $(0.1) million for both the nine months ended September 30, 2005 and the year ended December 31, 2005 and $1.1 million for the year ended December 31, 2003 (none in 2004).
The following table summarizes those securities available for sale with unrealized losses at December 31, 2005 (none at September 30, 2006), segregated by the length of time in a continuous unrealized loss position:
Of the approximate 115 securities owned by Peoples at December 31, 2005, 96 securities available for sale, or 85%, had unrealized losses at that date. Management reviews those securities with unrealized losses on a regular basis in accordance with current impairment measurement and recognition guidelines under EITF 99-20 and FSP FAS 115-1 and FAS 124-1. Securities with unrealized losses are either obligations of U.S. government-sponsored enterprises ($785 million), the U.S. Government and Agency ($283 million) or privately-issued mortgage-backed securities ($220 million), all with short durations and AAA credit ratings. The cause of the temporary impairment with respect to these securities is directly related to changes in interest rates. Therefore, the securities were not considered to be other than temporarily impaired because Peoples intended to continue with the strategy of downsizing the securities portfolio through repayments and maturities of securities and had the intent and ability to hold the remaining debt securities to receive full repayment of the amounts invested. The unrealized losses at December 31, 2005 were therefore considered to be temporary.
During the nine months ended September 30, 2006, Peoples sold approximately $1.1 billion of debt securities as part of the restructuring of its balance sheet. Realized losses from these sales of $27.4 million for the nine months ended September 30, 2006 are included in net security losses in the Consolidated Statements of Income.
In the second quarter of 2006, Peoples decided to exit a product line and cease purchasing federal funds from a group of smaller New England community banks. The sale of securities, at a loss of $4.0 million, was undertaken to pay down the related borrowings. This decision was contemplated in April 2006 and finalized in May 2006. Therefore, these actions were reflected in Peoples results for the second quarter 2006.
F-20
Peoples Bank and Subsidiaries
Notes to Consolidated Financial Statements(Continued)
(Information with respect to September 30, 2006 and the nine month periods ended September 30, 2006 and 2005 is unaudited)
During the third quarter of 2006, Peoples completed the sale of substantially its entire
remaining debt securities portfolio at a loss of $23.4 million. This sale eliminated the remaining debt securities portfolio to accelerate the restructuring of the balance sheet given the then current interest rate environment. This sale was not a
scenario contemplated in Peoples asset/liability management process or balance sheet restructuring plans at June 30, 2006. The evaluation and decision to sell these securities was made on August 24, 2006. Therefore, these actions
NOTE 5 Loans
The following tables summarize the geographic distribution of Peoples loan portfolio:
September 30, 2006 | |||||||||
(in millions) |
Connecticut | Other | Total | ||||||
Residential mortgage |
$ | 3,590.8 | $ | 286.9 | $ | 3,877.7 | |||
Commercial |
984.3 | 1,213.1 | 2,197.4 | ||||||
Commercial real estate finance |
1,230.3 | 569.0 | 1,799.3 | ||||||
Consumer |
1,303.3 | 7.2 | 1,310.5 | ||||||
Total loans |
$ | 7,108.7 | $ | 2,076.2 | $ | 9,184.9 | |||
Peoples loan portfolio is concentrated within the state of Connecticut with 77% and 81% of the total loan portfolio involving customers within the state at September 30, 2006 and December 31, 2005, respectively. However, substantially all (approximately 97% at September 30, 2006 and December 31, 2005 and 96% at December 31, 2004) of the equipment financing activities of PCLC, which is included in commercial, involves customers outside of Connecticut. PCLC loans and leases totaled $751.9 million, $634.7 million and $453.0 million at September 30, 2006, December 31, 2005 and December 31, 2004, respectively. Approximately 44% and 47% of the adjustable rate residential mortgage loan portfolio was comprised of interest-only loans at September 30, 2006 and December 31, 2005, respectively.
Residential mortgage and commercial real estate finance loans include construction loans totaling $752.2 million, $709.1 million and $590.2 million at September 30, 2006, December 31, 2005 and December 31, 2004, respectively, net of the unadvanced portion of such loans totaling $575.7 million, $472.4 million and $369.5 million, respectively. Included in total loans are one-to-four family residential mortgage loans totaling $3.6 billion, $3.3 billion and $3.0 billion at September 30, 2006, December 31, 2005 and December 31, 2004, respectively.
Net deferred loan costs that are included in total loans and accounted for as interest yield adjustments totaled $27.3 million, $26.2 million and $23.9 million at September 30, 2006, December 31, 2005 and December 31, 2004, respectively.
Certain residential mortgage loans originated by Peoples are sold without recourse in the secondary market. Net gains on sales of residential mortgage loans totaled $1.5 million for the nine months ended September 30, 2006 and $4.0 million, $3.7 million and $14.8 million for the years ended December 31, 2005, 2004 and 2003, respectively. Residential mortgage loans at September 30, 2006, December 31, 2005 and December 31, 2004 included loans held for sale (servicing released) of $16.4 million, $11.2 million and $14.1 million, respectively, which approximate fair value.
F-21
Peoples Bank and Subsidiaries
Notes to Consolidated Financial Statements(Continued)
(Information with respect to September 30, 2006 and the nine month periods ended September 30, 2006 and 2005 is unaudited)
The following is a summary of activity in the allowance for loan losses:
The principal balances of non-accrual loans are summarized as follows:
If interest payments on all loans classified as non-accrual at September 30, 2006 had been made during the nine months ended September 30, 2006 in accordance with loan agreements, interest income of $2.4 million would have been recognized on such loans during this period. If interest payments on all loans classified as non-accrual at December 31, 2005, 2004 and 2003 had been made during the respective years in accordance with the loan agreements, interest income of $2.0 million, $2.1 million and $2.7 million would have been recognized on such loans in 2005, 2004 and 2003, respectively. Interest income actually recognized on non-accrual loans totaled $0.9 million for the nine months ended September 30, 2006 and $0.7 million, $0.9 million and $1.8 million for the years ended December 31, 2005, 2004 and 2003, respectively.
Peoples impaired loans, as defined by SFAS No. 114, consist of certain non-accrual commercial real estate finance loans and commercial loans. The recorded investment in impaired loans was $9.7 million at September 30, 2006, $8.0 million at December 31, 2005 and $19.0 million at December 31, 2004, with allowances for loan impairment measured under SFAS No. 114 of $1.7 million, $0.6 million and $0.5 million, respectively. These allowances are included in the overall allowance for loan losses. Peoples average recorded investment in impaired commercial real estate finance loans and commercial loans was approximately $8.9 million for the nine months ended September 30, 2006 and $10.2 million, $22.4 million and $20.0 million for the years ended December 31, 2005, 2004 and 2003, respectively. Interest collections and income recognized on impaired loans was insignificant in 2006, 2005, 2004 and 2003.
F-22
Peoples Bank and Subsidiaries
Notes to Consolidated Financial Statements(Continued)
(Information with respect to September 30, 2006 and the nine month periods ended September 30, 2006 and 2005 is unaudited)
The recorded investment in accruing impaired restructured loans requiring an allowance for loan losses as defined by SFAS No. 114 totaled $0.7 million at September 30, 2006 and $0.8 million and $0.9 million at December 31, 2005 and December 31, 2004, respectively, with a related allowance for loan losses of $0.1 million in both 2005 and 2004 (none at September 30, 2006). This allowance is also included in the overall allowance for loan losses. Peoples average recorded investment in accruing impaired restructured loans was approximately $0.8 million for the nine months ended September 30, 2006 and $0.9 million and $0.2 million for the years ended December 31, 2005 and 2004, respectively. At September 30, 2006, December 31, 2005 and December 31, 2004, there were no commitments to lend additional funds to these debtors. The recognition of interest income on these accruing impaired loans is based upon an individual assessment of each loan, however, interest income is not accrued on a loan that is more than 90 days past due. Interest income recognized related to these loans under the accrual method was insignificant for the nine months ended September 30, 2006 and for the years ended December 31, 2005 and 2004.
NOTE 6 Other Assets
Selected components of other assets are as follows:
September 30, 2006 |
December 31, | ||||||||
(in millions) |
2005 | 2004 | |||||||
Prepaid pension costs (note 15) |
$ | 142.1 | $ | 57.9 | $ | 56.2 | |||
Receivables arising from securities brokerage and insurance businesses |
36.8 | 47.3 | 46.1 | ||||||
Accrued interest receivable: |
|||||||||
Loans |
43.1 | 36.0 | 28.7 | ||||||
Securities |
0.5 | 6.7 | 8.7 | ||||||
Net deferred tax asset (note 10) |
| 16.8 | 13.4 | ||||||
Leased equipment |
22.6 | 9.3 | 7.7 | ||||||
Fair value of derivative financial instruments (note 19) |
13.9 | 5.9 | 0.1 |
F-23
Peoples Bank and Subsidiaries
Notes to Consolidated Financial Statements(Continued)
(Information with respect to September 30, 2006 and the nine month periods ended September 30, 2006 and 2005 is unaudited)
NOTE 7 Deposits
The following are analyses of Peoples total deposits by product type and funding source:
September 30, 2006 |
December 31, | |||||||||||||||||
2005 | 2004 | |||||||||||||||||
(dollars in millions) |
Amount |
Weighted
Average Rate |
Amount |
Weighted
Average Rate |
Amount |
Weighted
Average Rate |
||||||||||||
Analysis by Deposit Product Type: |
||||||||||||||||||
Non-interest-bearing |
$ | 2,172.4 | | % | $ | 2,353.1 | | % | $ | 2,227.1 | | % | ||||||
Savings, interest-bearing checking and money market |
3,286.1 | 1.37 | 3,767.4 | 1.29 | 4,232.7 | 0.82 | ||||||||||||
Total |
5,458.5 | 0.83 | 6,120.5 | 0.79 | 6,459.8 | 0.54 | ||||||||||||
Time deposits maturing: |
||||||||||||||||||
Within 6 months |
1,513.5 | 3.93 | 1,357.1 | 2.97 | 864.3 | 1.59 | ||||||||||||
After 6 months but within 1 year |
1,659.9 | 4.74 | 958.1 | 3.44 | 855.8 | 2.53 | ||||||||||||
After 1 but within 2 years |
237.6 | 3.76 | 496.4 | 3.64 | 442.8 | 2.75 | ||||||||||||
After 2 but within 3 years |
56.2 | 3.01 | 89.1 | 2.86 | 152.9 | 3.64 | ||||||||||||
After 3 years |
52.9 | 3.79 | 61.4 | 3.47 | 86.4 | 3.10 | ||||||||||||
Total |
3,520.1 | 4.28 | 2,962.1 | 3.24 | 2,402.2 | 2.32 | ||||||||||||
Total deposits |
$ | 8,978.6 | 2.18 | % | $ | 9,082.6 | 1.59 | % | $ | 8,862.0 | 1.02 | % | ||||||
Analysis by Deposit Funding Source: |
||||||||||||||||||
Core |
$ | 8,843.1 | 2.22 | % | $ | 8,872.7 | 1.60 | % | $ | 8,681.4 | 1.03 | % | ||||||
Brokered, municipal and other non-interest-bearing |
135.5 | 0.32 | 209.9 | 1.27 | 180.6 | 0.62 | ||||||||||||
Total deposits |
$ | 8,978.6 | 2.18 | % | $ | 9,082.6 | 1.59 | % | $ | 8,862.0 | 1.02 | % | ||||||
Time deposits issued in amounts of $100,000 or more totaled $859.3 million at September 30, 2006 and $698.1 million and $443.1 million at December 31, 2005 and December 31, 2004, respectively. Deposit balances greater than $100,000 are generally not insured by the FDIC. Non-interest-bearing deposit overdrafts totaling $17.2 million at September 30, 2006 and $5.9 million at December 31, 2005 have been reclassified to loans.
Interest expense on deposits is summarized as follows:
F-24
Peoples Bank and Subsidiaries
Notes to Consolidated Financial Statements(Continued)
(Information with respect to September 30, 2006 and the nine month periods ended September 30, 2006 and 2005 is unaudited)
NOTE 8 Borrowings
Peoples borrowings are as follows:
September 30, 2006 |
December 31, | |||||||||||||||||
2005 | 2004 | |||||||||||||||||
(dollars in millions) |
Amount |
Weighted
Average Rate |
Amount |
Weighted
Average Rate |
Amount |
Weighted
Average Rate |
||||||||||||
Fixed rate FHLB advances maturing within 3 months |
$ | | | % | $ | 25.0 | 4.00 | % | $ | 100.0 | 2.17 | % | ||||||
Federal funds purchased maturing within 3 months |
13.6 | 5.15 | 269.9 | 3.94 | 240.8 | 2.14 | ||||||||||||
Total borrowings |
$ | 13.6 | 5.15 | % | $ | 294.9 | 3.94 | % | $ | 340.8 | 2.15 | % | ||||||
FHLB advances are secured by Peoples investment in FHLB stock and by a blanket security agreement that requires Peoples to maintain, as collateral, sufficient qualifying assets not otherwise pledged (principally securities and single-family residential mortgage loans). Peoples satisfied this collateral requirement at both September 30, 2006 and December 31, 2005. Peoples remaining borrowing capacity from FHLB advances, Federal Reserve Bank of New York advances and repurchase agreements, based on the level of qualifying collateral available for these borrowing sources, was $2.8 billion and $3.5 billion at September 30, 2006 and December 31, 2005, respectively.
In 2004, Peoples prepaid $799 million of FHLB advances and $110 million of long-term repurchase agreements as part of a balance sheet restructuring. Costs relating to these prepayments are included in liability restructuring costs in the Consolidated Statements of Income.
Information concerning Peoples borrowings under securities repurchase agreements is presented below:
As of and for the
nine months ended September 30, |
As of and for the years ended December 31, |
||||||||||||||
(in millions) |
2006 | 2005 | 2005 | 2004 | 2003 | ||||||||||
Carrying amount of collateral securities at period end |
$ | | $ | | $ | | $ | | $ | 221.5 | |||||
Average repurchase agreements outstanding during the period |
| 2.3 | 1.7 | 36.1 | 201.7 | ||||||||||
Maximum repurchase agreements outstanding at any month end |
| | | 205.5 | 276.3 |
Interest expense on borrowings consists of the following:
NOTE 9 Subordinated Notes
Peoples subordinated notes are summarized as follows:
September 30,
2006 |
December 31, | ||||||||
(in millions) |
2005 | 2004 | |||||||
9.875% subordinated notes due 2010 |
$ | 65.3 | $ | 65.1 | $ | 78.4 | |||
7.20% subordinated notes due 2006 |
43.5 | 43.5 | 43.4 | ||||||
Total subordinated notes |
$ | 108.8 | $ | 108.6 | $ | 121.8 | |||
F-25
Peoples Bank and Subsidiaries
Notes to Consolidated Financial Statements(Continued)
(Information with respect to September 30, 2006 and the nine month periods ended September 30, 2006 and 2005 is unaudited)
In 2005, Peoples repurchased $13.5 million of its 9.875% subordinated notes. In 2004, Peoples repurchased $70.8 million of its 9.875% subordinated notes and $61.6 million of its 7.20% subordinated notes as part of a balance sheet restructuring. Costs relating to these repurchases are included in liability restructuring costs in the Consolidated Statements of Income.
Both issues of subordinated notes are unsecured general obligations of Peoples with interest payable semi-annually; are subordinated to the claims of depositors and Peoples other creditors; and are not redeemable prior to maturity without prior approval of the OTS. The 9.875% subordinated notes qualify, up to certain limits, as supplementary (tier 2) capital for risk-based capital purposes. The 7.20% subordinated notes did not qualify as supplementary capital at September 30, 2006 and December 31, 2005 since they were to mature within one year.
NOTE 10 Income Taxes
The following is a reconciliation of total income tax expense:
Nine months ended
September 30, |
Years ended December 31, |
|||||||||||||||
(in millions) |
2006 | 2005 | 2005 | 2004 | 2003 | |||||||||||
Income tax expense (benefit): |
||||||||||||||||
From continuing operations |
$ | 42.1 | $ | 48.8 | $ | 64.1 | $ | (8.6 | ) | $ | 22.5 | |||||
From discontinued operations |
0.9 | 5.4 | 6.0 | 110.6 | 0.6 | |||||||||||
Total income tax expense |
$ | 43.0 | $ | 54.2 | $ | 70.1 | $ | 102.0 | $ | 23.1 | ||||||
The components of income tax expense (benefit) applicable to pre-tax income (loss) from continuing operations are summarized in the following table. The income tax effects on the components of other comprehensive income (loss) are described in Note 14.
(1) | Includes the effect of increases (decreases) in the valuation allowance for state deferred tax assets of $5.8 million and $6.0 million for the nine months ended September 30, 2006 and 2005, respectively, and $6.3 million, $(16.7) million and $13.4 million for the years ended December 31, 2005, 2004 and 2003, respectively. |
F-26
Peoples Bank and Subsidiaries
Notes to Consolidated Financial Statements(Continued)
(Information with respect to September 30, 2006 and the nine month periods ended September 30, 2006 and 2005 is unaudited)
The following is a reconciliation of expected income tax expense (benefit), computed at the U.S. federal statutory rate of 35%, to actual income tax expense (benefit) from continuing operations:
In 1998, Peoples formed a passive investment company, Peoples Mortgage Investment Company, in accordance with Connecticut tax laws, which permit transfers of mortgage loans to such subsidiaries on or after January 1, 1999. The related earnings of the subsidiary, and any dividends it pays to the parent, are not subject to Connecticut income tax. As a result of the exclusion of such earnings and dividends from Connecticut taxable income beginning in 1999, Peoples has established a valuation allowance for the full amount of its Connecticut deferred tax asset attributable to net temporary differences and state net operating loss carryforwards. Connecticut tax net operating loss carryforwards totaled $681.4 million at December 31, 2005 and expire between 2020 and 2025.
The tax effects of temporary differences that give rise to Peoples deferred tax assets and liabilities are as follows:
F-27
Peoples Bank and Subsidiaries
Notes to Consolidated Financial Statements(Continued)
(Information with respect to September 30, 2006 and the nine month periods ended September 30, 2006 and 2005 is unaudited)
Based on Peoples recent historical and anticipated future pre-tax earnings and the reversal of taxable temporary differences, management believes it is more likely than not that Peoples will realize its total deferred tax assets, net of the valuation allowance.
NOTE 11 Regulatory Capital Requirements
Peoples converted to a federally-chartered stock savings bank from a Connecticut-chartered stock savings bank effective August 18, 2006. Peoples regulator is the OTS (previously the FDIC). Simultaneously with Peoples conversion, Holdings converted to a federally-chartered mutual holding company from a Connecticut-chartered mutual holding company.
OTS and FDIC regulations require banks to maintain a minimum leverage ratio of tier 1 capital to total adjusted assets of 4.0%, and minimum ratios of tier 1 risk-based capital and total risk-based capital to risk-adjusted total assets of 4.0% and 8.0%, respectively.
Under their prompt corrective action regulations, the OTS and FDIC are 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 banks financial statements. The regulations establish a framework for the classification of banks into five categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. Generally, a bank is considered well capitalized if it has a leverage (tier 1) capital ratio of at least 5.0%, a tier 1 risk-based capital ratio of at least 6.0% and a total risk-based capital ratio of at least 10.0%.
The foregoing capital ratios are based in part on specific quantitative measures of assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting guidelines. Capital amounts and classifications are also subject to qualitative judgments by the OTS about capital components, risk weightings and other factors.
Management believes that, as of September 30, 2006, December 31, 2005 and December 31, 2004, Peoples met all capital adequacy requirements to which it is subject. Further, the most recent FDIC notifications categorized Peoples as a well-capitalized institution under the prompt corrective action regulations. No conditions or events have occurred since that notification that have caused management to believe any change in Peoples capital classification would be warranted.
The following is a summary of Peoples regulatory capital amounts and ratios compared to the OTS requirements as of September 30, 2006 and FDIC requirements as of December 31, 2005 and December 31, 2004 for classification as a well-capitalized institution and for minimum capital adequacy. While the capital regulations of these two agencies are substantially similar, they are not identical. Peoples risk-adjusted total assets, as defined, totaled $8.5 billion, $8.1 billion and $7.5 billion at September 30, 2006, December 31, 2005 and December 31, 2004, respectively.
OTS Requirements | ||||||||||||||||||
Peoples |
Classification as
Well-Capitalized |
Minimum Capital Adequacy |
||||||||||||||||
(dollars in millions) |
Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||
September 30, 2006 |
||||||||||||||||||
Tangible capital |
$ | 1,248.5 | 11.8 | % | n/a | n/a | $ | 158.7 | 1.5 | % | ||||||||
Leverage capital |
1,248.5 | 11.8 | $ | 528.9 | 5.0 | % | 423.1 | 4.0 | ||||||||||
Risk-based capital: |
||||||||||||||||||
Tier 1 |
1,248.5 | 14.7 | 509.4 | 6.0 | 339.6 | 4.0 | ||||||||||||
Total |
1,374.7 | 16.2 | 849.0 | 10.0 | 679.2 | 8.0 |
F-28
Peoples Bank and Subsidiaries
Notes to Consolidated Financial Statements(Continued)
(Information with respect to September 30, 2006 and the nine month periods ended September 30, 2006 and 2005 is unaudited)
FDIC Requirements | ||||||||||||||||||
Peoples |
Classification as
Well- Capitalized |
Minimum Capital Adequacy |
||||||||||||||||
(dollars in millions) |
Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||
December 31, 2005 |
||||||||||||||||||
Leverage capital |
$ | 1,201.1 | 11.2 | % | $ | 536.2 | 5.0 | % | $ | 428.9 | 4.0 | % | ||||||
Risk-based capital: |
||||||||||||||||||
Tier 1 |
1,201.1 | 14.8 | 485.7 | 6.0 | 323.8 | 4.0 | ||||||||||||
Total |
1,328.3 | 16.4 | 809.5 | 10.0 | 647.6 | 8.0 | ||||||||||||
December 31, 2004 |
||||||||||||||||||
Leverage capital |
$ | 1,099.0 | 10.5 | % | $ | 524.3 | 5.0 | % | $ | 419.4 | 4.0 | % | ||||||
Risk-based capital: |
||||||||||||||||||
Tier 1 |
1,099.0 | 14.6 | 451.2 | 6.0 | 300.8 | 4.0 | ||||||||||||
Total |
1,258.6 | 16.7 | 752.0 | 10.0 | 601.6 | 8.0 | ||||||||||||
The following is a reconciliation of Peoples total stockholders equity to regulatory capital amounts under OTS regulations at September 30, 2006 and FDIC regulations at December 31, 2005 and December 31, 2004:
NOTE 12 Common Stock and Dividends
Holdings is a mutual-form financial holding company organized in connection with the 1988 stock offering and reorganization of Peoples Bank. At both September 30, 2006 and December 31, 2005, Holdings owned 82.0 million shares of Peoples common stock, representing 57.7% and 57.9%, respectively, of the total number of outstanding shares of Peoples common stock.
Since its formation in 1988, Holdings has consistently waived the receipt of cash dividends on substantially all of the shares of Peoples common stock it owns. The Board of Directors of Peoples establishes the rate at which dividends are declared with advance knowledge of the amount of dividends to be waived by Holdings. No dividends are declared on shares for which Holdings waives the dividend. If dividends had actually been declared and paid on all outstanding shares of Peoples common stock at the same rate as was declared and paid on shares not subject to the waiver, Holdings would have received additional dividends of approximately $554 million since the date of its formation through September 30, 2006.
As a Connecticut-chartered savings bank prior to August 18, 2006, Peoples could only pay dividends (except stock dividends) from net profits, defined as the remainder of all earnings from current operations. Without specific regulatory approval, the total of all dividends declared by Peoples in a given calendar year could not exceed the total of Peoples net
F-29
Peoples Bank and Subsidiaries
Notes to Consolidated Financial Statements(Continued)
(Information with respect to September 30, 2006 and the nine month periods ended September 30, 2006 and 2005 is unaudited)
profits for that year plus its retained profits from the preceding two years. This limitation did not affect the dividends paid by Peoples in 2006, 2005, 2004 and 2003. Dividends declared and paid per common share (other than shares on which Holdings waived receipt of dividends) were $0.72 for the nine months ended September 30, 2006 and $0.85, $0.75 and $0.68 for the years ended December 31, 2005, 2004 and 2003, respectively.
As a federally-chartered savings bank since August 18, 2006, Peoples ability to make capital distributions is now governed by OTS regulations. The payment of dividends is considered to be a form of capital distribution under these regulations. Without specific OTS approval, the total of all capital distributions declared by Peoples in a given calendar year can not exceed the sum of its net income (as determined under generally accepted accounting principles) for the year to date and its retained net income for the preceding two years. The term retained net income as defined by the OTS means Peoples net income for each year, less the amount of capital distributions declared in each such year. Peoples retained net income for 2004 and 2005 totaled $129.7 million, its net income for the nine months ended September 30, 2006 was $84.7 million, and it had declared and paid capital distributions (all of which were in the form of dividends during 2006) totaling $44.5 million through that date. As of September 30, 2006, Peoples had $169.9 million available for capital distributions without specific OTS approval.
In 2005, Peoples completed a three-for-two stock split, which resulted in the issuance of approximately 47.1 million additional common shares. Upon completing the stock split, $47.1 million was reclassified to the common stock account from the additional paid-in capital account. These accounts and all share and per share data for all prior years have been restated to give retroactive effect to the stock split. In 2006, Peoples shareholders approved an increase in the number of authorized shares of common stock to 450 million from 150 million.
At September 30, 2006, Peoples had 50 million shares of preferred stock (without par value) authorized, none of which were issued or outstanding and 450 million shares of common stock (without par value) authorized.
Changes in the number of common shares outstanding are summarized as follows:
F-30
Peoples Bank and Subsidiaries
Notes to Consolidated Financial Statements(Continued)
(Information with respect to September 30, 2006 and the nine month periods ended September 30, 2006 and 2005 is unaudited)
NOTE 13 Earnings Per Common Share
The following is an analysis of Peoples basic and diluted EPS:
Nine months ended
September 30, |
Years ended December 31, |
|||||||||||||||
(in millions, except per share data) |
2006 | 2005 | 2005 | 2004 | 2003 | |||||||||||
Income (loss) from continuing operations |
$ | 83.0 | $ | 91.6 | $ | 125.9 | $ | (5.6 | ) | $ | 62.7 | |||||
Income from discontinued operations |
1.7 | 10.3 | 11.2 | 205.3 | 1.1 | |||||||||||
Net income |
84.7 | 101.9 | 137.1 | 199.7 | 63.8 | |||||||||||
Average common shares outstanding for basic EPS |
141.6 | 141.0 | 141.0 | 140.0 | 139.2 | |||||||||||
Effect of dilutive stock options and unvested stock awards (1) |
0.6 | 0.7 | 0.7 | 0.9 | 0.1 | |||||||||||
Average common and common-equivalent shares for diluted EPS |
142.2 | 141.7 | 141.7 | 140.9 | 139.3 | |||||||||||
Basic EPS: |
||||||||||||||||
Income (loss) from continuing operations |
$ | 0.59 | $ | 0.65 | $ | 0.89 | $ | (0.04 | ) | $ | 0.45 | |||||
Income from discontinued operations |
0.01 | 0.07 | 0.08 | 1.47 | 0.01 | |||||||||||
Net income |
0.60 | 0.72 | 0.97 | 1.43 | 0.46 | |||||||||||
Diluted EPS: |
||||||||||||||||
Income (loss) from continuing operations |
$ | 0.58 | $ | 0.65 | $ | 0.89 | $ | (0.04 | ) | $ | 0.45 | |||||
Income from discontinued operations |
0.01 | 0.07 | 0.08 | 1.46 | 0.01 | |||||||||||
Net income |
0.59 | 0.72 | 0.97 | 1.42 | 0.46 |
(1) | Excludes the effect of an average of 172,665 anti-dilutive stock options in 2003 (none in 2006, 2005 and 2004). |
NOTE 14 Comprehensive Income
Comprehensive income represents the sum of net income and items of other comprehensive income or loss that are reported directly in stockholders equity on an after-tax basis. These items include the net unrealized gains or losses on securities available for sale and derivatives accounted for as cash flow hedges, and minimum pension liability adjustments. Peoples total comprehensive income for the nine months ended September 30, 2006 and the years ended December 31, 2005, 2004 and 2003 are reported in the Consolidated Statements of Changes in Stockholders Equity.
The components of accumulated other comprehensive loss, which is included in Peoples stockholders equity on an after-tax basis, are as follows:
F-31
Peoples Bank and Subsidiaries
Notes to Consolidated Financial Statements(Continued)
(Information with respect to September 30, 2006 and the nine month periods ended September 30, 2006 and 2005 is unaudited)
The following is a summary of the changes in the components of Peoples other comprehensive income (loss) for the nine months ended September 30, 2006 and 2005 and the years ended December 31, 2005, 2004 and 2003:
F-32
Peoples Bank and Subsidiaries
Notes to Consolidated Financial Statements(Continued)
(Information with respect to September 30, 2006 and the nine month periods ended September 30, 2006 and 2005 is unaudited)
Year ended December 31, 2004 (in millions) |
Pre-Tax
Amount |
Tax
Effect |
After-Tax
Amount |
|||||||||
Net unrealized gains and losses on securities available for sale: |
||||||||||||
Net unrealized holding losses arising during the year |
$ | (9.1 | ) | $ | 3.0 | $ | (6.1 | ) | ||||
Reclassification adjustment for net realized losses included in net income |
4.7 | (1.6 | ) | 3.1 | ||||||||
Net unrealized losses |
(4.4 | ) | 1.4 | (3.0 | ) | |||||||
Net unrealized loss on derivatives accounted for as cash flow hedges: |
||||||||||||
Net unrealized holding losses arising during the year |
| | | |||||||||
Reclassification adjustment for net realized losses included in net income |
40.5 | (14.2 | ) | 26.3 | ||||||||
Net unrealized gains |
40.5 | (14.2 | ) | 26.3 | ||||||||
Minimum pension liability adjustment |
(0.9 | ) | 0.4 | (0.5 | ) | |||||||
Other comprehensive income |
$ | 35.2 | $ | (12.4 | ) | $ | 22.8 | |||||
Year ended December 31, 2003 (in millions) |
Pre-Tax
Amount |
Tax
Effect |
After-Tax
Amount |
|||||||||
Net unrealized gains and losses on securities available for sale: |
||||||||||||
Net unrealized holding gains arising during the year |
$ | 28.4 | $ | (8.2 | ) | $ | 20.2 | |||||
Reclassification adjustment for net realized losses included in net income |
1.7 | (0.6 | ) | 1.1 | ||||||||
Net unrealized gains |
30.1 | (8.8 | ) | 21.3 | ||||||||
Net unrealized loss on derivatives accounted for as cash flow hedges: |
||||||||||||
Net unrealized losses arising during the year |
(1.8 | ) | 0.6 | (1.2 | ) | |||||||
Reclassification adjustment for net realized losses included in net income |
16.3 | (5.6 | ) | 10.7 | ||||||||
Net unrealized gains |
14.5 | (5.0 | ) | 9.5 | ||||||||
Minimum pension liability adjustment |
(0.8 | ) | 0.6 | (0.2 | ) | |||||||
Other comprehensive income |
$ | 43.8 | $ | (13.2 | ) | $ | 30.6 | |||||
NOTE 15 Employee Benefit Plans
Employee Pension and Other Postretirement Benefits Plans
Peoples maintains a noncontributory defined benefit pension plan that covers substantially all full-time and part-time employees who meet certain age and length of service requirements and who were employed by Peoples prior to August 14, 2006. Benefits are based upon the employees years of credited service and either the average compensation for the last five years or the average compensation for the five consecutive years of the last ten years that produce the highest average. Peoples funding policy is to contribute the amounts required by applicable regulations, although additional amounts may be contributed from time to time. In addition, Peoples maintains unfunded and nonqualified supplemental plans to provide retirement benefits to certain senior officers.
Peoples also maintains an unfunded plan that provides retirees with optional medical, dental and life insurance benefits (other postretirement benefits). Peoples accrues the cost of these benefits over the employees years of service to the date of their eligibility for such benefits.
The table on the following page summarizes changes in the benefit obligations and plan assets for (i) the pension plans (combining the funded plan and the unfunded supplemental plans), and (ii) the other postretirement benefits plan. The table also provides a reconciliation of the funded status (or the difference between benefit obligations and plan assets) to the net amount recognized in the Consolidated Statements of Condition. Peoples uses a measurement date of September 30th for plan accounting purposes and, accordingly, changes in benefit obligations and plan assets are shown for the twelve-month periods ended September 30, 2005 and September 30, 2004. As shown in the following tables, plan assets for the funded plan
F-33
Peoples Bank and Subsidiaries
Notes to Consolidated Financial Statements(Continued)
(Information with respect to September 30, 2006 and the nine month periods ended September 30, 2006 and 2005 is unaudited)
of $179.8 million as of September 30, 2005 exceeded both the accumulated benefit obligations of $167.8 million and the vested benefit obligations of $160.5 million at that date.
Employer contributions for the next fiscal year are expected to total $2.2 million for both the unfunded plan and the other postretirement benefits plan, representing net benefit payments expected to be paid under these plans. Expected future net benefit payments for the pension plans as of December 31, 2005 are: $6.2 million in 2006; $6.6 million in 2007; $7.2 million in 2008; $7.8 million in 2009; $8.4 million in 2010; and an aggregate of $59.1 million in 2011 through 2015. Expected future net benefit payments for the other postretirement benefits plan as of December 31, 2005 are: $1.1 million in 2006, 2007, 2008, 2009 and 2010; and an aggregate of $4.7 million in 2011 through 2015. During the third quarter of 2006, Peoples contributed $91.5 million to the pension plan and as a result recorded an increase in its prepaid pension asset.
The supplemental pension plans had total projected benefit obligations of $25.8 million and $22.1 million in 2005 and 2004, respectively. Although these plans hold no assets, Peoples has funded a trust to provide for benefit payments to the extent such benefits are not paid directly by Peoples. Trust assets of $11.6 million, $11.3 million and $11.0 million are included in Peoples short-term investments as of September 30, 2006, December 31, 2005 and December 31, 2004, respectively.
The effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) have been recognized in Peoples postretirement benefits plan in 2005 and 2004 in accordance with the guidance provided in FASB Staff Position 106-2. The prescription drug benefit provided by Peoples for certain retirees is at least actuarially equivalent to the benefit provided under the Act. As of the September 30, 2005 and September 30, 2004 measurement dates, the accumulated benefit obligation was reduced by $0.6 million in both 2005 and 2004. The impact of the federal subsidy reduced the net periodic postretirement benefit cost by $0.1 million in 2005.
New employees starting on or after August 14, 2006 are not eligible to participate in the defined benefit pension plan. Peoples will make contributions on behalf of these employees to a qualified defined contribution plan in an annual amount equal to 3% of the covered employees eligible compensation. Employee participation in this plan is restricted to employees who are at least 21 years of age and worked at least 1,000 hours in a year. Both full-time and part-time employees are eligible to participate as long as they meet these requirements.
F-34
Peoples Bank and Subsidiaries
Notes to Consolidated Financial Statements(Continued)
(Information with respect to September 30, 2006 and the nine month periods ended September 30, 2006 and 2005 is unaudited)
Pension Benefits |
Other
Postretirement Benefits |
|||||||||||||||
(in millions) |
2005 | 2004 | 2005 | 2004 | ||||||||||||
Benefit obligations: |
||||||||||||||||
Beginning of period |
$ | 186.4 | $ | 171.3 | $ | 12.1 | $ | 15.2 | ||||||||
Service cost |
7.5 | 7.4 | 0.2 | 0.3 | ||||||||||||
Interest cost |
11.0 | 10.2 | 0.7 | 0.8 | ||||||||||||
Special termination benefits |
| 0.4 | | | ||||||||||||
Plan amendments |
| | | (2.5 | ) | |||||||||||
Actuarial loss (gain) |
15.3 | 2.9 | | (0.3 | ) | |||||||||||
Actuarial gain due to Medicare subsidy |
| | | (0.6 | ) | |||||||||||
Benefits paid |
(6.0 | ) | (5.8 | ) | (0.8 | ) | (0.8 | ) | ||||||||
End of period |
214.2 | 186.4 | 12.2 | 12.1 | ||||||||||||
Fair value of plan assets: |
||||||||||||||||
Beginning of period |
158.5 | 135.4 | | | ||||||||||||
Actual return on assets |
16.3 | 17.9 | | | ||||||||||||
Employer contributions |
11.0 | 11.0 | 0.8 | 0.8 | ||||||||||||
Benefits paid |
(6.0 | ) | (5.8 | ) | (0.8 | ) | (0.8 | ) | ||||||||
End of period |
179.8 | 158.5 | | | ||||||||||||
Funded status at September 30 |
(34.4 | ) | (27.9 | ) | (12.2 | ) | (12.1 | ) | ||||||||
Unrecognized net actuarial loss (1) |
75.5 | 68.5 | 1.7 | 1.7 | ||||||||||||
Fourth-quarter contributions |
0.2 | 0.2 | 0.3 | 0.3 | ||||||||||||
Unrecognized net transition obligation |
| | 2.6 | 3.0 | ||||||||||||
Unrecognized prior service cost |
0.1 | 0.2 | (2.1 | ) | (2.3 | ) | ||||||||||
Net amount recognized at end of year |
$ | 41.4 | $ | 41.0 | $ | (9.7 | ) | $ | (9.4 | ) | ||||||
Components of the net amount recognized: |
||||||||||||||||
Prepaid benefit cost |
$ | 57.9 | $ | 56.2 | $ | | $ | | ||||||||
Accrued benefit cost |
(16.5 | ) | (15.2 | ) | (9.7 | ) | (9.4 | ) | ||||||||
Additional minimum liability |
(7.1 | ) | (4.6 | ) | | | ||||||||||
Intangible asset |
0.2 | 0.1 | | | ||||||||||||
Accumulated other comprehensive loss (pre-tax basis) |
6.9 | 4.5 | | | ||||||||||||
Net amount recognized at end of year |
$ | 41.4 | $ | 41.0 | $ | (9.7 | ) | $ | (9.4 | ) | ||||||
(1) | Unrecognized net actuarial gains and losses in excess of 10% of the greater of the projected benefit obligation or the fair value of plan assets are amortized over the average remaining service period of active plan participants. |
F-35
Peoples Bank and Subsidiaries
Notes to Consolidated Financial Statements(Continued)
(Information with respect to September 30, 2006 and the nine month periods ended September 30, 2006 and 2005 is unaudited)
The following tables summarize the accumulated and vested benefit obligations for the funded and unfunded plans at the respective September 30th measurement dates:
Components of the net periodic benefit cost are as follows:
F-36
Peoples Bank and Subsidiaries
Notes to Consolidated Financial Statements(Continued)
(Information with respect to September 30, 2006 and the nine month periods ended September 30, 2006 and 2005 is unaudited)
The following assumptions were used in determining benefit obligations and net periodic benefit costs:
Pension Benefits | Other Postretirement Benefits | |||||||||||||||||
2005 | 2004 | 2003 | 2005 | 2004 | 2003 | |||||||||||||
Weighted-average assumptions used to determine benefit
|
||||||||||||||||||
Discount rate |
5.75 | % | 6.00 | % | 6.00 | % | 5.75 | % | 6.00 | % | 6.00 | % | ||||||
Rate of compensation increase |
3.50 | 4.00 | 4.00 | n/a | n/a | n/a | ||||||||||||
Weighted-average assumptions used to determine net periodic
|
||||||||||||||||||
Discount rate |
6.00 | % | 6.00 | % | 6.75 | % | 6.00 | % | 6.00 | % | 6.75 | % | ||||||
Expected return on plan assets |
8.25 | 8.25 | 8.75 | n/a | n/a | n/a | ||||||||||||
Rate of compensation increase |
4.00 | 4.00 | 4.00 | n/a | n/a | n/a | ||||||||||||
Assumed health care cost trend rates at December 31: (1) |
||||||||||||||||||
Health care cost trend rate assumed for next year |
n/a | n/a | n/a | 11.00 | % | 12.00 | % | 13.00 | % | |||||||||
Rate to which the cost trend rate is assumed to
|
n/a | n/a | n/a | 5.00 | 5.00 | 5.00 | ||||||||||||
Year that the rate reaches the ultimate trend rate |
n/a | n/a | n/a | 2013 | 2013 | 2013 |
n/a not applicable
(1) | Changes in the periodic benefit cost and the benefit obligation from a one-percentage-point increase or decrease in this assumed trend rate would not be significant. |
The following table summarizes the percentages of fair value for each major category of plan assets as of the respective measurement dates:
Plan Assets | ||||||
At September 30 |
2005 | 2004 | ||||
Equity securities |
79 | % | 77 | % | ||
Fixed income securities |
21 | 23 | ||||
Total |
100 | % | 100 | % | ||
Peoples retirement plan investment policy includes the following asset allocation guidelines:
Asset Class | ||||
Policy Target % | Policy Range % | |||
Cash reserves |
3 | 1 - 7 | ||
Equity securities |
69 | 52 - 81 | ||
Fixed income securities |
28 | 22 - 34 |
Equity securities may include convertible securities, and are required to be diversified among industries and economic sectors. Limitations are placed on the overall allocation to any individual security at both cost and market value. A limit of 15% of equity holdings may be invested in international equities. Short sales, margin purchases and similar speculative transactions are prohibited.
Fixed income securities are oriented toward risk-averse, investment-grade securities rated A or higher. A limit of up to 10% of the fixed income holdings may be invested in issues rated below Baa by Moodys or BBB by Standard & Poors, if the higher investment risk is compensated for by the prospect of a positive incremental investment return. With the exception of U.S. Government securities, in which the plan may invest the entire fixed income allocation, fixed income securities require diversification among individual securities and sectors. There is no limit on the maximum maturity of securities held. Short sales, margin purchases and similar speculative transactions are prohibited.
F-37
Peoples Bank and Subsidiaries
Notes to Consolidated Financial Statements(Continued)
(Information with respect to September 30, 2006 and the nine month periods ended September 30, 2006 and 2005 is unaudited)
Employee Savings Plans
Peoples also sponsors an employee savings plan that qualifies as a 401(k) plan under the Internal Revenue Code. Under the current plan, employees may contribute up to 20% of their pre-tax compensation up to
certain limits, and Peoples makes a matching contribution equal to 100% of a participants contributions up to 4% of pre-tax compensation. Peoples may increase the amount of its matching contribution to 5% of pre-tax compensation if
certain bankwide performance objectives are met. Participants vest immediately in their own contributions and after one year in Peoples contributions. A supplemental savings plan has also been established for certain senior officers. Expense
recognized for the 401(k) and supplemental savings plans totaled $5.3 million and $4.8 million for the nine months ended September 30, 2006 and 2005, respectively, and $6.4 million, $7.4 million and $7.3 million for the years ended
NOTE 16 Stock-Based Compensation Plans
Long-Term Incentive Plan
Peoples 1998 Long-Term Incentive Plan, as amended (the Incentive Plan), provides for awards to officers and employees in the form of (i) incentive stock options that may afford tax benefits to recipients, (ii) non-statutory stock options that do not afford tax benefits to recipients but may provide tax benefits to Peoples, and (iii) stock appreciation rights, restricted stock and performance units. A total of 9.4 million shares of Peoples common stock are reserved for issuance under the Incentive Plan. At September 30, 2006, a total of 3.8 million reserved shares remain available for future awards.
Non-statutory stock options have been granted under the Incentive Plan at exercise prices equal to the fair value of Peoples common stock at the grant dates. Option expiration dates are fixed at the grant date, with a maximum term of ten years. Most options granted since 1999 vest 50% after two years, 75% after three years and 100% after four years. All options become fully exercisable in the event of a change of control, as defined in the Incentive Plan. As disclosed in Note 1, Peoples adopted SFAS No. 123-R effective January 1, 2006.
The following is a summary of activity in stock options under the Incentive Plan and the predecessor 1988 Long-Term Incentive Plan:
F-38
Peoples Bank and Subsidiaries
Notes to Consolidated Financial Statements(Continued)
(Information with respect to September 30, 2006 and the nine month periods ended September 30, 2006 and 2005 is unaudited)
Additional information concerning options outstanding and options exercisable at December 31, 2005 is summarized as follows:
Options Outstanding | Options Exercisable | |||||||||||
Number |
Weighted Average |
Number |
Weighted Average
Exercise
|
|||||||||
Exercise Price Range |
Remaining
Life (in years) |
Exercise
Price |
||||||||||
$ 8.61 - $11.16 |
400,349 | 7 | $ | 10.83 | 400,349 | $ | 10.83 | |||||
11.45 - 14.45 |
396,018 | 5 | 12.24 | 396,018 | 12.24 | |||||||
19.45 - 21.13 |
374,110 | 8 | 19.86 | 374,110 | 19.86 | |||||||
25.25 - 32.46 |
247,380 | 9 | 25.36 | 247,380 | 25.36 |
Stock Options Awarded Prior to January 1, 2006
All stock options are fixed options that were granted at exercise prices equal to the fair value of Peoples common stock at the respective grant dates. Therefore, in accordance with APB Opinion No. 25, compensation expense was not recognized with respect to these options. If Peoples had adopted the alternative fair-value-based method defined in SFAS No. 123, the grant-date fair value of options would have been recognized as compensation expense over the vesting period. The estimated per-share fair value of options granted in 2005, 2004 and 2003 was approximately $5.00, $3.70 and $1.50, respectively, using the Black-Scholes option-pricing model with assumptions as follows: dividend yield of 3.0% in 2005, 3.4% in 2004 and 5.3% in 2003; expected volatility rate of 25% in all years; risk-free interest rate of 3.8% in 2005, 3.0% in 2004 and 2.8% in 2003; and expected option life of 5 years. Note 1 discloses the effect on net income and earnings per common share if Peoples had applied the fair value recognition provisions of SFAS No. 123 using these assumptions.
On December 22, 2005, Peoples accelerated the vesting of all unvested stock options previously awarded to employees that were outstanding at that time. Shares of common stock acquired pursuant to the exercise of an accelerated option may not be sold or otherwise transferred until the earlier of (a) the date the option would have vested under the terms on which it was initially awarded, or (b) termination of the option holders employment with Peoples. The purpose of the acceleration was to eliminate compensation expense associated with these options in future years upon the adoption of SFAS No. 123-R in the first quarter of 2006. As a result of the acceleration, options to purchase 0.9 million shares of common stock became immediately exercisable. Substantially all of these options were in-the-money at the time of acceleration. The accelerated vesting of these options eliminated potential pre-tax compensation expense through 2008 of approximately $1.7 million, including approximately $0.8 million in 2006. Peoples recorded a one-time charge of $0.7 million in 2005 as a result of the accelerated vesting, which is included in compensation and benefits in the Consolidated Statements of Income.
Stock Options Awarded in 2006
Peoples granted 260,932 stock options in the first quarter of 2006 and none in the second and third quarters of 2006. All stock options are non-statutory fixed options that were granted at exercise prices equal to the fair value of Peoples common stock at the respective grant dates. The estimated weighted-average grant-date fair value of these options was $6.46 per share, using the Black-Scholes option-pricing model with assumptions as follows: dividend yield of 2.8%; expected volatility rate of 23%; risk-free interest rate of 4.6%; and expected option life of 5 years. Expected volatilities were based on historical volatilities from Peoples traded common stock. The expected term of stock options represents the period of time that options granted are expected to be outstanding. Peoples used historical data to estimate voluntary suboptimal (early) exercises by continuing employees, and estimates of post-vest option exercise or forfeiture by terminated employees. Suboptimal exercise data and employee termination estimates are incorporated into Monte Carlo simulations of Peoples common stock prices to calculate the expected term. The risk-free interest rate approximated the U.S. Treasury yield curve at the time of the grant.
Compensation expense is recognized on a straight-line basis generally over the option vesting period and totaled $0.2 million for the nine months ended September 30, 2006. Amortization of these unvested stock options is expected to be
F-39
Peoples Bank and Subsidiaries
Notes to Consolidated Financial Statements(Continued)
(Information with respect to September 30, 2006 and the nine month periods ended September 30, 2006 and 2005 is unaudited)
recognized over the remaining weighted-average period of 3.3 years. Unamortized compensation cost for unvested stock options, which reflects an estimated forfeiture rate, totaled $1.1 million at September 30, 2006.
Prior to adopting SFAS No. 123-R, Peoples presented income tax-related benefits of deductions resulting from the exercise of stock options and vesting of restricted stock as an operating activity in the Consolidated Statements of Cash Flows. SFAS No. 123-R requires the cash flows from income tax-related benefits resulting from income tax deductions in excess of the compensation expense recognized for those stock options and restricted stock to be classified as a financing activity. An excess income tax benefit of $1.9 million was classified as a financing activity for the nine months ended September 30, 2006.
The following is a summary of activity in stock options for the nine months ended September 30, 2006:
The weighted-average grant-date fair value of stock options granted during the nine months ended September 30, 2006 was $6.46 per share (no options were granted in the second and third quarters of 2006). The total intrinsic value of stock options exercised during the nine months ended September 30, 2006 was $4.5 million.
Restricted Stock Awards
Peoples has also granted restricted stock awards under the Incentive Plan. Employees become fully vested in these shares generally after a three- or four-year period, with requisite service conditions and no performance-based conditions to such vesting. Unvested restricted stock awards become fully vested in the event of a change in control, as defined in the Incentive Plan. During the vesting period, dividends are accrued on the restricted stock and the recipients are entitled to vote these restricted shares. The fair value of restricted stock awards is measured at the grant date based on quoted market prices.
Restricted shares awarded during 2005, 2004 and 2003 totaled 101,691 shares, 172,379 shares and 153,731 shares, respectively, with weighted average fair values at the grant dates of $25.40, $19.81 and $11.32, respectively. At December 31, 2005, 330,778 unvested restricted shares were outstanding. Compensation expense is recognized on a straight-line basis over the vesting period and totaled $2.1 million, $2.0 million and $2.4 million for the years ended December 31, 2005, 2004 and 2003, respectively.
The following is a summary of activity in restricted stock awards for the nine months ended September 30, 2006:
F-40
Peoples Bank and Subsidiaries
Notes to Consolidated Financial Statements(Continued)
(Information with respect to September 30, 2006 and the nine month periods ended September 30, 2006 and 2005 is unaudited)
Straight-line amortization of unvested restricted stock awards, expected to be recognized over the remaining weighted-average vesting period of 2.6 years, resulted in compensation expense of $1.7 million for the nine months ended September 30, 2006. Unamortized compensation cost for unvested restricted stock awards, which reflects an estimated forfeiture rate, totaled $8.3 million at September 30, 2006. The total fair value of restricted stock awards vested during the nine months ended September 30, 2006 was $4.0 million.
Stock Price Appreciation Unit Plan
Peoples 1995 Stock Price Appreciation Unit Plan (the Unit Plan) provides for grants of up to 5,737,500 stock price appreciation units to officers and employees. Under the Unit Plan, participants are granted units that entitle the holder to receive a cash payment from Peoples upon exercise equal to the difference between (i) the fair value of Peoples common stock at that time and (ii) the base price of such units. The base price equals the fair value of Peoples common stock at the grant date. The units are exercisable 50% after three years and 100% after four years, and expire, if unexercised, after ten years.
In August 1998, Peoples entered into agreements with the holders of stock price appreciation units then outstanding. A Cap Price of $12.67 (the fair value of Peoples common stock on the agreement date) was established for units that had a base price below $12.67 (the Capped Units). Upon exercise, the holder of a Capped Unit will receive a cash payment from Peoples equal to the excess of (i) the Cap Price (or, if lower, the then-current fair value of Peoples common stock) over (ii) the base price. Each holder of Capped Units received an equal number of stock options under the Incentive Plan, which have an exercise price equal to the Cap Price of $12.67. These stock options must be exercised at the same time the Capped Units are exercised.
At December 31, 2005, all stock appreciation units had been exercised. Included in compensation and benefits expense is a charge of $0.7 million related to the Unit Plan for the year ended December 31, 2003 (none in 2005 and 2004).
The following is a summary of activity in stock appreciation units under the Unit Plan:
Directors Equity Compensation Plan
The Second Amended and Restated Peoples Bank Directors Equity Compensation Plan (the Directors Plan) provided for an annual award of 4,500 shares of Peoples common stock to each non-employee director immediately following each annual meeting of shareholders. The Directors Plan was adopted in 2000 as the successor plan to the Peoples Bank Directors Stock Unit Plan. There were 27,562 shares available for issuance at December 31, 2005. Expense of $0.8 million, $0.8 million and $0.5 million was recognized for the years ended December 31, 2005, 2004 and 2003, respectively, relating to the Directors Plan.
F-41
Peoples Bank and Subsidiaries
Notes to Consolidated Financial Statements(Continued)
(Information with respect to September 30, 2006 and the nine month periods ended September 30, 2006 and 2005 is unaudited)
The Third Amended and Restated Peoples Bank Directors Equity Compensation Plan (Directors Equity Plan) was adopted in 2006 as the successor plan to the Directors Plan. The Directors Equity Plan provides for an annual award of $95,000 worth of shares of Peoples common stock to each non-employee director immediately following each annual meeting of shareholders. Shares of Peoples common stock issued pursuant to the Directors Equity Plan are not transferable until the third anniversary of the grant date or, if earlier, upon the directors cessation of service.
A total of 425,000 shares of Peoples common stock are reserved for issuance under the Directors Equity Plan. In April 2006, directors were granted a total of 25,173 shares of Peoples common stock based on a grant-date fair value of $33.97 per share. Expense is recognized on a straight-line basis over a one-year period and $0.7 million was recognized for the nine months ended September 30, 2006 relating to the Directors Equity Plan and the predecessor Directors Plan. At September 30, 2006, 202,389 shares remain available for issuance.
NOTE 17 Financial Instruments
In the normal course of business, Peoples is a party to both on-balance-sheet and off-balance-sheet financial instruments involving, to varying degrees, elements of credit risk and interest rate risk in addition to the amounts recognized in the Consolidated Statements of Condition. The contractual amounts of off-balance-sheet instruments reflect the extent of Peoples involvement in particular classes of financial instruments.
A summary of the contractual or notional amounts of Peoples financial instruments follows:
September 30,
2006 |
December 31, | ||||||||
(in millions) |
2005 | 2004 | |||||||
Lending-Related Instruments: (1) |
|||||||||
Loan origination commitments and unadvanced lines of credit: |
|||||||||
Consumer |
$ | 1,350.0 | $ | 1,309.0 | $ | 1,040.0 | |||
Commercial |
1,109.5 | 980.4 | 757.4 | ||||||
Commercial real estate finance |
726.3 | 572.1 | 462.9 | ||||||
Residential mortgage |
93.6 | 71.8 | 189.2 | ||||||
Letters of credit |
43.3 | 41.1 | 34.9 | ||||||
Derivative Financial Instruments: (2) |
|||||||||
Interest rate floors |
700.0 | 400.0 | | ||||||
Interest rate swaps |
9.3 | 9.6 | 26.2 | ||||||
Foreign exchange contracts |
13.3 | 17.4 | | ||||||
Forward commitments to sell residential mortgage loans |
30.1 | 16.3 | 20.3 | ||||||
Interest rate-lock commitments on residential mortgage loans |
30.9 | 16.9 | 22.5 |
(1) | The contractual amounts of these financial instruments represent Peoples maximum potential exposure to credit loss, assuming (i) the instruments are fully funded at a later date, (ii) the borrower does not meet contractual repayment obligations, and (iii) any collateral or other security proves to be worthless. |
(2) | The contractual or notional amounts of these financial instruments are substantially greater than Peoples maximum potential exposure to credit loss. |
Lending-Related Instruments
The contractual amounts of Peoples lending-related financial instruments do not necessarily represent future cash requirements since certain of these instruments may expire without being funded and others may not be fully drawn upon. These instruments are subject to Peoples credit approval process, including an evaluation of the customers creditworthiness and related collateral requirements. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee by the customer. The geographic distribution of Peoples lending-related financial instruments is similar to the distribution of its loan portfolio, as described in Note 5.
F-42
Peoples Bank and Subsidiaries
Notes to Consolidated Financial Statements(Continued)
(Information with respect to September 30, 2006 and the nine month periods ended September 30, 2006 and 2005 is unaudited)
Peoples issues both stand-by and commercial letters of credit. Stand-by letters of credit are conditional commitments issued by Peoples to guarantee the performance of a customer to a third party. The letter of credit is generally extended for an average term of one year and secured similar to existing extensions of credit. For each letter of credit issued, if the customer fails to perform under the terms of the agreement, Peoples would have to fulfill the terms of the letter of credit. The fair value of Peoples obligations relating to $42.4 million of stand-by letters of credit at September 30, 2006 was $0.3 million, which is included in other liabilities in the Consolidated Statements of Condition. The credit risk involved in issuing stand-by letters of credit is essentially the same as that involved in extending loan facilities to customers.
A commercial letter of credit is normally a short-term instrument issued by a financial institution on behalf of its customer. The letter of credit authorizes a beneficiary to draw drafts on the financial institution or one of its correspondent banks, provided the terms and conditions of the letter of credit have been met. In issuing a commercial letter of credit, the financial institution has substituted its credit standing for that of its customer. After drafts are paid by the financial institution, the customer is charged or an obligation is created under an existing reimbursement agreement. An advance under a reimbursement agreement is recorded as a loan by the financial institution and is subject to terms and conditions similar to other commercial obligations.
Derivative Financial Instruments
Peoples uses derivative financial instruments for risk management purposes and not for trading or speculative purposes. Peoples controls the credit risk of these instruments through collateral, credit approvals and monitoring procedures. Under netting arrangements collateral is obtained, when appropriate, through physical delivery of securities or cash to reduce Peoples exposure to credit losses in the event of non-performance by the counterparties to these transactions. Peoples also controls its counterparty risk by entering into arrangements only with highly-rated counterparties that are specifically approved by Peoples up to a maximum credit exposure. Peoples credit exposure on its derivative contracts, representing those contracts with net positive fair values including the effect of bilateral netting, amounted to $13.7 million at September 30, 2006 and $6.0 million at December 31, 2005 (none at December 31, 2004).
Peoples principal derivative positions outstanding at September 30, 2006 and December 31, 2005 were interest rate floors accounted for as cash flow hedges relating to long-term commercial loans that reprice based on the one-month LIBOR-index rate. The interest rate floors purchased in January 2006 and December 2005 were terminated in September 2006 and new interest rate floors with the same notional amounts and higher strike rates than the terminated interest rate floors were purchased. Hedge ineffectiveness recorded in 2006 and 2005 was insignificant. To a much lesser extent, Peoples engages in derivative transactions accounted for as fair value hedges. The ineffective portion of hedge results related to fair value hedges recorded in 2006, 2005, 2004 and 2003 was insignificant.
The following sections further discuss each class of derivative financial instrument used by Peoples, including managements principal objectives and risk management strategies.
Interest Rate Floors
Interest rate floors are a type of option contract that exercises when the underlying interest rate falls below a specified strike rate. Peoples purchased interest rate floors for the purpose of partially managing its exposure to decreases in the one-month LIBOR-index rate used to reprice certain long-term commercial loans. If the one-month LIBOR-index rate falls below the specified strike rate, Peoples would receive an interest payment on the interest rate floor equal to the difference between the one-month LIBOR-index rate on the reset date and the strike rate.
The change in fair value of a derivative that is highly effective, and is designated and qualifies as a cash flow hedge, is recorded in accumulated other comprehensive income or loss until earnings are affected by the variability in cash flows of the designated hedged item. The fair value of interest rate floors at September 30, 2006 reflected the unamortized premium and unrealized loss (with a corresponding charge to accumulated other comprehensive loss, after applicable taxes). The unrealized loss in accumulated other comprehensive loss of $4.1 million at September 30, 2006 represented the changes in
F-43
Peoples Bank and Subsidiaries
Notes to Consolidated Financial Statements(Continued)
(Information with respect to September 30, 2006 and the nine month periods ended September 30, 2006 and 2005 is unaudited)
market values resulting from increases in interest rates since the original dates the interest rate floors were purchased. Interest rate floors outstanding at September 30, 2006 mature in 2011.
The group of individual transactions being hedged is Peoples one-month Libor-index commercial loan monthly interest cash flows. Peoples has identified the hedged forecasted transaction as the first one-month Libor-index interest payments received on commercial loans. These are individual transactions that share the same risk exposure, because the interest payments received on the one-month Libor-index commercial loans are subject to interest rate risk related to changes in the one-month Libor rate. The occurrence of one-month Libor interest payment cash flows is probable, and the prepayment of a given loan is not expected to have an effect on the hedging relationship, as the aggregate principal balance of the one-month Libor-index rate commercial loan portfolio underlying the interest payments is maintained at an amount sufficiently greater than the notional amount of the interest rate floors.
Interest Rate Swaps
Peoples pay fixed/receive floating interest rate swaps, which are accounted for as fair value hedges, are used to hedge the change in fair value of certain long-term, fixed-rate commercial real estate finance loans from rising interest rates. Under interest rate swaps, Peoples agrees with other parties to exchange, at specified intervals, the difference between fixed rate and floating rate interest amounts calculated by reference to an agreed notional amount. Peoples enters into these transactions to match more closely the repricing of its assets and liabilities, and to reduce its exposure to increases in interest rates and their effect on interest income and interest expense. For example, certain fixed rate assets may be funded with floating rate borrowings. Peoples enters into interest rate swaps in which it pays a fixed rate and receives a floating rate, in order to effectively match fund the asset and liability.
The change in fair value of a derivative that is highly effective, and is designated and qualifies as a fair value hedge, is recorded in earnings. The change in fair value on the hedged asset or liability is also recorded in earnings. Peoples liability at September 30, 2006, December 31, 2005 and December 31, 2004 of $0.2 million, $0.4 million and $1.3 million, respectively, represented the unrealized losses at those dates on these fair value hedges. Interest rate swaps outstanding at September 30, 2006 mature as follows: $2 million in 2011; $5 million in 2012; and $2 million thereafter.
The net effect of interest rate floors, interest rate swaps and corridors was to decrease net interest income by $0.5 million for the nine months ended September 30, 2006 and $0.4 million, $3.9 million and $20.3 million for the years ended December 31, 2005, 2004 and 2003, respectively. For the year ended December 31, 2005, other non-interest income included $0.1 million and other non-interest expense included $0.4 million relating to the cancellations of certain interest rates swaps.
Peoples cancelled interest rate swaps and interest rate corridors with notional amounts of $335 million and $435 million, respectively, in 2004 as part of a balance sheet restructuring. Costs to cancel those derivatives related to Peoples credit card business were reported in discontinued operations, due to the sale of that business in 2004, while costs to cancel the remaining derivatives were reported in liability restructuring costs in the Consolidated Statements of Income. At December 31, 2005 and December 31, 2004, there were no interest rate corridors remaining.
Forward Exchange Contracts
Foreign exchange forward contracts are commitments to buy or sell foreign currency on a future date at a contractual price. Peoples uses these instruments to eliminate its exposure to foreign currency exchange rate risk on certain of its commercial loans that are denominated in foreign currencies. Gains and losses on foreign exchange contracts substantially offset the translation gains and losses.
F-44
Peoples Bank and Subsidiaries
Notes to Consolidated Financial Statements(Continued)
(Information with respect to September 30, 2006 and the nine month periods ended September 30, 2006 and 2005 is unaudited)
Forward Commitments to Sell and Interest Rate-Lock Commitments on Residential Mortgage Loans
Peoples enters into forward commitments to sell fixed-rate residential mortgage loans in order to reduce the market risk associated with originating loans for sale in the secondary market. In order to fulfill a forward commitment, Peoples delivers originated loans at prices or yields specified by the contract. The risks associated with such contracts arise from the possible inability of counterparties to meet the contract terms or Peoples inability to originate the necessary loans. Gains and losses realized on the forward contracts are reported in the Consolidated Statements of Income as a component of the net gains on sales of residential mortgage loans. In the normal course of business, Peoples will commit to an interest rate on a mortgage loan application at a time after the application is approved by Peoples. Fixed-rate residential mortgage loan commitments totaled $1.1 million (interest rates from 6.13% to 6.65%) and $0.6 million (interest rates from 5.88% to 6.13%) at September 30, 2006 and December 31, 2005, respectively. The risks associated with residential mortgage interest rate-lock commitments arise if market interest rates change prior to the closing of these loans. Both forward sales commitments and interest rate-lock commitments made to borrowers are accounted for as derivatives and are reflected in the Consolidated Statements of Condition at fair value. See Note 19.
The following is a summary of certain information concerning Peoples derivative financial instruments utilized for risk management purposes:
September 30, 2006 | December 31, | |||||||||||
(dollars in millions) |
2005 | 2004 | ||||||||||
Interest Rate Floors: |
||||||||||||
Notional principal amounts |
$ | 700.0 | $ | 400.0 | $ | | ||||||
Weighted average strike rate |
5.00 | % | 4.30 | % | | |||||||
Weighted average remaining term to maturity (in months) |
52 | 60 | | |||||||||
Fair value recognized as an asset |
$ | 13.8 | $ | 5.9 | $ | | ||||||
Interest Rate Swaps: |
||||||||||||
Notional principal amounts: |
||||||||||||
Pay fixed rate/receive floating rate |
$ | 9.3 | $ | 9.6 | $ | 26.2 | ||||||
Weighted average interest rates: |
||||||||||||
Pay fixed (receive floating) |
5.51 | %(5.33%) | 5.51 | %(4.29%) | 5.07 | %(2.28%) | ||||||
Weighted average remaining term to maturity (in months) |
76 | 85 | 86 | |||||||||
Fair value recognized as a liability |
$ | 0.2 | $ | 0.4 | $ | 1.3 | ||||||
Foreign Exchange Contracts: |
||||||||||||
Notional principal amounts |
$ | 13.3 | $ | 17.4 | $ | | ||||||
Weighted average remaining term to maturity (in months) |
2 | 3 | | |||||||||
Fair value recognized as an asset |
$ | 0.1 | $ | | $ | | ||||||
NOTE 18 Legal Proceedings and Lease Commitments
Legal Proceedings
On July 12, 2005, Peoples was served with a summons and complaint naming it as one of several defendants in a lawsuit filed by a group of retail merchants in the United States District Court for the District of Connecticut. This case was subsequently transferred to the United States District Court for the Eastern District of New York in October 2005. Four similar lawsuits naming Peoples as a defendant have since been filed by: four retail trade associations; a food-services industry wholesaler; a booksellers trade association; and a group of supermarkets and supermarket trade association, respectively, in the United States District Court for the Eastern District of New York. Two of these additional lawsuits were filed on September 23, 2005 and the other two lawsuits were filed on November 14, 2005. On August 2, 2006, a separate class of retail merchants filed a similar lawsuit in the United States District Court for the District of South Carolina, naming Peoples as a defendant. Other defendants in each lawsuit include VISA and MasterCard, as well as many banks across the country that issue (or at one time issued) VISA and/or MasterCard-branded credit cards. Each of these cases (except for the case filed in August 2006) has been consolidated for pretrial purposes in the United States District Court for the Eastern District of New York.
F-45
Peoples Bank and Subsidiaries
Notes to Consolidated Financial Statements(Continued)
(Information with respect to September 30, 2006 and the nine month periods ended September 30, 2006 and 2005 is unaudited)
The plaintiffs allege that the defendants violated U.S. antitrust laws in connection with the imposition of interchange fees charged to merchants who accepted VISA and MasterCard credit cards as payment for sales of merchandise to the merchants customers. The trade association plaintiffs allege similar violations stemming from interchange fees charged to them when they accepted VISA and MasterCard credit cards as payment for various transactions with their members. The plaintiffs in each case are seeking to have the lawsuits certified as class actions.
Peoples sold its credit card business to The Royal Bank of Scotland Group effective March 5, 2004.
On April 24, 2006, the plaintiffs in the cases consolidated in the United States District Court for the Eastern District of New York filed a consolidated amended complaint. Peoples was not named as a defendant in the amended complaint. On August 29, 2006, the plaintiff in the case filed in United States District Court for the District of South Carolina filed a First Amended Class Action Complaint. Peoples was not named as a defendant in the amended complaint.
In the normal course of business, Peoples is subject to various other legal proceedings. Management has discussed the nature of these legal proceedings with legal counsel. In the opinion of management, Peoples financial condition or results of operations will not be affected materially as a result of the outcome of these other legal proceedings.
Lease Commitments
At December 31, 2005, Peoples was obligated under various noncancelable operating leases for office space, which expire on various dates through 2027. Certain leases contain renewal options and provide for increased rentals based principally on the consumer price index and fair market rental value provisions. The future minimum rental commitments under operating leases in excess of one year at December 31, 2005 were: $18.1 million in 2006; $18.3 million in 2007; $15.9 million in 2008; $15.1 million in 2009; $13.7 million in 2010; and an aggregate of $34.1 million in 2011 through 2027. Rent expense under operating leases was $13.3 million and $12.6 for the nine months ended September 30, 2006 and 2005, respectively, and $17.5 million, $16.8 million and $16.3 million for the years ended December 31, 2005, 2004 and 2003, respectively.
F-46
Peoples Bank and Subsidiaries
Notes to Consolidated Financial Statements(Continued)
(Information with respect to September 30, 2006 and the nine month periods ended September 30, 2006 and 2005 is unaudited)
NOTE 19 Fair Values of Financial Instruments
The following is a summary of the carrying amounts and estimated fair values of Peoples financial instruments:
September 30, 2006 |
December 31, | |||||||||||||||||
2005 | 2004 | |||||||||||||||||
(in millions) |
Carrying
Amount |
Estimated
Fair Value |
Carrying
Amount |
Estimated
Fair Value |
Carrying
Amount |
Estimated
Fair Value |
||||||||||||
Financial assets: |
||||||||||||||||||
Cash and cash equivalents |
$ | 535.4 | $ | 535.4 | $ | 423.5 | $ | 423.5 | $ | 333.2 | $ | 333.2 | ||||||
Securities (1) |
201.9 | 201.9 | 1,363.0 | 1,363.0 | 2,071.2 | 2,071.2 | ||||||||||||
Securities purchased under agreements to resell |
| | 25.0 | 24.8 | | | ||||||||||||
Loans, net |
9,110.9 | 9,114.3 | 8,497.9 | 8,547.2 | 7,860.9 | 8,029.5 | ||||||||||||
Accrued interest receivable |
43.6 | 43.6 | 42.7 | 42.7 | 37.4 | 37.4 | ||||||||||||
Financial liabilities: |
||||||||||||||||||
Time deposits |
3,520.1 | 3,498.9 | 2,962.1 | 2,933.9 | 2,402.2 | 2,392.8 | ||||||||||||
Other deposits |
5,458.5 | 5,458.5 | 6,120.5 | 6,120.5 | 6,459.8 | 6,459.8 | ||||||||||||
Federal funds purchased |
13.6 | 13.6 | 269.9 | 269.9 | 240.8 | 240.8 | ||||||||||||
FHLB advances |
| | 25.0 | 25.0 | 100.0 | 100.0 | ||||||||||||
Subordinated notes |
108.8 | 119.2 | 108.6 | 122.1 | 121.8 | 143.9 | ||||||||||||
Accrued interest payable |
2.8 | 2.8 | 3.6 | 3.6 | 3.5 | 3.5 | ||||||||||||
Derivative financial instruments: (2) |
||||||||||||||||||
Recognized as an asset: |
||||||||||||||||||
Interest rate floors |
13.8 | 13.8 | 5.9 | 5.9 | | | ||||||||||||
Forward commitments to sell residential mortgage loans |
| | | | 0.1 | 0.1 | ||||||||||||
Foreign exchange contracts |
0.1 | 0.1 | | | | | ||||||||||||
Recognized as a liability: |
||||||||||||||||||
Interest rate swaps |
0.2 | 0.2 | 0.4 | 0.4 | 1.3 | 1.3 | ||||||||||||
Interest rate-lock commitments on residential mortgage loans |
| | | | 0.1 | 0.1 |
(1) | Includes trading account securities of $29.5 million at September 30, 2006 and $27.3 million and $11.7 million at December 31, 2005 and December 31, 2004, respectively. No other financial instruments in this table were held for trading purposes. |
(2) | See Note 17 for a further discussion of derivative financial instruments. Peoples has certain off-balance-sheet financial instruments, as described in Note 17, with carrying amounts that primarily consist of deferred fee income and other accruals. The estimated fair values of these other instruments approximated the carrying amounts, which were not significant. |
SFAS No. 107 requires disclosures about the fair values of financial instruments for which it is practicable to estimate fair value. Fair value is defined in SFAS No. 107 as the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation. Quoted market prices are used to estimate fair values when those prices are available. However, active markets do not exist for many types of financial instruments. Consequently, fair values for these instruments must be estimated by management using techniques such as discounted cash flow analysis and comparison to similar instruments. These estimates are highly subjective and require judgments regarding significant matters such as the amount and timing of future cash flows and the selection of discount rates that appropriately reflect market and credit risks. Changes in these judgments often have a material impact on the fair value estimates. In addition, since these estimates are made as of a specific point in time, they are susceptible to material near-term changes. Fair values disclosed in accordance with SFAS No. 107 do not reflect any premium or discount that could result from the sale of a large volume of a particular financial instrument, nor do they reflect possible tax ramifications or estimated transaction costs.
F-47
Peoples Bank and Subsidiaries
Notes to Consolidated Financial Statements(Continued)
(Information with respect to September 30, 2006 and the nine month periods ended September 30, 2006 and 2005 is unaudited)
The following is a description of the principal valuation methods used by Peoples to estimate the fair values of its financial assets and liabilities:
Securities
The fair values of securities were based primarily upon market prices or dealer quotes. Certain fair values were estimated using independent pricing models or were based on comparisons to market prices of similar securities.
Loans
For valuation purposes, the loan portfolio was segregated into its significant categories, which are residential mortgage, commercial real estate finance, commercial and consumer. These categories were further segregated, where appropriate, into components based on significant financial characteristics such as type of interest rate (fixed or adjustable) and payment status (performing or non-performing). Fair values were estimated for each component using a valuation method selected by management.
The fair values of performing residential mortgage, commercial real estate finance, commercial and consumer loans were estimated by discounting the anticipated cash flows from the respective portfolios. Estimates of the timing and amount of these cash flows considered factors such as future loan prepayments and credit losses. The discount rates reflected current market rates for loans with similar terms to borrowers of similar credit quality. The fair values of non-performing loans were based on recent collateral appraisals or managements analysis of estimated cash flows discounted at rates commensurate with the credit risk involved.
The fair value of home equity lines of credit was based on the outstanding loan balances, as required by SFAS No. 107, and, therefore, does not reflect the value associated with earnings from future loans to existing customers. Management believes that the fair value of these customer relationships has a substantial intangible value separate from the loan balances currently outstanding.
Deposit Liabilities
The fair values of time deposits represent contractual cash flows discounted using interest rates currently offered on time deposits with similar characteristics and remaining maturities. In accordance with SFAS No. 107, the fair values of other deposit liabilities (those with no stated maturity, such as checking and savings accounts) are equal to the carrying amounts payable on demand. As required by SFAS No. 107, deposit fair values do not include the intangible value of core deposit relationships that comprise a significant portion of Peoples deposit base. Management believes that Peoples core deposit relationships provide a relatively stable, low-cost funding source that has a substantial intangible value separate from the deposit balances.
Borrowings and Subordinated Notes
The fair values of FHLB advances represent contractual repayments discounted using interest rates currently available on advances with similar characteristics and remaining maturities. The fair values of subordinated notes were based on dealer quotes.
Other Financial Assets and Liabilities
The fair value of securities purchased under agreements to resell was estimated using an independent pricing model. Cash and cash equivalents, accrued interest receivable and payable, and federal funds purchased have fair values that approximate the respective carrying amounts because the instruments are payable on demand or have short-term maturities, and present relatively low credit risk and interest rate risk.
F-48
Peoples Bank and Subsidiaries
Notes to Consolidated Financial Statements(Continued)
(Information with respect to September 30, 2006 and the nine month periods ended September 30, 2006 and 2005 is unaudited)
Derivative Financial Instruments
The carrying amounts for interest rate floors and interest rate swaps represent fair values. The fair values of interest rate floors and interest rate swaps were estimated using a valuation model based on market interest rates and other pricing terms prevailing for similar agreements at the valuation date. These fair values approximate the amounts that Peoples would receive or pay to terminate the interest rate floors and interest rate swaps at the valuation date. The carrying amount for foreign exchange contracts represents fair value. The fair value of foreign exchange contracts was estimated using a valuation model based on market interest rates and other pricing terms prevailing for similar agreements at the valuation date. The fair values of forward commitments to sell and interest rate-lock commitments on fixed-rate residential mortgage loans were estimated based on current secondary market prices for commitments with similar terms.
Off-Balance-Sheet Financial Instruments
The estimated fair values of Peoples off-balance-sheet financial instruments approximate the respective carrying amounts. These include commitments to extend credit and unadvanced lines of credit for which fair values were estimated based on an analysis of the interest rates and fees currently charged to enter into similar transactions, considering the remaining terms of the commitments and the creditworthiness of the potential borrowers.
NOTE 20 Business Segment Information
SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, requires public companies to report (i) certain financial and descriptive information about reportable operating segments, as defined, and (ii) certain enterprise-wide financial information about products and services, geographic areas and major customers. Operating segment information is reported using a management approach that is based on the way management organizes the segments for purposes of making operating decisions and assessing performance.
Peoples reportable operating segments are as follows:
Commercial Banking consists principally of commercial lending, commercial real estate finance lending and commercial deposit gathering activities. This segment also includes cash management, correspondent banking, municipal banking, as well as the equipment financing operations of PCLC.
Consumer Financial Services includes, as its principal business lines, consumer deposit gathering activities, residential mortgage lending and home equity and other consumer lending. In addition to trust services, this segment also includes brokerage, financial advisory services, investment management services and life insurance provided by PSI, and other insurance services provided through RC Knox.
Treasury encompasses the securities portfolio, short-term investments and wholesale funding activities, such as borrowings, and the Funding Center, which includes the impact of derivative instruments used for risk management purposes.
Peoples business segment disclosure is based on information generated by an internal profitability reporting system, which generates information by operating segment 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 can be subjective in nature, are continually being reviewed and refined. Any changes in estimates and allocations that may affect the reported results of a business segment will not affect the consolidated financial position or results of operation of Peoples as a whole. Certain reclassifications have been made to prior year amounts to conform to the current presentation (see below).
FTP is used in the calculation of the respective operating segments net interest income, and measures the value of funds used in and provided by an operating segment. Under this process, a money desk buys funds from liability-generating business lines (such as consumer deposits) and sells funds to asset-generating business lines (such as commercial lending).
F-49
Peoples Bank and Subsidiaries
Notes to Consolidated Financial Statements(Continued)
(Information with respect to September 30, 2006 and the nine month periods ended September 30, 2006 and 2005 is unaudited)
The price at which funds are bought and sold on any given day is set by Peoples Treasury group and is based on the wholesale cost to Peoples of assets and liabilities with similar maturities. Liability-generating businesses sell newly originated liabilities to the money desk and recognize a funding credit, while asset-generating businesses buy funding for newly originated assets from the money desk and recognize a funding charge. Once funding for an asset is purchased from or a liability is sold to the money desk, 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 interest rate risk to the Treasury group. This process results in a difference, which is reflected in the Funding Center as part of Treasury.
In the second quarter of 2006, the results of the Funding Center, previously included in Other, were reclassified to Treasury. In the first quarter of 2006, Peoples revised its FTP methodology assumptions relating to those deposit products with indeterminate maturities, based on a comprehensive historical analysis of the implied maturities and repricing characteristics of those deposits. As a result, the duration for most of those deposits was lengthened, which in turn increased their value and corresponding FTP credit. Segment information for all periods presented reflects the changes resulting from the reclassification of the Funding Center to Treasury and the revised FTP methodology assumptions.
The provision for loan losses for the Commercial Banking and Consumer Financial Services segments is generally based on a five-year rolling average net charge-off rate for the respective operating segment. The provision for loan losses for the national consumer loan portfolio is based on the actual loan loss provision for the year.
Peoples allocates a majority of non-interest expenses to the operating segments using a full-absorption costing process. Direct and indirect costs are analyzed and pooled by process and assigned to the appropriate operating segment. Corporate overhead costs are assigned to operating segments using a standard allocation process. 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.
The category Other includes the residual financial impact from the allocation of revenues and expenses and certain revenues and expenses not attributable to a particular segment. This category also includes: revenues and expenses relating to the national consumer loan portfolio; liability restructuring costs in 2004 and 2003; other nonrecurring expenses; and income from discontinued operations, including the gain on sale of the credit card business, and benefits from completed IRS audits in each year. Total assets at year end for each reportable operating segment represent earning assets. Included in Other are assets such as cash, national consumer loans, premises and equipment, assets of discontinued operations (in 2003), and other assets.
The following tables provide selected financial information for Peoples reportable operating segments:
F-50
Peoples Bank and Subsidiaries
Notes to Consolidated Financial Statements(Continued)
(Information with respect to September 30, 2006 and the nine month periods ended September 30, 2006 and 2005 is unaudited)
Nine months ended September 30, 2005 (in millions) |
Commercial
Banking |
Consumer
Financial Services |
Treasury |
Total
Reportable Segments |
Other |
Total
Consolidated |
||||||||||||||
Net interest income |
$ | 97.4 | $ | 200.5 | $ | (34.2 | ) | $ | 263.7 | $ | 12.7 | $ | 276.4 | |||||||
Provision for loan losses |
6.9 | 2.7 | | 9.6 | (6.3 | ) | 3.3 | |||||||||||||
Non-interest income |
18.6 | 98.3 | 1.9 | 118.8 | 2.3 | 121.1 | ||||||||||||||
Non-interest expense |
54.9 | 194.0 | 1.3 | 250.2 | 3.6 | 253.8 | ||||||||||||||
Income (loss) from continuing operations before
|
54.2 | 102.1 | (33.6 | ) | 122.7 | 17.7 | 140.4 | |||||||||||||
Income tax expense (benefit) |
18.9 | 37.0 | (11.8 | ) | 44.1 | 4.7 | 48.8 | |||||||||||||
Income (loss) from continuing operations |
35.3 | 65.1 | (21.8 | ) | 78.6 | 13.0 | 91.6 | |||||||||||||
Income from discontinued operations, net of tax |
| | | | 4.1 | 4.1 | ||||||||||||||
Gain on sale of discontinued operations, net of tax |
| | | | 6.2 | 6.2 | ||||||||||||||
Income from discontinued operations |
| | | | 10.3 | 10.3 | ||||||||||||||
Net income (loss) |
$ | 35.3 | $ | 65.1 | $ | (21.8 | ) | $ | 78.6 | $ | 23.3 | $ | 101.9 | |||||||
Total assets at end of period |
$ | 3,659.2 | $ | 4,859.6 | $ | 1,749.6 | $ | 10,268.4 | $ | 622.7 | $ | 10,891.1 | ||||||||
Year ended December 31, 2005 (in millions) |
Commercial
Banking |
Consumer
Financial Services |
Treasury |
Total
Reportable Segments |
Other |
Total
Consolidated |
||||||||||||||
Net interest income |
$ | 129.7 | $ | 266.4 | $ | (43.0 | ) | $ | 353.1 | $ | 16.6 | $ | 369.7 | |||||||
Provision for loan losses |
9.4 | 3.5 | | 12.9 | (4.3 | ) | 8.6 | |||||||||||||
Non-interest income |
23.7 | 143.5 | 4.1 | 171.3 | 2.0 | 173.3 | ||||||||||||||
Non-interest expense |
73.7 | 259.4 | 1.4 | 334.5 | 9.9 | 344.4 | ||||||||||||||
Income (loss) from continuing operations before
|
70.3 | 147.0 | (40.3 | ) | 177.0 | 13.0 | 190.0 | |||||||||||||
Income tax expense (benefit) |
24.6 | 52.8 | (15.3 | ) | 62.1 | 2.0 | 64.1 | |||||||||||||
Income (loss) from continuing operations |
45.7 | 94.2 | (25.0 | ) | 114.9 | 11.0 | 125.9 | |||||||||||||
Income from discontinued operations, net of tax |
| | | | 5.0 | 5.0 | ||||||||||||||
Gain on sale of discontinued operations, net of tax |
| | | | 6.2 | 6.2 | ||||||||||||||
Income from discontinued operations |
| | | | 11.2 | 11.2 | ||||||||||||||
Net income (loss) |
$ | 45.7 | $ | 94.2 | $ | (25.0 | ) | $ | 114.9 | $ | 22.2 | $ | 137.1 | |||||||
Total assets at year end |
$ | 3,812.2 | $ | 4,900.7 | $ | 1,553.2 | $ | 10,266.1 | $ | 666.4 | $ | 10,932.5 | ||||||||
F-51
Peoples Bank and Subsidiaries
Notes to Consolidated Financial Statements(Continued)
(Information with respect to September 30, 2006 and the nine month periods ended September 30, 2006 and 2005 is unaudited)
Year ended December 31, 2004 (in millions) |
Commercial
Banking |
Consumer
Financial Services |
Treasury |
Total
Reportable Segments |
Other |
Total
Consolidated |
|||||||||||||||
Net interest income |
$ | 125.8 | $ | 268.0 | $ | (88.4 | ) | $ | 305.4 | $ | 21.7 | $ | 327.1 | ||||||||
Provision for loan losses |
8.8 | 3.3 | | 12.1 | 1.2 | 13.3 | |||||||||||||||
Non-interest income |
19.8 | 129.5 | (4.4 | ) | 144.9 | 6.8 | 151.7 | ||||||||||||||
Non-interest expense |
67.4 | 252.1 | 0.2 | 319.7 | 160.0 | 479.7 | |||||||||||||||
Income (loss) from continuing operations before
|
69.4 | 142.1 | (93.0 | ) | 118.5 | (132.7 | ) | (14.2 | ) | ||||||||||||
Income tax expense (benefit) |
24.3 | 52.1 | (32.5 | ) | 43.9 | (52.5 | ) | (8.6 | ) | ||||||||||||
Income (loss) from continuing operations |
45.1 | 90.0 | (60.5 | ) | 74.6 | (80.2 | ) | (5.6 | ) | ||||||||||||
Income from discontinued operations, net of tax |
| | | | 6.8 | 6.8 | |||||||||||||||
Gain on sale of discontinued operations, net of tax |
| | | | 198.5 | 198.5 | |||||||||||||||
Income from discontinued operations |
| | | | 205.3 | 205.3 | |||||||||||||||
Net income (loss) |
$ | 45.1 | $ | 90.0 | $ | (60.5 | ) | $ | 74.6 | $ | 125.1 | $ | 199.7 | ||||||||
Total assets at year end |
$ | 3,531.8 | $ | 4,487.9 | $ | 2,086.8 | $ | 10,106.5 | $ | 611.4 | $ | 10,717.9 | |||||||||
Year ended December 31, 2003 (in millions) |
Commercial
Banking |
Consumer
Financial Services |
Treasury |
Total
Reportable Segments |
Other |
Total
Consolidated |
|||||||||||||||
Net interest income |
$ | 120.3 | $ | 264.3 | $ | (110.2 | ) | $ | 274.4 | $ | 7.2 | $ | 281.6 | ||||||||
Provision for loan losses |
7.1 | 2.3 | | 9.4 | 7.3 | 16.7 | |||||||||||||||
Non-interest income |
22.4 | 138.3 | (0.3 | ) | 160.4 | 5.9 | 166.3 | ||||||||||||||
Non-interest expense |
60.1 | 258.1 | 3.4 | 321.6 | 24.4 | 346.0 | |||||||||||||||
Income (loss) from continuing operations before income tax expense (benefit) |
75.5 | 142.2 | (113.9 | ) | 103.8 | (18.6 | ) | 85.2 | |||||||||||||
Income tax expense (benefit) |
25.1 | 49.6 | (40.1 | ) | 34.6 | (12.1 | ) | 22.5 | |||||||||||||
Income (loss) from continuing operations |
50.4 | 92.6 | (73.8 | ) | 69.2 | (6.5 | ) | 62.7 | |||||||||||||
Income from discontinued operations, net of tax |
| | | | 1.1 | 1.1 | |||||||||||||||
Net income (loss) |
$ | 50.4 | $ | 92.6 | $ | (73.8 | ) | $ | 69.2 | $ | (5.4 | ) | $ | 63.8 | |||||||
Total assets at year end |
$ | 3,040.1 | $ | 4,075.1 | $ | 2,452.7 | $ | 9,567.9 | $ | 2,103.6 | $ | 11,671.5 | |||||||||
NOTE 21 Discontinued Operations
On March 5, 2004, Peoples completed the sale of its credit card business, which included $2.0 billion of credit card receivables, as well as the transfer of its related credit card operations and 420 employees, to The Royal Bank of Scotland Group (RBS). Gross proceeds from the sale, after the completion of normal post-closing adjustments, totaled $2.4 billion. The net pre-tax gain on sale of $305.4 million, after deducting transaction-related costs and other adjustments, is included in income from discontinued operations in the Consolidated Statements of Income.
As a result of the sale of the credit card business, the assets and results of operations of this business for all years prior to the sale were reclassified to discontinued operations in the Consolidated Financial Statements. Interest expense was allocated to discontinued operations by applying the weighted-average cost of funds previously used for credit card business segment reporting purposes to the discontinued operations average earning assets for 2004 and 2003, with a corresponding reduction in total interest expense in the Consolidated Statements of Income.
F-52
Peoples Bank and Subsidiaries
Notes to Consolidated Financial Statements(Continued)
(Information with respect to September 30, 2006 and the nine month periods ended September 30, 2006 and 2005 is unaudited)
The Consolidated Statements of Condition included an accrued liability of $24.3 million at December 31, 2004 for contract termination and other exit costs related to the credit card sale. In 2005, Peoples resolved the remaining issues regarding its financial obligations under a contract for the servicing of its credit card portfolio. Therefore, the accrued liability was reversed and a $9.7 million pre-tax gain was recorded, which is included in income from discontinued operations on an after-tax basis for the nine months ended September 30, 2005 and the year ended December 31, 2005, respectively, in the Consolidated Statements of Income. Income from discontinued operations for the nine months ended September 30, 2006 includes an after-tax charge of $0.5 million from the resolution of a contingency related to the credit card sale.
Peoples continues to generate recoveries from collection efforts on previously charged-off credit card accounts that were not included in the sale of the credit card business. These recoveries are included in income from discontinued operations in the Consolidated Statements of Income. Recoveries, net of collection costs, totaled $3.4 million and $6.2 million for the nine months ended September 30, 2006 and 2005, respectively, and $7.7 million and $11.2 million for the years ended December 31, 2005 and 2004, respectively.
NOTE 22 Plan of Conversion and Reorganization
On September 20, 2006, Peoples and Holdings announced their plan to convert from a mutual holding company structure to a fully-public stock holding company structure. The Boards of Holdings and Peoples have adopted a Plan of Conversion and Reorganization (the Plan). Pursuant to the Plan, Holdings will merge with and into Peoples, with Peoples as the surviving entity, and Peoples will become a wholly-owned subsidiary of Peoples United Financial, Inc. (PUFI), a Delaware corporation.
In connection with the conversion, shares of Peoples common stock currently owned by Holdings will be cancelled and new shares of common stock, representing the 57.7% ownership interest of Holdings, will be offered for sale by PUFI. Concurrent with the completion of the offering, Peoples existing public stockholders will receive shares of PUFI common stock for each share of Peoples common stock they own at that date, based on an exchange ratio to ensure that they will own approximately the same percentage of PUFI common stock as they owned of Peoples common stock immediately prior to the conversion.
The transactions contemplated by the Plan are subject to approval by Peoples stockholders (other than Holdings), its depositors and the OTS. Special meetings of Peoples stockholders and depositors will be held to approve the Plan, likely in the first quarter of 2007.
PUFI intends to contribute 2 million shares of PUFI common stock and $20.0 million in cash from the offering proceeds to The Peoples Community Foundation (the Foundation), a charitable foundation to be established in connection with the conversion and offering. The shares of common stock contributed to the Foundation will be in addition to the shares being offered for sale. This contribution of common stock and cash will be an additional operating expense and will reduce PUFIs net income in the year that the Foundation is established, which is expected to be the year ending December 31, 2007.
Peoples has incurred $0.3 million of conversion costs through September 30, 2006. If the conversion is completed, conversion costs will be netted against the offering proceeds. If the conversion is terminated, such costs will be expensed.
F-53
Up to 185,437,500 Shares of Common Stock
(subject to increase to up to 213,253,125 shares)
PROSPECTUS
R YAN B ECK & C O .
, 2007
EXPLANATORY NOTE
The prospectus included in this Registration Statement contains two alternative forms of front and back cover pages, one set of which will be used in connection with a subscription offering to our depositors, and the other in an offering to the general public through a syndicate of selected dealers. The front and back cover pages for the syndicated offering prospectus have been labeled Alternate Cover Page for Syndicated Offering Prospectus.
This explanatory note will not appear in final prospectus.
The information in this prospectus is not complete and may be changed. We may not sell these securities until the Securities and Exchange Commission declares the registration statement effective. This prospectus is not an offer to sell these securities, and we are not soliciting an offer to buy these securities, in any state or jurisdiction where the offer or sale is not permitted.
SUBJECT TO COMPLETION DATED FEBRUARY 13, 2007
PROSPECTUS
Up to 185,437,500 Shares of Common Stock
(subject to increase to up to 213,253,125 shares)
Peoples United Financial, Inc. is offering up to 185,437,500 shares of its common stock for sale in connection with the conversion of Peoples Bank and Peoples Mutual Holdings from the mutual holding company structure to the stock holding company structure. We may increase the maximum number of shares that we sell in the offering, without notice to persons who have subscribed for shares, by up to 15%, to 213,253,125 shares, as a result of market demand, regulatory considerations or changes in financial markets. The shares of Peoples United Financial common stock are being offered for sale at a price of $20.00 per share. Peoples Bank common stock is currently listed on the Nasdaq Global Select Market under the trading symbol PBCT. We expect Peoples United Financial common stock to trade on that market under the symbol PBCTD for a period of 20 trading days after completion of the offering. Thereafter, Peoples United Financials trading symbol will revert to PBCT. Concurrent with the completion of the offering, shares of Peoples Bank common stock owned by the public will be exchanged for shares of Peoples United Financial common stock so that Peoples Banks existing public stockholders will own approximately the same percentage of Peoples United Financial common stock as they owned of Peoples Bank common stock immediately prior to the conversion. In connection with the conversion, we also intend to form The Peoples Community Foundation and contribute to it 2,000,000 shares of Peoples United Financial common stock and $20.0 million in cash from the offering proceeds.
Peoples United Financial is offering these shares for sale to Peoples Banks depositors in a subscription offering and to the general public through a syndicate of selected dealers. Peoples Banks depositors have a priority right to purchase shares of Peoples United Financial common stock in the subscription offering, and accordingly, the number of shares available for sale in the syndicated offering will be reduced by the number of shares sold in the subscription offering. In order to complete the subscription offering and the syndicated offering we must sell, in the aggregate, a minimum of 137,062,500 shares. The minimum purchase is 25 shares. The syndicated offering is expected to expire on or about [Expiration Date], 2007. However, we may extend this expiration date without notice to you to up to May 6, 2007, or such later date as the Office of Thrift Supervision may approve, which will not be beyond April 5, 2009. The offering must be completed no later than 24 months after Peoples Banks depositors approve the plan of conversion. After that, the offering may not be extended by us or by the Office of Thrift Supervision. The members of the syndicate will deposit any funds they receive from interested investors prior to closing of the syndicated offering into one or more separate non-interest bearing accounts.
Morgan Stanley & Co. Incorporated is acting as sole book-running manager and Keefe, Bruyette & Woods, Inc., Lehman Brothers and Ryan Beck & Co., Inc. are acting as joint lead managers for the syndicated offering, which is being conducted on a best efforts basis. None of Morgan Stanley & Co. Incorporated, Ryan Beck & Co., Inc. or any other member of the syndicate is required to purchase any shares in the offering.
Investing in our common stock involves risks. Please read the Risk Factors beginning on page [ ].
OFFERING SUMMARY
Price: $20.00 per share
Minimum | Maximum |
Adjusted
Maximum |
|||||||
Number of shares |
137,062,500 | 185,437,500 | 213,253,125 | ||||||
Gross offering proceeds |
$ | 2,741,250,000 | $ | 3,708,750,000 | $ | 4,265,062,500 | |||
Estimated offering expenses (1) |
$ | 83,572,500 | $ | 122,272,500 | $ | 144,525,000 | |||
Estimated net proceeds |
$ | 2,657,677,500 | $ | 3,586,477,500 | $ | 4,120,537,500 | |||
Estimated net proceeds per share |
$ | 19.39 | $ | 19.34 | $ | 19.32 |
(1) | Includes: (1) selling commissions payable by us to Ryan Beck & Co., Inc. in connection with the subscription offering equal to the lesser of 1% of the aggregate amount of common stock sold in the subscription offering or $12.0 million; (2) fees and selling commissions payable by us to Morgan Stanley & Co. Incorporated, Ryan Beck & Co., Inc. and the other syndicate members participating in the syndicated offering equal to 4% of the aggregate amount of common stock sold in the syndicated offering; and (3) other fees and expenses of the offering estimated to be $10.0 million. Does not include an advisory fee in the amount of $5.0 million payable to Morgan Stanley & Co. Incorporated in the event gross proceeds from the subscription offering equal or exceed $1.75 billion. Also does not include an additional advisory fee in the amount of $2.5 million payable, in Peoples Banks sole discretion, to Morgan Stanley & Co. Incorporated in the event gross proceeds from the subscription offering equal or exceed $2.5 billion. For information regarding compensation to be received by Morgan Stanley & Co. Incorporated, Ryan Beck & Co., Inc. and the other syndicate members that may participate in the syndicated offering, including the assumptions regarding the number of shares that may be sold in the subscription offering and the syndicated offering to determine the estimated offering expenses, see Pro Forma Data on page [ ] and The Conversion and Offer ingPlan of Distribution; Selling Agent Compensation on page [ ]. |
These securities are not deposits or savings accounts and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other governmental agency. Neither the Securities and Exchange Commission, the Office of Thrift Supervision nor any state securities regulator has approved or disapproved these securities or determined if this prospectus is accurate or complete. Any representation to the contrary is a criminal offense.
Sole Book-Running Manager
MORGAN STANLEY
Joint Lead Managers
KEEFE, BRUYETTE & WOODS, INC.
LEHMAN BROTHERS
RYAN BECK & CO.
SANDLER ONEILL & PARTNERS, L.P.
The date of this prospectus is , 2007
[Alternate Cover Page for Syndicated Offering Prospectus]
Up to 185,437,500 Shares of Common Stock
(subject to increase to up to 213,253,125 shares)
PROSPECTUS
(Sole Book-Running Manager)
MORGAN STANLEY
(Joint Lead Managers)
KEEFE, BRUYETTE & WOODS, INC.
LEHMAN BROTHERS
RYAN BECK & CO.
SANDLER ONEILL & PARTNERS, L.P.
, 2007
[Alternate Cover Page for Syndicated Offering Prospectus]
Alternate Prospectus for Exchange Offer
Explanatory Note
Peoples United Financial, Inc. is offering shares of its common stock for sale to eligible depositors and the public in connection with the conversion of Peoples Bank and Peoples Mutual Holdings from the mutual holding company structure to the stock holding company structure (the Offering). Concurrent with the completion of the Offering, shares of Peoples Bank common stock owned by the public will be canceled and exchanged for shares of Peoples United Financial common stock so that Peoples Banks existing public stockholders will own approximately the same percentage of Peoples United Financial common stock as they owned of Peoples Banks common stock immediately prior to the conversion and Offering (the Exchange Offer). This alternate prospectus serves as the proxy statement for the special meeting of stockholders of Peoples Bank and the prospectus for the shares of Peoples United Financial to be issued in the Exchange Offer.
The cover page through page 38 of this proxy statement/prospectus replace the cover page through page 27 of the prospectus for the Offering.
Pages 39 through 223 of this proxy statement/prospectus are identical to pages 28 through 174 of the prospectus for the Offering.
Pages 224 through 278 of this proxy statement/prospectus replace pages 175 through 208 of the prospectus for the Offering.
Pages F-1 through F-79 of this proxy statement/prospectus are identical to pages F-1 through F-79 of the prospectus for the Offering.
The back cover page of this proxy statement/prospectus replaces the back cover page of the prospectus for the Offering.
This explanatory note will not appear in the final proxy statement/prospectus.
The information in this prospectus is not complete and may be changed. We may not sell these securities until the Securities and Exchange Commission declares the registration statement effective. This prospectus is not an offer to sell these securities, and we are not soliciting an offer to buy these securities, in any state or jurisdiction where the offer or sale is not permitted.
SUBJECT TO COMPLETION DATED FEBRUARY 13, 2007
PROSPECTUS OF PEOPLES UNITED FINANCIAL, INC.
PROXY STATEMENT OF PEOPLES BANK
Peoples Bank and its parent, Peoples Mutual Holdings, are converting from a mutual holding company structure to a fully-public ownership structure. Currently, Peoples Mutual Holdings owns 57.7% of Peoples Banks common stock. The remaining 42.3% of Peoples Banks common stock is owned by public stockholders. As a result of the conversion, our newly formed company, called Peoples United Financial, Inc., will become the parent of Peoples Bank. Shares of Peoples Bank common stock owned by the public will be exchanged for between 100,491,584 and 135,959,202 shares of common stock of Peoples United Financial (subject to increase to 156,353,083 shares as a result of market demand, regulatory considerations or changes in financial markets) so that Peoples Banks existing public stockholders will own approximately the same percentage of Peoples United Financial common stock as they owned of Peoples Banks common stock immediately prior to the conversion. The actual number of shares that you will receive will depend on the exchange ratio, which will depend on the percentage of Peoples Bank common stock held by the public at the completion of the conversion, the final independent appraisal of Peoples United Financial and the number of shares of Peoples United Financial common stock sold in the offering described in the following paragraph. It will not depend on the market price of Peoples Bank common stock. See The Conversion and OfferingThe Share Exchange of Peoples Bank Common Stock for Peoples United Financial Common Stock for a discussion of the exchange ratio. Based on the $[__] per share closing price of Peoples Bank common stock as of the last trading day prior to the date of this proxy/prospectus, unless at least [ ] shares of Peoples United Financial common stock are sold in the offering (close to the maximum of the offering range), the initial value of the Peoples United Financial common stock you receive in the share exchange would be less than the market value of the Peoples Bank common stock you currently own. See Risk FactorsThe Market Value of Peoples United Financial Common Stock Received in the Share Exchange May Be Less than the Market Value of Peoples Bank Common Stock Exchanged .
Concurrently with the exchange offer, we are offering up to 185,437,500 shares of common stock of Peoples United Financial, representing the 57.7% ownership interest of Peoples Mutual Holdings in Peoples Bank, for sale to eligible depositors and to the public at a price of $20.00 per share. We may increase the maximum number of shares that we sell in the offering, without notice to persons who have subscribed for shares, by up to 15%, to 213,253,125 shares, as a result of market demand, regulatory considerations or changes in financial markets. The conversion of Peoples Mutual Holdings and the offering and exchange of common stock by Peoples United Financial is referred to herein as the conversion and offering. After the conversion and offering are completed, Peoples Bank will be a wholly-owned subsidiary of Peoples United Financial, and 100% of the common stock of Peoples United Financial will be owned by public stockholders. As a result of the conversion and offering, Peoples Mutual Holdings will cease to exist.
Peoples Bank common stock is currently listed on the Nasdaq Global Select Market under the trading symbol PBCT. We expect Peoples United Financial common stock to trade on that market under the symbol PBCTD for a period of 20 trading days after completion of the offering. Thereafter, Peoples United Financials trading symbol will revert to PBCT. In connection with the conversion, we also intend to form The Peoples Community Foundation and contribute to it 2,000,000 shares of Peoples United Financial common stock and $20.0 million in cash from the offering proceeds.
The conversion and offering cannot be completed unless the stockholders of Peoples Bank approve the plan of conversion. Peoples Bank is holding a special meeting of stockholders of Peoples Bank at The Klein Memorial Auditorium, 910 Fairfield Avenue, Bridgeport, Connecticut, on April 5, 2007 at 2:00 p.m., Eastern Time, to consider and vote upon:
1. | The amended and restated agreement and plan of conversion and reorganization (the plan of conversion) of Peoples Bank and Peoples Mutual Holdings; |
2. | The establishment and funding of The Peoples Community Foundation; and |
3. | Any other matters that may properly come before the special meeting or any adjournment or postponement thereof. (Note: Management is not aware of any such other matters at this time.) |
Peoples Banks board of directors unanimously recommends that its stockholders vote FOR each proposal.
By their approval of the plan of conversion as set forth in Proposal 1, the Board of Directors of Peoples Bank has approved the proposals described in this proxy statement/prospectus relating to Peoples United Financials Certificate of Incorporation. These proposals are informational in nature only because the Office of Thrift Supervisions regulations governing mutual-to-stock conversions do not provide for votes on matters other than the plan of conversion and the establishment and funding of the charitable foundation. These proposals are referred to as informational proposals and Peoples Bank stockholders are not being asked to approve these informational proposals at the Special Meeting.
This document serves as the proxy statement for the special meeting of stockholders of Peoples Bank and the prospectus for the shares of Peoples United Financial common stock to be issued in exchange for shares of Peoples Bank common stock. We urge you to read this entire document carefully. You can also obtain information about our companies from documents that we have filed with the Securities and Exchange Commission and the Office of Thrift Supervision. This document does not serve as the prospectus relating to the offering by Peoples United Financial of its shares of common stock in the subscription offering and any syndicated offering, both of which will be made pursuant to a separate prospectus.
Shares of Peoples United Financial common stock are not deposits or savings accounts and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.
None of the Securities and Exchange Commission, the Office of Thrift Supervision nor any state securities regulator has approved or disapproved of these securities or determined if this proxy statement/prospectus is accurate or complete. Any representation to the contrary is a criminal offense.
For assistance, please call our proxy information agent, Georgeson Inc. at 1-866-277-1186, Monday through Friday from 8:00 a.m. to 8:00 p.m., Eastern Time, Saturday from 10:00 a.m. to 4:00 p.m., Eastern Time and Sunday from 11:00 a.m. to 4:00 p.m., Eastern Time.
The date of this proxy statement/prospectus is [ ], 2007, and is first being mailed to stockholders of Peoples Bank on or about [ ], 2007.
REFERENCE TO ADDITIONAL INFORMATION
This proxy statement/prospectus incorporates important business and financial information about Peoples Bank, Peoples United Financial and Peoples Mutual Holdings from other documents that are not included in, or delivered with, this proxy statement/prospectus, including the plan of conversion. This information is available to you without charge upon your written or oral request. You can obtain these documents relating to Peoples Bank, Peoples United Financial and Peoples Mutual Holdings by requesting them in writing or by telephone from:
Peoples Bank
Bridgeport Center
850 Main Street
Bridgeport, Connecticut 06604
Attention: Investor Relations
(203) 338-7228
If you would like to request documents, you must do so no later than [ ], 2007 in order to receive them before Peoples Banks special meeting of stockholders. You will not be charged for any of these documents that you request.
For additional information regarding where you can find information about Peoples Bank, Peoples United Financial and Peoples Mutual Holdings, please see the section entitled Where You Can Find Additional Information beginning on page [__] of this proxy statement/prospectus. A copy of the plan of conversion and its exhibits is available for inspection at each of Peoples Banks branches.
For information on submitting your proxy, please refer to the instructions on the enclosed proxy card.
Peoples Bank
Bridgeport Center
850 Main Street
Bridgeport, Connecticut 06604
(203) 338-7171
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON April 5, 2007
NOTICE IS HEREBY GIVEN that a special meeting of stockholders of Peoples Bank (the Special Meeting) will be held at The Klein Memorial Auditorium, 910 Fairfield Avenue, Bridgeport, Connecticut on Thursday, April 5, 2007 at 2:00 p.m., Eastern Time, to consider and vote upon:
1. | The amended and restated agreement and plan of conversion and reorganization (the plan of conversion) pursuant to which, among other things, Peoples United Financial, Inc. (Peoples United Financial) will offer for sale shares of its common stock and shares of common stock of Peoples Bank currently held by public stockholders will be exchanged for shares of Peoples United Financial. As a result, Peoples Mutual Holdings will no longer exist as a separate entity, and Peoples Bank will be a wholly-owned subsidiary of Peoples United Financial; |
2. | The establishment of The Peoples Community Foundation, a Delaware non-stock corporation dedicated to the promotion of charitable purposes within Peoples Banks market area, and the funding of the charitable foundation with 2,000,000 shares of Peoples United Financial common stock and $20.0 million in cash from the offering proceeds; and |
3. | Any other matters that may properly come before the Special Meeting or any adjournment or postponement thereof. (Note: Management is not aware of any such other matters at this time.) |
The following informational proposals relating to Peoples United Financials Certificate of Incorporation are also described in this proxy statement/prospectus, but, due to Office of Thrift Supervision regulations, are not subject to a vote of the Peoples Bank stockholders. Peoples Bank stockholders are not being asked to approve these informational proposals at the Special Meeting.
1. | Increasing the amount of authorized common stock from 450,000,000 shares of common stock in Peoples Banks Charter to 1.95 billion shares of common stock in Peoples United Financials Certificate of Incorporation; |
2. | Including provisions governing business combinations with interested stockholders in Peoples United Financials Certificate of Incorporation; |
3. | Precluding stockholder action without a meeting in Peoples United Financials Certificate of Incorporation; |
4. | Including provisions in Peoples United Financials Certificate of Incorporation that limit certain amendments to Peoples United Financials Bylaws; |
5. | Including provisions in Peoples United Financials Certificate of Incorporation that limit certain amendments to the Certificate of Incorporation; and |
6. | Including provisions in Peoples United Financials Certificate of Incorporation that limit stockholders ability to remove directors. |
The Board of Directors has fixed February 5, 2007 as the record date for the determination of stockholders entitled to notice of and to vote at the Special Meeting and at any adjournment or postponement thereof.
The following proxy statement/prospectus is a summary of information about Peoples Bank and the proposed conversion and offering. A copy of the plan of conversion is available for inspection at every Peoples Bank branch.
By Order of the Board of Directors, |
John A. Klein Chairman, Chief Executive Officer and President |
Bridgeport, Connecticut
February 23, 2007
Your prompt vote is very important. Failure to vote will have the same effect as voting against the plan of conversion and the establishment and funding of the charitable foundation. Without sufficient favorable votes, we cannot proceed with the conversion and offering and the establishment and funding of the charitable foundation.
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The Board of Directors recommends that you promptly vote the enclosed proxy card(s) in favor of the adoption of the plan of conversion and the establishment and funding of The Peoples Community Foundation. Proxy votes must be cast prior to the commencement of the Special Meeting. Voting a proxy card will not prevent you from voting in person at the Special Meeting.
We have mailed a proxy card with this proxy statement/prospectus to each of our registered stockholders as of the record date.
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You should rely only on the information contained in this proxy statement/prospectus or to which we have referred you. We have not authorized anyone to provide you with information that is different. This proxy statement/prospectus does not constitute an offer to sell, or the solicitation of an offer to buy, any of the securities offered hereby to any person in any jurisdiction in which such offer or solicitation would be unlawful. The affairs of Peoples Mutual Holdings, Peoples United Financial, Peoples Bank and their subsidiaries may change after the date of this proxy statement/prospectus. Delivery of this proxy statement/prospectus and the exchange of shares of Peoples United Financial common stock made hereunder does not mean otherwise.
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FORWARD-LOOKING STATEMENTS |
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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA |
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RECENT DEVELOPMENTS |
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NON-GAAP FINANCIAL MEASURES AND RECONCILIATION TO GAAP |
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HOW WE INTEND TO USE THE PROCEEDS FROM THE OFFERING |
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OUR POLICY REGARDING DIVIDENDS |
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MARKET FOR THE COMMON STOCK |
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BANK REGULATORY CAPITAL COMPLIANCE |
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CAPITALIZATION |
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PRO FORMA DATA |
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COMPARISON OF VALUATION AND PRO FORMA INFORMATION WITH AND WITHOUT THE CHARITABLE FOUNDATION |
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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BUSINESS OF PEOPLES BANK |
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BUSINESS OF PEOPLES UNITED FINANCIAL |
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REGULATION OF PEOPLES BANK AND PEOPLES UNITED FINANCIAL |
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TAXATION |
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PROPERTIES |
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LEGAL PROCEEDINGS |
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MANAGEMENT OF PEOPLES UNITED FINANCIAL |
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MANAGEMENT OF PEOPLES BANK |
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT |
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PROPOSED PURCHASES OF COMMON STOCK BY MANAGEMENT |
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COMPARISON OF STOCKHOLDERS RIGHTS FOR EXISTING PEOPLES BANK STOCKHOLDERS |
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RESTRICTIONS ON ACQUISITION OF PEOPLES UNITED FINANCIAL AND PEOPLES BANK |
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PROPOSAL 2 THE ESTABLISHMENT AND FUNDING OF THE PEOPLES COMMUNITY FOUNDATION |
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INFORMATIONAL PROPOSALS RELATED TO THE CERTIFICATE OF INCORPORATION OF PEOPLES UNITED FINANCIAL, INC. |
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INFORMATIONAL PROPOSAL 1 INCREASE IN AUTHORIZED COMMON STOCK |
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INFORMATIONAL PROPOSAL 2 PROVISIONS GOVERNING BUSINESS COMBINATIONS WITH INTERESTED
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INFORMATIONAL PROPOSAL 3 PROVISIONS PRECLUDING STOCKHOLDER ACTION WITHOUT A MEETING |
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INFORMATIONAL PROPOSAL 4 PROVISIONS LIMITING CERTAIN AMENDMENTS TO BYLAWS |
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INFORMATIONAL PROPOSAL 6 PROVISIONS LIMITING STOCKHOLDERS ABILITY TO REMOVE DIRECTORS |
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FOR STOCKHOLDERS OF PEOPLES BANK
You should read this document for more information about the conversion and offering. The plan of conversion described herein has been conditionally approved by the Office of Thrift Supervision.
The Proxy Vote
Q. | What are the proposals that our stockholders are being asked to approve? |
A. | Peoples Bank stockholders as of February 5, 2007 are asked to vote on the plan of conversion. Under the plan of conversion, Peoples Mutual Holdings will convert from the mutual holding company form to a stock holding company, and as part of such conversion, Peoples United Financial will offer for sale, in the form of shares of its common stock, Peoples Mutual Holdings 57.7% ownership interest in Peoples Bank. In addition to the shares of common stock to be issued to those who purchase shares in the offering, public stockholders of Peoples Bank as of the completion of the conversion will receive shares of Peoples United Financial common stock in exchange for their existing shares. |
Peoples Bank stockholders as of February 5, 2007 are also asked to vote on the establishment and funding of The Peoples Community Foundation. As part of the conversion and offering, we will fund the charitable foundation with 2,000,000 shares of Peoples United Financial common stock and $20.0 million in cash from the offering proceeds.
In addition, informational proposals relating to Peoples United Financials Certificate of Incorporation are also described in this proxy statement/prospectus, but, due to Office of Thrift Supervision regulations, are not subject to a vote of the Peoples Bank stockholders. Peoples Bank stockholders are not being asked to approve these informational proposals at the Special Meeting.
Q. | What is the conversion? |
A. | Peoples Bank and its parent, Peoples Mutual Holdings, are converting from a mutual holding company structure to a fully-public ownership structure. Currently, Peoples Mutual Holdings owns 57.7% of Peoples Banks common stock. The remaining 42.3% of Peoples Banks common stock is owned by public stockholders. As a result of the conversion, our newly formed company, called Peoples United Financial, Inc., will become the parent of Peoples Bank. |
Shares of common stock of Peoples United Financial, representing the 57.7% ownership interest of Peoples Mutual Holdings in Peoples Bank, are being offered for sale to eligible depositors and to the public. At the completion of the conversion and offering, current public stockholders of Peoples Bank will exchange their shares of Peoples Bank common stock for shares of common stock of Peoples United Financial.
After the conversion and offering are completed, Peoples Bank will become a wholly-owned subsidiary of Peoples United Financial, and 100% of the common stock of Peoples United Financial will be owned by public stockholders. As a result of the conversion and offering, Peoples Mutual Holdings will cease to exist.
See The Conversion and Offering beginning on page [ ] of this proxy statement/prospectus, for more information about the conversion.
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Q. | What are the reasons for the conversion and offering? |
A. | The conversion and offering are intended to provide us with significantly greater access to capital than is available to us under the mutual holding company structure and to significantly increase the liquidity of our common stock. In addition, the stock holding company structure will provide us with more flexibility in structuring mergers and acquisitions. The net proceeds raised in the offering will allow us to: |
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finance de novo expansion and support organic growth both inside and outside of the state of Connecticut; |
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acquire other financial institutions, branches of other financial institutions or other businesses related to banking (although there is no specific agreement with any institution or business at this time); |
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increase lending to support continued growth in our commercial banking loan portfolios; |
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establish and fund a charitable foundation to benefit the communities we serve; and |
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use the additional capital for other general corporate purposes. |
Q. | What is The Peoples Community Foundation? |
A. | To continue our long-standing commitment to our local communities, we intend to establish a charitable foundation, The Peoples Community Foundation, to benefit the communities that we serve. We will fund the charitable foundation with 2,000,000 shares of Peoples United Financial common stock and $20.0 million in cash from the offering proceeds. The Peoples Community Foundation will make grants and donations to non-profit and community groups and projects within our market areas. We believe the charitable foundation will enhance the long-term value of our banking franchise. |
Q. | Why should I vote? |
A. | You are not required to vote, but your vote is very important. In order for us to implement the plan of conversion and establish and fund the charitable foundation, we must receive the affirmative vote of the holders of a majority of the outstanding shares of Peoples Bank common stock entitled to vote at the Special Meeting, excluding shares held by Peoples Mutual Holdings. YOUR BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE PLAN OF CONVERSION AND THE ESTABLISHMENT AND FUNDING OF THE CHARITABLE FOUNDATION. |
Q. | What happens if I dont vote? |
A. | Your prompt vote is very important. Not voting will have the same effect as voting Against each of the proposals. Without sufficient favorable votes for the conversion and charitable foundation, we will not proceed with the conversion and offering or establish and fund the charitable foundation. |
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Q. | How do I vote? |
A. | You should sign your proxy card and return it in the enclosed proxy reply envelope. Alternatively, you may vote by Internet or telephone by following the simple instructions on the proxy card. Each proxy card has a unique number to be entered if you choose to vote by Internet or telephone. PLEASE VOTE PROMPTLY. NOT VOTING HAS THE SAME EFFECT AS VOTING AGAINST THE PROPOSALS. |
Q. | If my shares are held in street name, will my broker automatically vote on my behalf? |
A. | No. Your broker will not be able to vote your shares without instructions from you. You should instruct your broker to vote your shares, using the directions that your broker provides to you. |
Q. | What if I do not give voting instructions to my broker? |
A. | If you do not instruct your broker to vote your shares by proxy, each unvoted share will have the same effect as a vote against each of the proposals. We urge you to vote your proxy card. If you dont have your proxy card, contact your broker. |
The Exchange
Q. | I own Peoples Bank common stock. What will happen to my shares? |
A. | Effective upon the date of completion of the conversion and offering, expected to be in April 2007, your shares of Peoples Bank common stock will be canceled and exchanged for new shares of Peoples United Financial common stock. |
Q. | How many shares of Peoples United Financial stock will I receive in the share exchange? |
A. | You will receive between 1.6712 and 2.2611 shares (subject to increase to 2.6003 shares) of Peoples United Financial common stock for each share of Peoples Bank common stock you own on the date of the completion of the conversion and offering. You will receive cash for the value of any fractional share. For example, if you own 100 shares of Peoples Bank common stock, and the exchange ratio is 1.9662, after the conversion you will receive 196 shares of Peoples United Financial common stock and $12.40 in cash, the value of the fractional share, based on the $20.00 per share offering price. Stockholders who hold shares in street-name at a brokerage firm will receive these funds in their brokerage account. Stockholders with stock certificates or shares held in book-entry form will receive checks. |
The actual number of shares that you receive will depend on the exchange ratio, which will depend on the percentage of Peoples Bank common stock held by the public at the completion of the conversion, the final independent appraisal of Peoples United Financial and on the number of shares of Peoples United Financial common stock sold in the offering. It will not depend on the market price of Peoples Bank common stock. See The Conversion and Offering The Share Exchange of Peoples Bank Common Stock for Peoples United Financial Common Stock beginning on page [ ] of this proxy statement/prospectus for a discussion of the exchange ratio.
Q. | How will my existing Peoples Bank shares be exchanged? |
A. |
If your shares of Peoples Bank common stock are held in street name at a brokerage firm or are held in book-entry form by our transfer agent, Mellon Investor Services LLC, promptly upon |
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completion of the conversion, your shares will be automatically exchanged within your account, without any action on your part. The number of shares of Peoples United Financial common stock that you own will be reflected on your brokerage statement, or, if your shares are held in book-entry form, Mellon Investor Services LLC will mail you an account statement indicating the number of shares of Peoples United Financial common stock held by you. |
If you have possession of a stock certificate, shortly after completion of the conversion, you will receive a transmittal form with instructions on how to surrender your Peoples Bank stock certificate to our transfer agent, acting as exchange agent. Shares of Peoples United Financial common stock issued to you in the exchange will be issued in book-entry form, meaning that you will not receive a stock certificate. Within three business days after the exchange agent receives your properly completed and signed transmittal form, accompanied by your Peoples Bank stock certificate, our transfer agent, Mellon Investor Services LLC, will mail you an account statement indicating the number of shares of Peoples United Financial common stock held in book-entry by Mellon Investor Services LLC on your behalf. The account statement will be accompanied by information telling you how to obtain a stock certificate, and how to transfer your shares to a brokerage account. Please do not send in your stock certificate until you receive a transmittal form and instructions.
Further Questions?
For answers to other questions, please read this proxy statement/prospectus. Questions about voting may be directed to our proxy information agent, Georgeson Inc. at 1-866-277-1186, Monday through Friday from 8:00 a.m. to 8:00 p.m., Eastern Time, Saturday from 10:00 a.m. to 4:00 p.m., Eastern Time and Sunday from 11:00 a.m. to 4:00 p.m., Eastern Time.
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The following summary highlights the material information from this proxy statement/prospectus and may not contain all the information that is important to you. You should read this entire document carefully, including the sections entitled Risk Factors and The Conversion and Offering and the consolidated financial statements and the notes to the consolidated financial statements, before making a decision to invest in our common stock.
What This Document Is About
The Board of Directors of Peoples Bank and the Board of Trustees of Peoples Mutual Holdings have adopted a plan of conversion pursuant to which Peoples Bank will reorganize from a mutual holding company structure to a stock form holding company structure. As part of the conversion, Peoples Bank formed Peoples United Financial. Public stockholders of Peoples Bank will receive shares in Peoples United Financial in exchange for their shares of Peoples Bank common stock based on an exchange ratio. This conversion to a stock holding company structure also includes the offering by Peoples United Financial of shares of its common stock to eligible depositors of Peoples Bank in a subscription offering and, if necessary, to the public in a syndicated offering or an underwritten public offering. Following the conversion and offering, Peoples Mutual Holdings will no longer exist and Peoples United Financial will be the parent company of Peoples Bank.
In connection with the conversion, we intend to contribute 2,000,000 shares of Peoples United Financial common stock and $20.0 million in cash from the offering proceeds to The Peoples Community Foundation, a charitable foundation to be established in connection with the conversion and offering.
The conversion and offering and the establishment and funding of the charitable foundation cannot be completed unless the stockholders of Peoples Bank approve the plan of conversion. Peoples Banks stockholders will vote on the plan of conversion and the establishment and funding of the charitable foundation at Peoples Banks special meeting. This document is the proxy statement used by Peoples Banks Board of Directors to solicit proxies for the special meeting. It is also the prospectus of Peoples United Financial regarding the shares of Peoples United Financial common stock to be issued to Peoples Bank stockholders in the share exchange. This document does not serve as the prospectus relating to the offering by Peoples United Financial of its shares of common stock in the subscription offering and any syndicated offering, both of which will be made pursuant to a separate prospectus.
In addition, informational proposals relating to Peoples United Financials Certificate of Incorporation are also described in this proxy statement/prospectus, but, due to Office of Thrift Supervision regulations, are not subject to a vote of Peoples Bank stockholders. Peoples Bank stockholders are not being asked to approve these informational proposals at the Special Meeting.
The Peoples Bank Special Meeting
Date, Time and Place. Peoples Bank will hold its special meeting of stockholders to consider and vote on the plan of conversion and the establishment and funding of the charitable foundation at The Klein Memorial Auditorium, 910 Fairfield Avenue, Bridgeport, Connecticut on April 5, 2007 at 2:00 p.m., Eastern Time.
Record Date. The record date for stockholders entitled to vote at the special meeting of stockholders is February 5, 2007. [ ] shares of Peoples Bank common stock were outstanding on the record date and entitled to vote at the special meeting.
The Proposals. Stockholders will be voting on the following proposals at the special meeting:
1. | Approval of the plan of conversion; |
2. | The establishment and funding of The Peoples Community Foundation; and |
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3. | Any other matters that may properly come before the special meeting or any adjournment or postponement thereof. |
The Informational Proposals. The provisions of Peoples United Financials Certificate of Incorporation which are summarized as informational proposals 1 through 6 were approved as part of the process in which the Board of Directors of Peoples Bank approved the plan of conversion. These proposals are informational in nature only, because the Office of Thrift Supervisions regulations governing mutual-to-stock conversions do not provide for votes on matters other than the plan of conversion and the establishment and funding of the charitable foundation. Peoples Bank stockholders are not being asked to approve these informational proposals at the Special Meeting.
Vote Required. The affirmative vote of the holders of a majority of the outstanding shares of Peoples Bank common stock entitled to vote at the special meeting and the affirmative vote of the holders of a majority of the outstanding shares of Peoples Bank common stock, excluding shares held by Peoples Mutual Holdings, is required to approve the plan of conversion and the establishment and funding of The Peoples Community Foundation. Under Office of Thrift Supervision regulations and the plan of conversion, each of these two proposals are also subject to the approval of the Office of Thrift Supervision and the affirmative vote of a majority of the total eligible votes of the depositors of Peoples Bank. If there are insufficient votes at the time of the special meeting of stockholders, the special meeting may be adjourned by Peoples Banks Board of Directors to permit further solicitation of proxies.
As of the record date, the directors and executive officers of Peoples Bank and their affiliates beneficially owned [ ]shares, or approximately [ ]% of the outstanding shares of Peoples Bank common stock and Peoples Mutual Holdings owned [ ] shares, or approximately [ ]% of the outstanding shares of Peoples Bank common stock. Peoples Mutual Holdings is expected to vote all of its shares FOR the plan of conversion and the establishment and funding of the charitable foundation.
Peoples Banks Board of Directors unanimously recommends that Peoples Bank stockholders vote FOR the plan of conversion and the establishment and funding of The Peoples Community Foundation.
The Companies
Peoples United Financial, Inc. Peoples United Financial is a newly-formed Delaware corporation and currently a wholly-owned subsidiary of Peoples Bank. Peoples United Financial was formed for the purpose of effectuating the conversion and offering described in this proxy statement/prospectus. In connection with those transactions, Peoples United Financial is registering shares of its common stock with the Securities and Exchange Commission and will be selling shares of its common stock to new stockholders and, as described in this proxy statement/prospectus, issuing shares of its common stock to existing stockholders of Peoples Bank in exchange for their shares of Peoples Bank common stock. Peoples United Financial currently does not have significant assets, but as a result of the conversion and offering, it will become the holding company of Peoples Bank.
Peoples Bank. Peoples Bank is a federal stock savings bank and as a result of the conversion and offering will become the wholly-owned subsidiary of Peoples United Financial. Peoples Bank was organized in 1842 as a Connecticut mutual savings bank. In 1988, Peoples Bank reorganized into the mutual holding company structure, converted to a Connecticut-chartered stock savings bank and became the majority-owned subsidiary of Peoples Mutual Holdings, a Connecticut-chartered mutual holding company. Effective August 18, 2006, Peoples Bank converted to a federal stock savings bank regulated by the Office of Thrift Supervision. At September 30, 2006, Peoples Bank had total assets of $10.6 billion, total deposits of $9.0 billion and total stockholders equity of $1.4 billion.
Peoples Mutual Holdings . Peoples Mutual Holdings is the federally-chartered mutual holding company of Peoples Bank. Its principal business is to own a majority of Peoples Banks outstanding shares of common stock. As of September 30, 2006, Peoples Mutual Holdings owned 82,012,500 shares, equivalent to approximately 57.7%, of Peoples Bank common stock. At September 30, 2006, Peoples Mutual Holdings had $8.5 million of net assets, excluding the shares of Peoples Bank. As part of the conversion, Peoples Mutual Holdings will cease to exist as a separate entity.
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Our Corporate Information
The executive offices of Peoples Bank, Peoples Mutual Holdings and Peoples United Financial are located at 850 Main Street, Bridgeport, Connecticut 06604. The telephone number at this address is (203) 338-7171.
Reasons For The Conversion And Offering
The conversion and offering are intended to provide us with substantially greater access to capital than is currently available to us under the mutual holding company structure and are expected to significantly increase the liquidity of our common stock. In addition, the stock holding company structure will provide us with more flexibility in structuring mergers and acquisitions. The net proceeds raised in the offering will allow us and Peoples Bank to:
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finance de novo expansion and support organic growth both inside and outside of the state of Connecticut; |
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acquire other financial institutions, businesses related to banking or branches, although there is no specific agreement with any institution or business at this time; |
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increase lending to support continued growth in our commercial banking loan portfolios; |
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form a charitable foundation to benefit the communities we serve; and |
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use the additional capital for other general corporate purposes. |
See How We Intend to Use the Proceeds from the Offering for a detailed description of how we plan to use the net proceeds we raise in the offering.
After considering the relative merits of the conversion and offering, as well as applicable fiduciary duties, the Board of Trustees of Peoples Mutual Holdings and the Board of Directors of Peoples Bank approved the plan of conversion as being in the best interests of each such institution, the communities they serve and the depositors, stockholders and employees of Peoples Bank. The completion of the conversion and offering is subject to the approval of stockholders and depositors of Peoples Bank who are being asked to vote on the plan of conversion.
Terms Of The Conversion And Offering
We are converting from the mutual holding company structure, where Peoples Bank is 42.3% owned by public stockholders, to a stock holding company, which will be 100% owned by public stockholders. This is commonly referred to as a second-step conversion. As part of the conversion, Peoples Mutual Holdings will convert into a federal stock savings bank, which will merge with and into Peoples Bank, with Peoples Bank as the surviving entity. As a result, Peoples Mutual Holdings will cease to exist as a separate entity. Voting rights in Peoples United Financial will be vested solely in its public stockholders immediately following the conversion.
In connection with the conversion, the shares of common stock of Peoples Bank owned by Peoples Mutual Holdings will be canceled and new shares of common stock representing the 57.7% ownership interest of Peoples Mutual Holdings will be offered for sale by Peoples United Financial in the offering. In addition, the net assets of Peoples Mutual Holdings will be added to Peoples Bank as a capital contribution. At September 30, 2006, Peoples Mutual Holdings net assets, excluding its ownership of shares of Peoples Bank common stock, totaled $8.5 million.
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At the conclusion of the conversion and offering, existing public stockholders of Peoples Bank will receive shares of common stock of Peoples United Financial for each share of Peoples Bank common stock they own at that date, based on an exchange ratio as described in The Conversion and OfferingThe Share Exchange of Peoples Bank Common Stock for Peoples United Financial Common Stock. As a result, Peoples Banks existing public stockholders will own approximately the same percentage of Peoples United Financial common stock as they owned of Peoples Bank common stock immediately prior to the conversion. The exchange ratio will be determined as of the date of completion of the conversion and offering and will be based on the percentage of Peoples Bank common stock held by the public prior to the conversion, the final independent appraisal of Peoples United Financial common stock prepared by RP Financial, LC, an appraisal firm experienced in appraisals of financial institutions, and the number of shares of common stock sold in the offering. The exchange ratio will be between 1.6712 and 2.2611 shares (subject to increase to 2.6003 shares as a result of market demand, regulatory considerations or changes in financial markets) of Peoples United Financial common stock per share of Peoples Bank common stock.
Between 137,062,500 and 185,437,500 shares of Peoples United Financial common stock are being offered to our depositors and to the public in subscription and syndicated offerings (which we refer to in this document collectively as the offering). We may increase the maximum number of shares that we sell in the offering by up to 15% to 213,253,125 shares as a result of market demand, regulatory considerations or changes in financial markets. The offering price is $20.00 per share.
The shares of common stock are being offered on a priority basis to depositors of Peoples Bank in a subscription offering. Ryan Beck & Co., Inc., our financial advisor and selling agent in connection with the subscription offering, will use its best efforts to assist us in selling the common stock in the subscription offering. Ryan Beck & Co., Inc. is not obligated to purchase any shares of common stock in the subscription offering.
We are also offering for sale to the general public in a syndicated offering through a syndicate of selected dealers shares of Peoples United Financial common stock not subscribed for by our depositors in the subscription offering. We may begin the syndicated offering at any time following the commencement of the subscription offering. Morgan Stanley & Co. Incorporated is acting as sole book-running manager and Keefe, Bruyette & Woods, Inc., Lehman Brothers and Ryan Beck & Co., Inc. are acting as joint lead managers for the syndicated offering, which is also being conducted on a best efforts basis. None of Morgan Stanley & Co. Incorporated, Ryan Beck & Co., Inc. or any other member of the syndicate is required to purchase any shares in the syndicated offering. Alternatively, we may sell remaining shares in an underwritten public offering, which would be conducted on a firm commitment basis.
In addition, in connection with and immediately following the conversion, we intend to contribute 2,000,000 shares of Peoples United Financial common stock and $20.0 million in cash from the offering proceeds to The Peoples Community Foundation, a charitable foundation to be established in connection with the conversion and offering. The shares of common stock contributed to the charitable foundation will be in addition to the shares being offered for sale. For a further discussion of the charitable foundation, see Proposal 2 The Establishment and Funding of The Peoples Community Foundation.
8
This chart shows our structure before the conversion and offering:
This chart shows our new structure after the conversion and offering:
9
How We Determined The Offering Range And The Exchange Ratio
The offering range and the exchange ratio are based on an independent appraisal of the market value of the common stock to be offered both in the offering and in exchange for shares of Peoples Bank common stock. RP Financial has advised us that, as of January 18, 2007, the estimated pro forma market value of our common stock, including offering shares, exchange shares and shares issued to the charitable foundation, ranges from a minimum of $4.791 billion to a maximum of $6.468 billion, with a midpoint of $5.630 billion. Based on this valuation range, the percentage of Peoples Bank common stock owned by Peoples Mutual Holdings, the shares issued to the charitable foundation and the $20.00 price per share, the Board of Directors of Peoples Bank and the Board of Trustees of Peoples Mutual Holdings determined to offer shares of Peoples United Financial common stock ranging from a minimum of 137,062,500 shares to a maximum of 185,437,500 shares, with a midpoint of 161,250,000 shares. The exchange ratio ranges from a minimum of 1.6712 to 2.2611 shares of Peoples United Financial common stock per share of Peoples Bank common stock. Under certain circumstances, the pro forma market value can be adjusted upward to reflect changes in market conditions, and, at the adjusted maximum, the estimated pro forma market value of Peoples United Financials common stock would be $7.432 billion, the number of shares offered would equal 213,253,125 shares and the exchange ratio would be 2.6003.
The independent appraisal was based in part on our financial condition and results of operations, the pro forma impact of the additional capital raised by the sale of common stock in the offering, and an analysis of a peer group of companies that RP Financial considered comparable to us. RP Financial also considered that we intend to contribute cash and issue shares of Peoples United Financial common stock to The Peoples Community Foundation, a charitable foundation that will be established in connection with the conversion. The intended contribution of cash and shares of common stock to the charitable foundation has the effect of reducing the number of shares that may be offered in the offering. See Comparison of Valuation and Pro Forma Information With and Without the Charitable Foundation . RP Financials independent valuation will be updated before we complete our offering.
The following table presents a summary of selected pricing ratios for the companies comprising the peer group used by RP Financial in its independent appraisal report dated January 18, 2007 and the pro forma pricing ratios for us, as calculated in the table on page [ ] in the section of this proxy statement/prospectus entitled Pro Forma Data . Compared to the median pricing of the peer group, our pro forma pricing ratios at the midpoint of the offering range indicated a premium of 88% on a price-to-earnings basis and discounts of 34% on a price-to-book value basis and 45% on a price-to-tangible book value basis. The estimated appraised value and the resulting premiums and discounts took into consideration the potential financial impact of the conversion and offering and RP Financials analysis of the results of operations and financial condition of Peoples United Financial compared to the peer group.
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Price-to-
earnings
|
Price-to-
book value
|
Price-to-
tangible book
|
||||||
Peoples United Financial (pro forma) ( 2 ) : |
||||||||
Minimum of offering range |
27.27x | 128.12 | % | 131.84 | % | |||
Midpoint of offering range |
30.00x | 135.50 | % | 138.99 | % | |||
Maximum of offering range |
32.61x | 141.44 | % | 144.82 | % | |||
Maximum of offering range, as adjusted |
35.71x | 147.17 | % | 150.26 | % | |||
Valuation of peer group companies as of January 18, 2007 ( 3) : |
||||||||
Average |
17.53x | 209.12 | % | 269.15 | % | |||
Median |
15.96x | 205.31 | % | 250.45 | % |
(1) | Multiples calculated by RP Financial in the independent appraisal are based on an estimate of core, or recurring, earnings for the twelve months ended December 31, 2006, total pro forma outstanding shares of common stock, including all shares owned by our employee stock ownership plan, whether or not allocated to participants, and including shares issued to the charitable foundation, and equal 24.86x, 27.75x, 30.38x and 33.10x, respectively, at the minimum, midpoint, maximum and adjusted maximum of the offering range. Because this is a different method than used by us in calculating the numbers included in this table and in the pro forma information included under Pro Forma Data , the pro forma price-to-earnings multiples in the table do not correspond to the multiples in the independent appraisal. See note 2 to the pro forma information included under Pro Forma Data for more information on our treatment of shares owned by our employee stock ownership plan for purposes of this calculation. |
(2) | Based on Peoples Banks financial data as of and for the nine months ended September 30, 2006. Price-to-earnings multiples for Peoples United Financial are shown on an annualized basis. |
(3) | Reflects earnings for the most recent 12-month period for which data were publicly available. |
The independent appraisal is not necessarily indicative of post-offering trading value. You should not assume or expect that the valuation of Peoples United Financial as indicated above means that the common stock will trade at or above the $20.00 purchase price after the offering is completed.
On [ ], 2007, we received authorization from the Office of Thrift Supervision to conduct the offering. The independent appraisal must be updated before we can complete the offering. The updated appraisal will be subject to the further approval of the Office of Thrift Supervision.
11
After-Market Performance Information Provided By The Independent Appraiser
The following table, prepared by our independent appraiser, presents for all second-step conversions that began trading from January 1, 2004 to January 18, 2007, the percentage change in the trading price from the initial trading date of the offering to the dates shown in the table. The table also presents the average and median trading prices and percentage change in trading prices for the same dates. This information relates to stock performance experienced by other companies that may have no similarities to us with regard to market capitalization, offering size, earnings quality and growth potential, among other factors. Most of the institutions listed in the table are significantly smaller than we are in terms of asset size. In addition, gross proceeds raised in most of the offerings listed in the table are significantly less than the amount of gross proceeds we expect to raise in the offering. Also, two of the three largest offerings listed in the table involved a simultaneous acquisition of another financial institution.
The table is not intended to indicate how our common stock may perform. Data represented in the table reflects a small number of transactions and is not indicative of general stock market performance trends or of price performance trends of companies that undergo second-step conversions. Furthermore, this table presents only short-term price performance and may not be indicative of the longer-term stock price performance of these companies. There can be no assurance that our stock price will appreciate or that our stock price will not trade below $20.00 per share. The movement of any particular companys stock price is subject to various factors, including, but not limited to, the amount of proceeds a company raises, the companys historical and anticipated operating results, the nature and quality of the companys assets, the companys market area and the quality of management and managements ability to deploy proceeds (such as through loans and investments, the acquisition of other financial institutions or other businesses, the payment of dividends and common stock repurchases). In addition, stock prices may be affected by general market and economic conditions, the interest rate environment, the market for financial institutions and merger or takeover transactions and the presence of professional and other investors who purchase stock on speculation, as well as other unforeseeable events not in the control of management. Before you make an investment decision, please carefully read this proxy statement/prospectus, including Risk Factors .
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After Market Trading Activity
Second Step Offerings
Completed Closing Dates between January 1, 2004 and January 18, 2007
Price Performance from Initial Trading Date | |||||||||||||||||
Transaction |
Closing
Date |
Gross
Proceeds |
1 Day | 1 Week | 1 Month |
Through
January 18, 2007 |
|||||||||||
(In millions) | |||||||||||||||||
Osage Bancshares, Inc. |
1/18/07 | $ | 25.1 | -0.5 | % | N/A | N/A | -0.5 | % | ||||||||
New Westfield Financial, Inc. |
1/4/07 | $ | 184.0 | 7.0 | % | 7.5 | % | N/A | 8.8 | % | |||||||
Citizens Community Bancorp, Inc. |
11/1/06 | $ | 52.9 | -2.5 | % | -1.0 | % | -3.3 | % | -2.9 | % | ||||||
Liberty Bancorp, Inc. |
7/24/06 | $ | 28.1 | 2.5 | % | 1.0 | % | 1.5 | % | 5.5 | % | ||||||
First Clover Leaf Financial Corp. (1) |
7/11/06 | $ | 41.7 | 3.9 | % | 6.0 | % | 11.2 | % | 15.0 | % | ||||||
Monadnock Bancorp, Inc. |
6/29/06 | $ | 5.7 | 0.0 | % | -5.0 | % | -13.8 | % | -16.3 | % | ||||||
NEBS Bancshares, Inc. |
12/29/05 | $ | 30.8 | 6.6 | % | 7.0 | % | 7.0 | % | 31.0 | % | ||||||
American Bancorp, Inc. |
10/6/05 | $ | 99.2 | 1.6 | % | -2.5 | % | 1.6 | % | 17.7 | % | ||||||
Hudson City Bancorp, Inc. |
6/7/05 | $ | 3,929.8 | 9.6 | % | 10.8 | % | 15.9 | % | 39.7 | % | ||||||
First Federal of Northern Michigan Bancorp, Inc. |
4/4/05 | $ | 17.0 | -5.1 | % | -8.0 | % | -16.0 | % | -8.5 | % | ||||||
Rome Bancorp, Inc. |
3/31/05 | $ | 59.0 | 0.5 | % | -2.5 | % | -5.6 | % | 24.6 | % | ||||||
Roebling Financial Corp. |
10/1/04 | $ | 9.1 | -1.0 | % | -0.5 | % | -8.0 | % | 22.5 | % | ||||||
DSA Financial Corporation |
7/30/04 | $ | 8.5 | -2.0 | % | -5.0 | % | -7.0 | % | 30.0 | % | ||||||
Partners Trust Financial Group, Inc. (1) |
7/15/04 | $ | 148.8 | -0.1 | % | -0.2 | % | -1.9 | % | 13.5 | % | ||||||
Synergy Financial Group, Inc. |
1/21/04 | $ | 70.4 | 8.1 | % | 8.0 | % | 7.9 | % | 61.8 | % | ||||||
Provident Bancorp, Inc. (1) |
1/15/04 | $ | 195.7 | 15.0 | % | 11.5 | % | 15.1 | % | 45.4 | % | ||||||
Average |
2.7 | % | 1.8 | % | 0.3 | % | 18.0 | % | |||||||||
Median |
1.1 | % | -0.2 | % | 0.2 | % | 16.4 | % |
(1) | Included a simultaneous acquisition. |
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Public Stockholders Will Receive Shares Through The Exchange Of Peoples Bank Common Stock
If you are currently a stockholder of Peoples Bank, your shares as of the date of completion of the conversion and offering will be canceled and exchanged for new shares of Peoples United Financial common stock. The number of shares you receive will be based on an exchange ratio which will be determined as of the date of completion of the conversion and offering and will be based on the percentage of Peoples Bank common stock held by the public prior to the conversion, the final independent appraisal of Peoples United Financial common stock prepared by RP Financial and the number of shares of common stock sold in the offering. No fractional shares will be issued. For each fractional share that would otherwise be issued, stockholders will receive an amount equal to the product obtained by multiplying the fractional share interest by the $20.00 per share purchase price. The exchange ratio will ensure that existing public stockholders of Peoples Bank common stock will own approximately the same percentage of Peoples United Financial common stock after the conversion and offering as they owned of Peoples Bank common stock immediately prior to completion of the conversion and offering, exclusive of the effect of their purchase of additional shares in the offering and the receipt of cash in lieu of fractional shares. The exchange ratio will not depend on the market price of Peoples Bank common stock.
The following table shows how many shares a hypothetical owner of Peoples Bank common stock would receive in the share exchange, based on the number of shares sold in the offering.
Shares to be sold in the offering |
Shares to be exchanged for shares of Peoples Bank common stock |
Shares to be issued to the foundation |
Total shares
of common stock to be outstanding after the conversion |
Exchange
ratio |
Equivalent
per share current market price (1) |
Shares that
would be exchanged per 100 shares of Peoples Bank common stock |
||||||||||||||||||
Amount | Percent | Amount | Percent | Amount | Percent | |||||||||||||||||||
Minimum |
137,062,500 | 57.22 | % | 100,491,584 | 41.95 | % | 2,000,000 | 0.83 | % | 239,554,084 | 1.6712 | $ | 33.42 | 167 | ||||||||||
Midpoint |
161,250,000 | 57.29 | % | 118,225,393 | 42.00 | % | 2,000,000 | 0.71 | % | 281,475,393 | 1.9662 | $ | 39.32 | 196 | ||||||||||
Maximum |
185,437,500 | 57.34 | % | 135,959,202 | 42.04 | % | 2,000,000 | 0.62 | % | 323,396,702 | 2.2611 | $ | 45.22 | 226 | ||||||||||
Maximum, as adjusted |
213,253,125 | 57.39 | % | 156,353,083 | 42.07 | % | 2,000,000 | 0.54 | % | 371,606,208 | 2.6003 | $ | 52.01 | 260 |
(1) | Represents the value of shares of Peoples United Financial common stock and cash in lieu of fractional shares received in the share exchange by a holder of one share of Peoples Bank common stock at the exchange ratio, assuming a market price of $20.00 per share. |
At the midpoint shown in the preceding table, a stockholder owning 100 shares of Peoples Bank common stock would receive 196 shares of Peoples United Financial common stock plus $12.40 in cash, which is equivalent to a value of $39.32 per share of Peoples Bank common stock based on the $20.00 per share offering price of Peoples United Financial common stock. At the maximum shown in the preceding table, a stockholder owning 100 shares of Peoples Bank common stock would receive 226 shares of Peoples United Financial common stock plus $2.20 in cash, which is equivalent to a value of $45.22 per share of Peoples Bank common stock based on the $20.00 per share offering price of Peoples United Financial common stock. Based on the $[ ] per share closing price of Peoples Bank common stock as of the last trading day prior to the date of this proxy/prospectus, unless at least [ ] shares of Peoples United Financial common stock are sold in the offering (close to the maximum of the offering range), the initial value of the Peoples United Financial common stock you receive in the share exchange would be less than the market value of the Peoples Bank common stock you currently own. See Risk
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FactorsThe Market Value of Peoples United Financial Common Stock Received in the Share Exchange May Be Less than the Market Value of Peoples Bank Common Stock Exchanged.
We also will convert options previously awarded under the Peoples Bank 1998 Long-Term Incentive Plan into options to purchase Peoples United Financial common stock. At September 30, 2006, there were outstanding options to purchase 1,435,055 shares of Peoples Bank common stock. The number of outstanding options and related per share exercise prices will be adjusted based on the exchange ratio. The aggregate exercise price, term and vesting period of the outstanding options will remain unchanged. If any options are exercised before we complete the offering, the number of shares of Peoples Bank common stock outstanding will increase and the exchange ratio could be adjusted. If all currently outstanding options are exercised, stockholders will experience dilution of approximately 1.00% in their ownership interest in Peoples Bank common stock.
Effect Of The Conversion and Offering On Peoples Bank Stockholders
The conversion and offering will increase the stockholders equity per share and earnings per share of the current stockholders of Peoples Bank, as adjusted for the exchange offer. The following table compares historical information for Peoples Bank with similar information on a pro forma and per equivalent Peoples United Financial share basis. The information listed as Pro Forma Per One Share of Peoples Bank Common Stock was obtained by multiplying the Pro Forma Per One Share of Peoples United Financial Common Stock amounts by the exchange ratio indicated in the table.
Historical
Per One Share of Peoples Bank Common Stock |
Pro Forma
Per One Share of Peoples United Financial Common Stock (1) |
Exchange
Ratio |
Pro Forma
Per One Share of Peoples Bank Common Stock (2) |
||||||||
Stockholders equity at September 30, 2006: |
|||||||||||
Sale of 137,062,500 shares |
$ | 9.51 | $ | 15.61 | 1.6712 | $ | 26.09 | ||||
Sale of 161,250,000 shares |
9.51 | 14.76 | 1.9662 | 29.02 | |||||||
Sale of 185,437,500 shares |
9.51 | 14.14 | 2.2611 | 31.97 | |||||||
Sale of 213,253,125 shares |
9.51 | 13.59 | 2.6003 | 35.34 | |||||||
Earnings for the nine months ended September 30, 2006: |
|||||||||||
Sale of 137,062,500 shares |
$ | 0.59 | $ | 0.55 | 1.6712 | $ | 0.92 | ||||
Sale of 161,250,000 shares |
0.59 | 0.50 | 1.9662 | 0.98 | |||||||
Sale of 185,437,500 shares |
0.59 | 0.46 | 2.2611 | 1.04 | |||||||
Sale of 213,253,125 shares |
0.59 | 0.42 | 2.6003 | 1.09 | |||||||
Market price (3): |
|||||||||||
Sale of 137,062,500 shares |
$ | 37.39 | $ | 20.00 | 1.6712 | $ | 33.42 | ||||
Sale of 161,250,000 shares |
37.39 | 20.00 | 1.9662 | 39.32 | |||||||
Sale of 185,437,500 shares |
37.39 | 20.00 | 2.2611 | 45.22 | |||||||
Sale of 213,253,125 shares |
37.39 | 20.00 | 2.6003 | 52.01 |
(1) |
This column shows the pro forma effect of the conversion and offering (including the sale of shares in the offering, the issuance of shares to the charitable foundation and the share exchange) per share of |
15
Peoples United Financial common stock. The stockholders equity and earnings numbers can also be found in the pro forma tables contained in the Pro Forma Data section of this proxy statement/prospectus. |
(2) | This column shows the pro forma effect of the conversion and offering on one share of Peoples Bank common stock and takes into account the fact that, because of the share exchange, a current Peoples Bank stockholder will own a greater number of Peoples United Financial shares than the number of shares of Peoples Bank common stock he or she held prior to the conversion and offering. |
(3) | Based on the $37.39 closing price of Peoples Bank common stock on September 19, 2006, which was the business day immediately preceding the public announcement of the conversion. |
Dividend Policy
The amount of dividends that Peoples United Financial initially intends to pay to stockholders following the conversion and offering is intended to approximate the per share dividend amount, adjusted to reflect the share exchange, that Peoples Banks stockholders currently receive on their shares of Peoples Bank common stock. For a detailed description of our dividend policy, see Our Policy Regarding Dividends .
Ownership By Officers And Directors
Collectively, our directors and executive officers and their associates expect to purchase a total of 387,500 shares, or approximately 0.2% of the shares of common stock available for sale in the offering plus the shares to be issued to the charitable foundation (assuming the midpoint of the offering range). These shares do not include shares that may be awarded or issued in the future under any of our stock benefit plans. The shares purchased by our directors and executive officers and their associates will be included in determining whether the minimum number of shares necessary to close the offering has been sold. See Proposed Purchases of Common Stock by Management .
After the offering and the exchange of existing shares of Peoples Bank common stock, including stock options exercisable within 60 days of September 30, 2006, our directors and executive officers, together with their associates, are expected to beneficially own approximately 3,928,237 shares of our common stock, or 1.40% of the total outstanding shares of our common stock, including shares to be issued to the charitable foundation, based upon the midpoint of the offering range.
Future Benefit Plans
We intend to implement a tax-qualified employee stock ownership plan in connection with the offering which we expect will purchase an amount of common stock equal to up to 6% of the sum of the shares of common stock that we sell in the offering and those we issue to the charitable foundation, or 11,246,250 shares of common stock, assuming we sell 185,437,500 shares, the maximum of the offering range. We expect that this employee stock ownership plan will, with prior Office of Thrift Supervision approval, purchase these shares in the open market following the offering using funds borrowed from us. However, as a tax-qualified employee benefit plan, this plan may instead purchase shares in the subscription offering consistent with its subscription priority. The plan is a tax-qualified retirement plan for the benefit of all employees who meet certain eligibility requirements. Assuming the employee stock ownership plan purchases 11,246,250 shares, we will recognize additional compensation expense of $224.9 million (or approximately $148.4 million after tax) over a 30-year period, assuming the shares of common stock have a fair market value of $20.00 per share for the full 30-year period. If, in the future, the shares of common stock have a fair market value greater or less than $20.00, the compensation expense will increase or decrease accordingly.
16
Because investment decisions for our employee stock ownership plan are subject to the discretion of an independent fiduciary, we can offer no assurance as to the amount, timing or other terms of stock purchases by this plan.
We also intend to implement a stock option plan, providing for grants of stock options, and a recognition and retention plan, providing for awards of restricted stock to our key employees, officers and directors. If these stock-based incentive plans are implemented and approved by stockholders within one year of the completion of our conversion, the number of options granted or shares of restricted stock awarded under these stock-based incentive plans may not exceed 10% and 4%, respectively, of the shares of common stock sold in the offering and issued to the charitable foundation. We expect that any shares required for restricted stock awards would be purchased in the open market or privately negotiated transactions following stockholder approval of the plan. Funds necessary for stock purchases would be provided by Peoples United Financial. We anticipate that awards under the stock option plan and recognition and retention plan would vest over a five-year period measured from the award date and that compensation expense would be recognized over the vesting period. Both the stock option plan and recognition and retention plan cannot be adopted sooner than six months after the completion of our conversion and will be contingent on approval of Peoples United Financial stockholders.
The following table summarizes the number of shares and aggregate dollar value of awards available for grant that are expected under the stock option and recognition and retention plans, if adopted as expected after the offering. A portion of the available stock grants shown in the table below may be made to non-executive employees.
(1) | The actual value of restricted stock grants will be determined based on their fair value as of the date that grants are made. For purposes of this table, the fair value of the restricted stock grants is assumed to be the same as the offering price of $20.00 per share. The fair value of stock options has been estimated at $3.31 per option using the Black-Scholes option pricing model with the following assumptions: a grant-date share price and option exercise price of $20.00; dividend yield of 3.0%; expected option life of 10 years; risk-free interest rate of 4.64%; and volatility rate of 11.3% based on an index of publicly-traded thrifts. The actual value of option grants will be determined by the grant-date fair value of the option, which will depend on a number of factors, including the valuation assumptions used in the option pricing model. |
17
(2) | Assumes shares are issued from authorized but unissued shares and dilution is calculated at the maximum and maximum, as adjusted of the offering range. |
In addition to shares of common stock that could be issued under the future stock option and recognition and retention plans, additional shares can be issued under stock benefit plans currently maintained by Peoples Bank. At September 30, 2006, a total of 9,157,471 shares could be issued under existing stock benefit plans after applying the exchange ratio at the minimum of the offering range, and 12,389,874 shares could be issued under existing stock benefit plans after applying the exchange ratio at the maximum of the offering range. These totals represent shares that would be issued upon exercise of outstanding stock options and shares that would be issued because of future grants under existing benefit plans. The issuance of all of these shares would cause additional dilution of 3.69% at the maximum of the offering range.
Unless a waiver is obtained from the Office of Thrift Supervision, the following additional Office of Thrift Supervision restrictions would apply to the stock option plan and the recognition and retention plan:
|
non-employee directors in the aggregate may not receive more than 30% of the options and restricted stock awards authorized under the plans; |
|
any one non-employee director may not receive more than 5% of the options and restricted stock awards authorized under the plans; |
|
any officer or employee may not receive more than 25% of the options and restricted stock awards authorized under the plans; |
|
the options and restricted stock awards may not vest more rapidly than 20% per year, beginning on the first anniversary of stockholder approval of the plans; and |
|
accelerated vesting is not permitted except for death, disability or upon a change in control of Peoples Bank or Peoples United Financial. |
In the event the Office of Thrift Supervision changes its regulations or policies regarding stock-based incentive plans, including any regulations or policies restricting the size of awards and vesting of benefits as described above, the restrictions described above may not be applicable. Also, these restrictions will not apply to stock-based compensation plans currently maintained by Peoples Bank (the Peoples Bank 1998 Long-Term Incentive Plan and the Peoples Bank Directors Equity Compensation Plan), which will continue in effect after the conversion.
The following table presents information regarding the eligible participants in our contemplated employee stock ownership plan and our contemplated stock-based incentive plans, the percentage of outstanding shares of common stock after the offering assuming shares are sold at the maximum of the offering range and the dollar value of the common stock available for issuance or allocation under these plans.
18
Individuals Eligible
|
Number of
Shares at the Maximum of Offering Range |
Number of
Shares at the Maximum, as adjusted of Offering Range |
Percentage of
Total Shares Outstanding (including shares issued to the charitable foundation) |
Percentage of
Shares Sold in the Offering (including shares issued to the charitable foundation) |
Estimated
Value of Shares at the Maximum of the Offering Range(1) |
Estimated
Value of Shares at the Maximum, as adjusted of Offering Range(1) |
||||||||||||
Employee stock ownership plan |
Officers and Employees | 11,246,250 | 12,915,188 | 3.48 | % | 6.0 | % | $ | 224,925,000 | $ | 258,303,760 | |||||||
Stock option plan |
Directors, Officers and Employees | 18,743,750 | 21,525,313 | 5.80 | % | 10.0 | % | $ | 62,041,813 | $ | 71,248,786 | |||||||
Recognition and retention plan |
Directors, Officers and Employees | 7,497,500 | 8,610,125 | 2.32 | % | 4.0 | % | $ | 149,950,000 | $ | 172,202,500 |
(1) | The actual value of restricted stock grants will be determined based on their fair value as of the date that grants are made. For purposes of this table, the fair value of the restricted stock grants is assumed to be the same as the offering price of $20.00 per share. The fair value of stock options has been estimated at $3.31 per option using the Black-Scholes option pricing model with the following assumptions: a grant-date share price and option exercise price of $20.00; dividend yield of 3.0%; expected option life of 10 years; risk free interest rate of 4.64%; and a volatility rate of 11.3% based on an index of publicly-traded thrifts. The actual value of option grants will be determined by the grant-date fair value of the option, which will depend on a number of factors, including the valuation assumptions used in the option pricing model. |
For a detailed description of these potential plans and their applicable limitations see Management of Peoples BankFuture Benefit Plans . For a detailed description of the benefit plans we currently have in place, see Management of Peoples BankDirector Compensation and Management of Peoples BankExecutive Officer Compensation .
Interest of Management and Directors in Matters to be Acted Upon
Management and directors of Peoples Bank have an interest in the matters that will be acted upon because Peoples United Financial intends to acquire additional stock for its employee stock ownership plan, to consider the implementation of the recognition and retention plan and stock option plan, and intends to implement a change in control employee severance plan. See Management of Peoples BankFuture Benefit Plans .
Common Stock Ownership Limitation
Shares of common stock that you receive in the exchange individually, and together with associates or persons acting in concert, plus any shares of Peoples United Financial you and they purchase in the offering may not exceed 5% of the total shares of Peoples United Financial common stock issued and outstanding at the completion of the conversion and offering.
Conditions To Completing The Conversion And Offering
We are conducting the conversion and offering pursuant to the terms of our plan of conversion. We cannot complete the conversion and offering unless:
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the plan of conversion is approved by at least a majority of votes eligible to be cast by depositors of Peoples Bank; |
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the plan of conversion is approved by a majority of the outstanding shares of Peoples Bank common stock entitled to vote at a meeting of stockholders of Peoples Bank (because Peoples Mutual Holdings owns more than 50% of Peoples Banks outstanding shares, we expect that Peoples Mutual Holdings will control the outcome of this vote); |
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the plan of conversion is approved by a majority of the outstanding shares of Peoples Bank common stock held by the stockholders of Peoples Bank, excluding Peoples Mutual Holdings; |
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we sell at least the minimum number of shares of common stock offered; and |
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we receive approval from the Office of Thrift Supervision to complete the conversion and offering. |
In order to establish and fund the charitable foundation, we must receive regulatory, public stockholder and depositor approvals, similar to those described above.
Peoples Mutual Holdings intends to vote its ownership interest in favor of the plan of conversion and the establishment and funding of the charitable foundation. At September 30, 2006, it owned 57.7% of the outstanding common stock of Peoples Bank. As of September 30, 2006, the directors and executive officers of Peoples Bank and their associates beneficially owned 1,800,802 shares of Peoples Bank common stock (including options exercisable within 60 days of September 30, 2006), or 1.26% of the outstanding shares of common stock. They intend to vote their shares in favor of the plan of conversion and establishment and funding of the charitable foundation.
Market For Common Stock
Peoples Banks common stock is currently listed on the Nasdaq Global Select Market under the symbol PBCT. Upon completion of the offering, the new shares of Peoples United Financial will replace existing shares and will be traded on the Nasdaq Global Select Market. For a period of 20 trading days following completion of the offering, our symbol will be PBCTD. Thereafter, our trading symbol will revert to PBCT. See Market for the Common Stock .
Tax Aspects of the Conversion
As a general matter, the conversion and offering will not be taxable transactions for federal or state income tax purposes to Peoples Mutual Holdings, Peoples Bank, Peoples United Financial, persons eligible to subscribe in the subscription offering or existing stockholders of Peoples Bank. Existing stockholders of Peoples Bank who receive cash in lieu of a fractional share of Peoples United Financial common stock in the share exchange will recognize a gain or loss equal to the difference between the cash received and the tax basis of such fractional share. Thacher Proffitt & Wood LLP has issued an opinion to us to the effect that consummation of the transactions contemplated by the conversion and offering qualifies as a tax-free transaction for federal income tax purposes and will not result in any adverse federal tax consequences to Peoples Mutual Holdings, Peoples Bank, Peoples United Financial, persons eligible to subscribe in the subscription offering or existing stockholders of Peoples Bank before or after the conversion. PricewaterhouseCoopers LLP has issued an opinion to us to the effect that consummation of the transactions contemplated by the conversion and offering should qualify as a tax-free transaction for Connecticut state income tax purposes and should not result in any adverse Connecticut state tax consequences to Peoples Mutual Holdings, Peoples Bank, Peoples United Financial, persons eligible to subscribe in the subscription offering or existing stockholders of Peoples Bank before or after the conversion. See The Conversion and Offering Tax Aspects.
The Peoples Community Foundation
To continue our long-standing commitment to our local communities, we intend to establish a charitable foundation, The Peoples Community Foundation, as a non-stock Delaware corporation in
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connection with the conversion. We will fund the charitable foundation with 2,000,000 shares of Peoples United Financial common stock and $20.0 million in cash from the offering proceeds. The shares of common stock contributed to the charitable foundation will be issued in addition to the shares being offered for sale in the offering and will not be included in determining whether the minimum number of shares of common stock has been sold in order to complete the offering. Our contribution to the charitable foundation would reduce net earnings by approximately $39.6 million, after tax, in 2007.
Currently, there are no plans to make further contributions to the charitable foundation in the future. The amount of common stock that we offer for sale in the offering would be greater if the offering were to be completed without the contribution to The Peoples Community Foundation. The establishment and funding of the charitable foundation requires the affirmative vote of a majority of the votes eligible to be cast by Peoples Banks depositors and the affirmative vote of a majority of the stockholders of Peoples Bank, excluding Peoples Mutual Holdings. If these approvals are not obtained, the foundation will not be established and the shares of Peoples United Financial common stock we intend to issue to the foundation will remain unissued. The charitable foundation will be required to vote its shares of Peoples United Financial common stock in the same ratio as all other shares of the common stock on all proposals considered by Peoples United Financials stockholders.
Issuing shares of common stock to the charitable foundation will:
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dilute the ownership interests of holders of Peoples United Financial common stock; and |
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result in an expense, and a reduction in earnings, during the year in which the contribution is made, equal to the full amount of the contribution to the charitable foundation, offset in part by a corresponding tax benefit. |
For a further discussion of the financial impact of the charitable foundation, including its effect on those who purchase shares in the offering, see Risk Factors The Contribution To The Peoples Community Foundation Will Hurt Our Profits For 2007 And Dilute Your Ownership Interest , Comparison of Valuation and Pro Forma Information With and Without the Charitable Foundation and Proposal 2 The Establishment and Funding of The Peoples Community Foundation .
Appraisal Rights
Peoples Bank has determined that, pursuant to 12 C.F.R. § 552.14, the regulations regarding appraisal rights promulgated by the Office of Thrift Supervision, appraisal rights are not available to Peoples Bank stockholders in connection with the conversion.
Differences in Stockholders Rights
As a result of the conversion and offering, each Peoples Bank stockholder will become a Peoples United Financial stockholder. Certain rights of stockholders of Peoples United Financial will differ from the rights Peoples Bank stockholders currently have. See Proposals Relating to the Certificate of Incorporation of Peoples United Financial Inc. and Comparison of Stockholders Rights for Existing Peoples Bank Stockholders for a discussion of these differences.
Questions
Questions about voting may be directed to our proxy information agent, Georgeson Inc. at 1-866-277-1186, Monday through Friday from 8:00 a.m. to 8:00 p.m., Eastern Time, Saturday from 10:00 a.m. to 4:00 p.m., Eastern Time and Sunday from 11:00 a.m. to 4:00 p.m., Eastern Time.
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You should consider carefully the following risk factors before determining how you will vote on the plan of conversion and the establishment and funding of the charitable foundation. Our business could be harmed by any of these risks. The trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment. In assessing these risks you should also refer to the other information contained in this proxy statement/prospectus, including our consolidated financial statements and related notes.
Risks Related To Our Business
Changes in Interest Rates Could Adversely Affect Our Results of Operations and Financial Condition . Peoples Bank 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. Peoples Bank earns interest on loans and to a much lesser extent on securities and short-term investments. These are called interest-earning assets. Peoples Bank pays interest on some forms of deposits and on funds it borrows from other sources. These are called interest-bearing liabilities.
Peoples Banks 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 Peoples Banks 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 Peoples Bank may not be able to make loans that meet its lending standards. Peoples Banks interest spread may also change based on the mix of interest-earning assets and interest-bearing liabilities.
Peoples Banks 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, Peoples Bank may earn less on its interest-earning assets while it is still locked in to paying higher rates on its interest-bearing liabilities. On the other hand, if interest rates go up, Peoples Bank might have to pay more on its interest-bearing liabilities while it is still locked in to receiving lower rates on its interest-earning assets.
Peoples Bank manages this risk using many different techniques. If it is not successful in managing this risk, Peoples Bank will probably 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. It is unlikely that our asset quality will stay as strong as it has been for the past several years, particularly if the economy deteriorates.
We May Not Be Able to Successfully Implement Our Plans for Growth. Since our conversion to the mutual holding company form of organization in 1988, we have experienced significant growth. We will be raising a significant amount of capital from the offering, which we plan to use to continue implementing our growth strategy, primarily by building our core banking business through internal growth and increased de novo branching and acquisitions. During 2005, Peoples Bank opened seven new branches, three of which are traditional branches and four of which are located in Stop & Shop supermarkets. During the first nine months of 2006, Peoples Bank opened three new Stop & Shop branches. Peoples Bank also plans to expand into New York State by opening at least 15 new traditional
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branches in Westchester County over the next three years. Seven of these branches are expected to be open by the end of 2007. Peoples Bank also plans to continue its branch expansion in Connecticut by opening new traditional and Stop & Shop branches. In addition, we will consider expansion opportunities such as the acquisition of branches and other financial institutions, although we do not have any current understandings, agreements or arrangements for expansion by the acquisition of any branches or other financial institutions. Significant changes in interest rates or the competition we face may make it difficult to attract the level of customer deposits needed to fund our internal growth at projected levels. In addition, Peoples Bank may have difficulty finding suitable sites for de novo branches. Our expansion plans may result in Peoples Bank opening branches in geographic markets in which it has no previous experience. Our ability to grow effectively in those markets will be dependent on our ability to identify and retain personnel familiar with the new markets. Any future acquisitions of branches or of other financial institutions would present many challenges associated with integrating merged institutions and expanding operations. Our profitability may suffer if we do not continue to experience the type of growth that we have in the past, if we do not adequately and profitably implement our plans for growth or if we incur additional expenditures beyond current projections to support our growth.
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 Peoples Banks supermarket banking initiative, pursuant to which, as of September 30, 2006, Peoples Bank has established 73 full-service Stop & Shop branches that provide customers with the convenience of seven-day-a-week banking. At September 30, 2006, 47% of Peoples Banks branches were located in Stop & Shop supermarkets. During 2005, the Stop & Shop branches originated 27% of Peoples Banks home equity loans, 47% of retail checking and savings accounts, and 34% of commercial checking accounts. Approximately 40% of Peoples Banks branch transactions originate in Stop & Shop branches.
Peoples Bank currently has exclusive branching rights in Stop & Shop supermarkets in the state of Connecticut, in the form of a license agreement between The Stop & Shop Supermarket Company and Peoples Bank, which provides for the leasing of space to Peoples Bank within Stop & Shop supermarkets for branch use. Under the terms of the license agreement, Peoples Bank generally is required to open a branch in each new Connecticut Stop & Shop supermarket (up to a maximum of 120 supermarkets) that has either (1) a total square footage of greater than 45,000 square feet or (2) if less than 45,000 square feet in size, the store has projected customers of at least 15,000 per week. Peoples Bank has the exclusive right to branch in these supermarkets until 2012, provided that Peoples Bank does not default on its obligations under the licensing agreement. Peoples Bank has the option to extend the license agreement until 2022.
Stop & Shop is currently the leading grocery store in Connecticut, with nearly twice the market share of its closest competitor, according to Modern Grocer. The success of Peoples Banks supermarket branches is dependent, in part, on the success of the Stop & Shop supermarkets in which they are located. The existing labor agreements between Stop & Shop and a number of the unions representing its employees in Connecticut expire on or around February 18, 2007. As of the date of this proxy statement/prospectus, members of at least one union have voted to strike if new labor agreements are not reached. A drop in Stop & Shops market share, a decrease in the number of Stop & Shop locations or customers, a disruption in Stop & Shops operations due to labor disputes or otherwise, 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 Peoples Banks Stop & Shop supermarket branches as convenient banking locations. Under the terms of the license agreement, Peoples Bank has the obligation to open branches in new Connecticut Stop & Shop locations through 2012, even if Stop & Shops market share declines or the value of the Stop & Shop brand is diminished.
In addition, Peoples Bank may not be able to renew or renegotiate the license agreement with Stop & Shop beyond 2022. If renewal or renegotiation of the license agreement were unsuccessful, Peoples Bank would be forced to find new locations for and relocate the Stop & Shop branches, or to
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close those branches and transfer the affected customer accounts to other Peoples Bank branches, either of which would involve significant expense and the possible loss of customer relationships.
We Depend on Our Executive Officers and Key Personnel to Continue the Implementation of 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 is 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. Although Peoples Bank has an employment agreement with its president and chief executive officer, the loss of the services of one or more of our executive officers and key personnel could impair our ability to continue to develop and execute our business strategy.
Our Business Is Affected by the International, National, Regional and Local Economy Generally, and the Geographic Concentration of Our Loan Portfolio and Lending Activities Makes Us Vulnerable to a Downturn in the Local Economy . 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.
At September 30, 2006, approximately 77% of Peoples Banks loans by outstanding principal amount were to people and businesses located in the state of Connecticut, or involved property located here. All of Peoples Banks branches are currently in Connecticut. How well we perform depends very much on the health of the Connecticut economy, and we expect that to remain true for the foreseeable future.
As of June 30, 2006, the median household income in Connecticut was $66,018, ranking second in the United States and well above the U.S. median household income of $51,546. Our state unemployment rate as of June 2006 was 4.1%, slightly lower than the national rate of 4.6%. A low unemployment rate usually means that businesses have a hard time finding qualified workers, and will have to pay them more if they can find them. Businesses that cannot find qualified workers or that have to pay higher wages might decide not to stay in Connecticut, or to send work outside the state. Someone deciding where to locate a new business or to expand an existing business might decide to go somewhere outside Connecticut.
If the general economic situation deteriorates, or there are negative trends in the stock market, the Connecticut economy could suffer more than the national economy. This would be especially likely in Fairfield County, where Peoples Bank has many of its branches and where many of its customers reside, because of the large number of Fairfield County residents who are professionals in the financial services industry.
Peoples Bank could experience losses in its real estate-related loan portfolios if the prices for housing and other kinds of real estate decreased significantly in Connecticut. Even though Connecticut (especially Fairfield County) has some of the highest housing prices in the country, property values can decrease. This has happened before (as recently as the early 1990s), and can happen again.
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 . Peoples Bank 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 think about whether the bank offers other kinds of services they might need and, if they have ever been a customer of the bank before, what their experience was like.
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People also like convenience, so the number of offices and banking hours may be important. Some people also think that on-line services are important.
Peoples Bank 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 the U.S., state and local governments and agencies, instead of opening a deposit account.
In making decisions about loans, many people look first at the interest rate they will have to pay. They also think about any extra fees they might have to pay in order to get the loan. Some people also think about whether the bank offers other kinds of services they might need and, if they have ever been a customer of the bank before, what their experience was like. Many business loans are more complicated because there may not be a standard kind of loan that meets all of the customers needs. Business borrowers look at many different factors that are not all financial in nature. Examples include the kind and amount of security the lender wants and other terms of the loan that do not involve the interest rate.
Peoples Bank competes with other banks, credit unions, credit card issuers, finance companies, mortgage lenders and mortgage brokers for loans. Insurance companies also compete with Peoples Bank for some kinds of commercial loans.
Many of Peoples Banks competitors have branches in the same market area as it does. Some of them are much larger than it is. Connecticut, and especially Fairfield County, is an attractive banking market. Many locally-based banks have been acquired by large regional and national companies in the last several years. We expect this trend to continue. This means that there are not as many competitors in our market as there used to be, but the ones that are left are usually bigger and have more resources than the ones they acquired.
Peoples Bank also has competition from outside its own market area. A bank that does not have any branches in Connecticut can still have customers here 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 Peoples Bank 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 Peoples Banks business 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 can make our business less profitable. Changes in the accounting rules we are required to follow may also make us less profitable. Changes in the governments 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 Peoples Bank to hold additional capital, pay higher deposit insurance premiums, stop paying dividends, stop making
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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.
The Office of Thrift Supervision letter dated July 3, 2006 approving, among other things, Peoples Banks conversion from a Connecticut savings bank to a federal savings bank, granted Peoples Bank (1) a phase-in period of three years from the date of its conversion to a federal savings bank, August 18, 2006, to comply with the Home Owners Loan Acts commercial loan limits, with the ability to seek an additional one-year extension if necessary; and (2) an exception from the Qualified Thrift Lender test for a period of four years from the date of conversion. The manner in which the Office of Thrift Supervision interprets or applies its phase-in period can also make it more expensive for us to do business, make our business less profitable and limit our strategic flexibility. See Regulation of Peoples Bank and Peoples United FinancialFederally Chartered Savings Bank Regulation and Regulation of Peoples Bank and Peoples United FinancialQualified Thrift Lender Test .
If Peoples Bank Is Not Permitted to Pay Dividends to Us, We May Not Be Able to Fully Fund Our Operations, Pay Dividends or Make Acquisitions. Peoples United Financial will fund its operations and pay dividends to its stockholders through the net offering proceeds it retains, cash and cash equivalents held by Peoples United Financial, dividends paid by Peoples Bank to Peoples United Financial, and borrowings. Dividends may be paid by Peoples Bank only out of current or retained net profits, and prior Office of Thrift Supervision approval is required if dividends for the current year would exceed net income for the current year plus retained net income for the preceding two years. Peoples Bank will also be prohibited from paying cash dividends to Peoples United Financial to the extent that any such payment would reduce Peoples Banks capital below required capital levels, would impair the liquidation account to be established for the benefit of the Peoples Banks eligible account holders and supplemental eligible account holders at the time of the conversion and offering, or if the Office of Thrift Supervision notified Peoples Bank that it was in need of more than normal supervision. Payment of dividends by Peoples Bank also may be restricted at any time at the discretion of the Office of Thrift Supervision if it deems the payment to constitute an unsafe and unsound banking practice.
If Peoples Banks Allowance for Loan Losses Is Not Sufficient to Cover Actual Loan Losses, Our Earnings Could Decrease. Peoples Bank 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 customers collateral will not be sufficient to cover the balance of their loan, as underlying collateral values fluctuate with market changes. Peoples Bank 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 provision expense or 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.
Peoples Bank maintains the allowance for loan losses at a level that it believes is adequate to absorb probable losses inherent in the existing loan portfolio, based on a quarterly evaluation of a variety of factors. These factors include, but are not limited to: its historical loan loss experience and recent trends in that experience; risk ratings assigned by lending personnel to commercial real estate finance, commercial and Peoples Capital and Leasing loans, and the results of ongoing reviews of those ratings by its independent loan review function; an evaluation of 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 Peoples Bank seeks to use the best available information to make these evaluations, and at September 30, 2006, management believed that the allowance for loan losses was adequate 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
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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.
Our Stock Benefit Plans Will Increase Our Costs, Which Will Reduce Our Profitability and Stockholders Equity. We anticipate that our employee stock ownership plan will purchase an amount of common stock equal to up to 6% of the sum of the common stock that is sold in the offering and that is issued to the charitable foundation. The cost of acquiring the employee stock ownership plan shares will be between $166.9 million at the minimum of the offering range and $224.9 million at the maximum of the offering range, or $258.3 million at the adjusted maximum of the offering range, assuming a purchase price of $20.00 per share. Under current accounting standards, we will record annual employee stock ownership plan expenses in an amount equal to the fair market value of shares committed to be released to employees for that year. If our common stock appreciates in value over time, compensation expense relating to the employee stock ownership plan will increase.
We intend to adopt a stock option plan that will provide for grants to key employees, officers, and directors of options to purchase an amount of common stock equal to up to 10% of the shares of common stock sold in the offering and issued to the charitable foundation. We also intend to adopt a recognition and retention plan that will provide for awards of common stock to key employees, officers, and directors in an amount of up to 4% of the shares of common stock sold in the offering and issued to the charitable foundation. We will fund these plans through either open market purchases, if permitted, or from the issuance of authorized but unissued shares. These plans will increase our future costs of compensating our key employees, officers and directors, thereby reducing our earnings. In addition, at the maximum of our offering range, stockholders will experience a 2.27% reduction or dilution in ownership interest in the event authorized but unissued shares are used to fund restricted stock awards and a 5.48% reduction or dilution in ownership interest in the event authorized but unissued shares are used to fund the stock options. Under current accounting standards, we will expense the grant-date fair value of stock options granted to key employees, officers and directors over the vesting period of such awards. Similarly, under current accounting standards, as the restricted stock shares are awarded under the recognition and retention plan, we will recognize compensation expense equal to the fair market value of such shares at grant over the vesting period. Recognizing an expense equal to the grant-date fair value of stock options or shares of restricted stock will increase our compensation costs over the vesting period of the options or shares of restricted stock.
Risks Related to the Offering and the Share Exchange
The Market Value of Peoples United Financial Common Stock Received in the Share Exchange May Be Less than the Market Value of Peoples Bank Common Stock Exchanged. The number of shares of Peoples United Financial common stock you receive will be based on an exchange ratio which will be determined as of the date of completion of the conversion and offering. The exchange ratio will be based on the percentage of Peoples Bank common stock held by the public prior to the conversion, the final independent appraisal of Peoples United Financial common stock prepared by RP Financial and the number of shares of common stock sold in the offering. The exchange ratio will ensure that existing public stockholders of Peoples Bank common stock will own approximately the same percentage of Peoples United Financial common stock after the conversion and offering as they owned of Peoples Bank common stock immediately prior to completion of the conversion and offering, exclusive of the effect of their purchase of additional shares in the offering and the receipt of cash in lieu of fractional shares. The exchange ratio will not depend on the market price of Peoples Bank common stock.
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The exchange ratio ranges from a minimum of 1.6712 to a maximum of 2.2611 shares of Peoples United Financial common stock per share of Peoples Bank common stock. Under certain circumstances, the pro forma market value can be adjusted upward to reflect changes in market conditions, and, at the adjusted maximum, the exchange ratio would be 2.6003 shares of Peoples United Financial common stock per share of Peoples Bank common stock. Shares of Peoples United Financial common stock issued in the share exchange will have an initial value of $20.00 per share. Depending on the exchange ratio and the market value of Peoples Bank common stock at the time of the exchange, the initial market value of the Peoples United Financial common stock that you receive in the share exchange could be less than the market value of the Peoples Bank common stock that you currently own. Based on the $[ ] per share closing price of Peoples Bank common stock as of the last trading day prior to the date of this proxy/prospectus, unless at least [ ] shares of Peoples United Financial common stock are sold in the offering (close to the maximum of the offering range), the initial value of the Peoples United Financial common stock you receive in the share exchange would be less than the market value of the Peoples Bank common stock you currently own. See The Conversion and OfferingThe Share Exchange of Peoples Bank Common Stock for Peoples United Financial Common Stock and The Conversion and OfferingEffects of the ConversionEffect on Peoples Bank Stockholders.
After the Offering, Our Return on Average Equity Will Be Low Compared to Other Companies. This Could Negatively Impact the Price of Our Common Stock. The net proceeds from the offering will substantially increase our equity capital. It may take a significant period of time to prudently invest this capital. Our ability to leverage our new capital and grow our balance sheet profitably will be significantly affected by industry competition for loans and deposits. The net proceeds will be invested initially in short-term investments, government securities or government-sponsored agency securities. These investments have lower average yields than a significant portion of our existing interest-earning assets. This excess capital will result in a significantly lower return on equity, which is the ratio of our earnings divided by our average stockholders equity, than we have experienced previously. For the nine months ended September 30, 2006 and the year ended December 31, 2005, our return on average equity was 8.6% and 11.1%, respectively. On a pro forma basis assuming that 185,437,500 shares had been sold at the beginning of the year, the maximum of the offering range, and the net proceeds had been invested at an average yield of 5.25%, our return on pro forma equity for the nine months ended September 30, 2006 and the year ended December 31, 2005 would have been approximately 4.2% and 4.3%, respectively. As a result of the offering, our return on equity will be lower than that of our peers. To the extent that the stock market values a company based in part on its return on equity, our low return on equity relative to our peers could negatively affect the trading price of our common stock.
We Have Broad Discretion in Allocating the Proceeds of the Offering. Our Failure to Effectively Utilize the Proceeds Could Significantly Reduce Our Profitability. Peoples United Financial intends to contribute approximately 50% of the net proceeds of the offering to Peoples Bank. Peoples United Financial may use the remaining net proceeds to purchase investment securities, finance the acquisition of other financial institutions or other businesses that are related to banking or for other general corporate purposes, including repurchases of common stock and the payment of cash dividends. Peoples United Financial expects to use a portion of the net proceeds to fund the purchase by Peoples Banks employee stock ownership plan of shares of Peoples United Financial common stock. We also intend to contribute 2,000,000 shares of Peoples United Financial common stock and $20.0 million in cash to The Peoples Community Foundation. Peoples Bank may use the net proceeds it receives to make acquisitions, fund new loans, purchase investment securities, establish or acquire new branches, acquire financial institutions or other businesses that are related to banking, pay dividends to Peoples United Financial or for general corporate purposes. Although the net proceeds of the offering are expected to be invested initially in short-term investments, government securities or government-sponsored agency securities, Peoples United Financial and Peoples Bank will have significant flexibility in determining how much of the net proceeds to apply to different uses and the timing of such
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applications. The failure by us to utilize these funds effectively could significantly reduce our profitability.
Stock Market Volatility May Affect the Price of Our Common Stock. Publicly traded stocks can experience substantial market price volatility that may be unrelated to the operating performance of the particular companies. The final number of shares of common stock sold in the offering will be based on an independent appraisal prepared by RP Financial. The independent appraisal is not intended, and should not be construed, as a recommendation of any kind as to the advisability of purchasing shares of common stock. The valuation is based on estimates and projections of a number of factors, all of which are subject to change. After the shares begin trading, the trading price of our common stock will be determined by the marketplace, and will be influenced not only by our results of operations and financial condition but also by many factors outside of our control, including prevailing interest rates, investor perceptions of us, our performance relative to our peers, research analysts ratings, and general industry and economic conditions. Consequently, if you purchase shares of common stock in the offering, you may not be able to sell them later at or above the $20.00 per share purchase price.
The Certificate of Incorporation and Bylaws of Peoples United Financial and Certain Laws and Regulations May Prevent or Make More Difficult Certain Transactions, Including a Sale or Merger of Peoples United Financial. Provisions of the Certificate of Incorporation and Bylaws of Peoples United Financial, federal regulations and various other factors may make it more difficult for companies or persons to acquire control of Peoples United Financial. The factors that may discourage takeover attempts or make them more difficult include:
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Office of Thrift Supervision regulations . Office of Thrift Supervision regulations prohibit, for three years following the completion of a mutual-to-stock conversion, the offer to acquire or the acquisition of more than 10% of any class of equity security of a converted institution without the prior approval of the Office of Thrift Supervision. |
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Certificate of Incorporation, Bylaws and statutory provisions . Provisions of the Certificate of Incorporation and Bylaws of Peoples United Financial and of Delaware law may make it more difficult and expensive to pursue a takeover attempt that the Board of Directors opposes. These provisions also make more difficult the removal of current directors or management, or the election of new directors. These provisions include: |
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supermajority voting requirements for certain business combinations, removal of directors and changes to some provisions of the Certificate of Incorporation and Bylaws; |
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the election of directors to staggered terms of three years; |
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provisions regarding the timing and content of stockholder proposals and nominations; |
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provisions restricting the calling of special meetings of stockholders; |
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the absence of cumulative voting by stockholders in the election of directors; and |
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limitations imposed by Delaware law on business transactions with certain significant stockholders. |
See Restrictions on Acquisition of Peoples United Financial and Peoples Bank.
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Significant ownership by our directors, executive officers and stock benefit plans. Following the conversion and offering, the directors, executive officers and stock benefit plans of Peoples United Financial are expected to own in the aggregate approximately 7.40% of Peoples United Financial common stock to be outstanding based upon the midpoint of the offering range. This significant percentage ownership by directors, executive officers and stock benefit plans could make it more difficult to obtain the required vote for a takeover or merger that management opposes. |
Risks Related to the Formation of Our Charitable Foundation
Our Contribution to The Peoples Community Foundation Will Hurt Our 2007 Profits and Dilute Your Ownership Interest. We intend to contribute 2,000,000 shares of Peoples United Financial common stock and $20.0 million in cash from the offering proceeds to The Peoples Community Foundation. This contribution of common stock and cash will be an additional operating expense and will reduce net income during the fiscal year in which The Peoples Community Foundation is established, which is expected to be the year ending December 31, 2007. Based on the pro forma assumptions, the contribution to The Peoples Community Foundation would reduce net earnings by approximately $39.6 million, after tax, in 2007. In addition, at the midpoint of the offering range, purchasers of shares in the offering and current Peoples Bank stockholders will have their ownership interests diluted by 0.71% at the close of the offering, when we contribute the shares of our common stock to The Peoples Community Foundation from authorized but unissued shares of common stock. For a further discussion regarding the effect of the contribution to the charitable foundation, see Pro Forma Data and Comparison of Valuation and Pro Forma Information With and Without the Charitable Foundation.
Our Contribution to The Peoples Community Foundation May Not Be Tax Deductible, Which Could Hurt Our Profits. We believe that our $60 million pre-tax contribution in cash and shares of our common stock to The Peoples Community Foundation will be deductible for federal income tax purposes. However, we do not have any assurance that the Internal Revenue Service will grant tax-exempt status to the charitable foundation. If the contribution is not deductible, we would not receive any tax benefit from the contribution. In addition, even if the contribution is tax deductible, we may not have sufficient profits to be able to use the deduction fully.
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INFORMATION ABOUT THE SPECIAL MEETING
General
The special meeting will be held at The Klein Memorial Auditorium, 910 Fairfield Avenue, Bridgeport, Connecticut, on April 5, 2007 at 2:00 p.m., Eastern Time, and any adjournment or postponement thereof.
The purpose of the special meeting is to consider and vote upon the amended and restated agreement and plan of conversion and reorganization of Peoples Mutual Holdings and Peoples Bank (the plan of conversion), under which:
1. Peoples Mutual Holdings will convert to a stock form interim federal savings bank and simultaneously will merge with and into Peoples Bank, with Peoples Bank as the surviving entity; Peoples Mutual Holdings will thus cease to exist and a new liquidation account will be established by Peoples Bank for the benefit of Peoples Banks depositors.
2. Immediately thereafter, Peoples United Financial, a newly formed Delaware stock corporation and wholly-owned subsidiary of Peoples Bank, will form a federally chartered interim stock savings bank, which will then merge with and into Peoples Bank, with Peoples Bank as the surviving entity; Peoples Bank will thus become a wholly-owned subsidiary of Peoples United Financial.
3. In connection with the conversion, Peoples United Financial will offer shares of its common stock representing the ownership interest of Peoples Mutual Holdings in Peoples Bank in a subscription offering and possibly a syndicated offering.
4. In connection therewith, each share of Peoples Bank common stock outstanding immediately prior to the effective time of the conversion will be canceled and exchanged for new shares of Peoples United Financial common stock based on an exchange ratio, plus cash in lieu of any fractional share interest.
In addition, in connection with the conversion and offering, you are being asked to consider and vote upon the establishment of The Peoples Community Foundation, a Delaware non-stock corporation dedicated to the promotion of charitable purposes within Peoples Banks market area, and the funding of the charitable foundation with 2,000,000 shares of Peoples United Financial common stock and $20.0 million in cash from the offering proceeds.
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Voting in favor of or against the plan of conversion constitutes a vote for or against the conversion of Peoples Mutual Holdings to a stock form holding company and all other transactions contemplated by the plan of conversion. Peoples Mutual Holdings is expected to vote all of its shares FOR the plan of conversion and the establishment and funding of the charitable foundation.
The Board of Directors recommends that you promptly sign, date and mark the enclosed proxy card in favor of each of the proposals and return the proxy card in the enclosed self-addressed, postage prepaid proxy reply envelope. If you prefer, you may vote by using telephone or Internet following the instructions on the proxy card. Proxy cards must be received prior to the commencement of the Special Meeting. Returning the proxy card will not prevent you from voting in person if you attend the Special Meeting. Your prompt vote is very important. Failing to vote will have the same effect as voting against each of the proposals.
Record Date and Voting Rights
You are entitled to one vote at the Special Meeting for each share of Peoples Bank common stock that you owned of record at the close of business on February 5, 2007 (the Record Date). On the Record Date, there were [ ] shares of common stock outstanding.
You may vote your shares at the Special Meeting in person or by proxy. To vote in person, you must attend the Special Meeting and obtain and submit a ballot, which we will provide to you at the Special Meeting. To vote by proxy, you must complete, sign and return the enclosed proxy card, or cast your vote by Internet or telephone. If you properly complete the proxy card and send it to us in time to vote, or cast your vote by Internet or telephone, your proxy (one of the individuals named on your proxy card) will vote your shares as you have directed. If you sign the proxy card but do not specify choices, your proxy will vote your shares FOR each of the proposals identified in the Notice of Special Meeting.
If any other matter is presented, your proxy will vote the shares represented by all properly executed proxies on such matters as a majority of the Board of Directors determines. As of the date of this proxy statement, we know of no other matters that may be presented at the Special Meeting.
If your shares are not registered in your own name, you will need appropriate documentation from your stockholder of record to vote personally at the Special Meeting. Examples of such documentation include a brokers statement, letter or other document that will confirm your ownership of shares of Peoples Bank.
Quorum
A quorum of stockholders is necessary to hold a valid meeting. If the holders of at least a majority of the total number of the outstanding shares of common stock of Peoples Bank entitled to vote are represented in person or by proxy at the Special Meeting, a quorum will exist. We will include proxies marked as abstentions to determine the number of shares present at the Special Meeting.
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Votes Required
Proposal 1: Approval of the Plan of Conversion. We must obtain the affirmative vote of the holders of a majority of the outstanding shares of Peoples Bank common stock entitled to vote at the Special Meeting and the affirmative vote of a majority of the outstanding shares of Peoples Bank common stock entitled to vote at the Special Meeting, excluding shares held by Peoples Mutual Holdings, to approve the plan of conversion. Under Office of Thrift Supervision regulations and the plan of conversion, completion of the conversion and offering is also subject to the approval of the plan of conversion by the affirmative vote of a majority of the total eligible votes of the depositors of Peoples Bank. If there are insufficient stockholder votes for approval of the plan of conversion at the time of the Special Meeting, the Special Meeting may be adjourned by the Board of Directors to permit further solicitation of proxies.
Proposal 2: Approval of the Establishment and Funding of The Peoples Community Foundation. We must obtain the affirmative vote of the holders of a majority of the outstanding shares of Peoples Bank common stock entitled to vote at the Special Meeting and the affirmative vote of the holders of a majority of the outstanding shares of Peoples Bank common stock, excluding shares held by Peoples Mutual Holdings, to approve the establishment and funding of the charitable foundation. Under Office of Thrift Supervision regulations and the plan of conversion, the establishment and funding of the charitable foundation is also subject to the approval of the Office of Thrift Supervision and the affirmative vote of a majority of the total eligible votes of the depositors of Peoples Bank. If there are insufficient votes for approval of the establishment and funding of the charitable foundation at the time of the Special Meeting, the Special Meeting may be adjourned by the Board of Directors to permit further solicitation of proxies.
Informational Proposals 1 6: Related to Certain Provisions in Peoples United Financials Certificate of Incorporation. The provisions of Peoples United Financials Certificate of Incorporation which are summarized as informational proposals 1 through 6 were approved as part of the process in which the Board of Directors of Peoples Bank approved the plan of conversion. These proposals are informational in nature only, because the Office of Thrift Supervisions regulations governing mutual-to-stock conversions do not provide for votes on matters other than the plan of conversion and the establishment and funding of the charitable foundation. Peoples Bank stockholders are not being asked to approve these informational proposals at the Special Meeting.
Other Matters. We must obtain the affirmative vote of the holders of a majority of the outstanding shares of common stock of Peoples Bank, including shares held by Peoples Mutual Holdings. At this time, we know of no other matters that may be presented at the Special Meeting.
Effect of Broker Non-Votes
If your broker does not vote on the proposals, this will constitute a broker non-vote. Broker non-votes and abstentions will have the same effect as shares voted Against each of the proposals.
Revoking Your Proxy
You may revoke your grant of proxy at any time before it is voted by:
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filing a written revocation of the proxy with the Secretary of Peoples Bank; |
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submitting a signed proxy card bearing a later date; or |
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attending and voting in person at the Special Meeting. |
Solicitation of Proxies
This proxy statement and the accompanying proxy card are being furnished to you in connection with the solicitation of proxies for the Special Meeting by the Board of Directors. Peoples Bank will pay the costs of soliciting proxies from its stockholders. To the extent necessary to obtain approval of the proposals, directors, officers or employees of Peoples Bank may solicit proxies by mail, telephone and
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other forms of communication. We will reimburse such persons for their reasonable out-of-pocket expenses incurred in connection with such solicitation.
We have retained Georgeson Inc. to solicit proxies in connection with the special meeting of stockholders and in connection with a separate meeting of depositors of Peoples Bank, who will also vote on the matters set forth in Proposals 1 and 2. We have agreed to pay Georgeson Inc. a base fee of $35,000 plus out of pocket expenses. The aggregate fee will vary considerably based on the number and length of telephone solicitations made. We have also agreed to reimburse Georgeson Inc. for its expenses for such solicitation services. We will request persons, firms and corporations holding shares in their names or in the name of their nominees, which are beneficially owned by others, to send proxy materials to and obtain proxies from such beneficial owners, and will reimburse such firms for reasonable expenses incurred in connection therewith. We will bear all costs of solicitation.
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PROPOSAL 1 APPROVAL OF THE PLAN OF CONVERSION
The Board of Directors of Peoples Bank and the Board of Trustees of Peoples Mutual Holdings have approved the plan of conversion. The plan of conversion also has been approved by the Office of Thrift Supervision, subject to approval by the depositors of Peoples Bank and the stockholders of Peoples Bank entitled to vote on the matter. Office of Thrift Supervision approval does not constitute an endorsement or recommendation of the plan of conversion.
General
On September 19, 2006, the Board of Directors of Peoples Bank and the Board of Trustees of Peoples Mutual Holdings adopted the plan of conversion pursuant to which Peoples Bank will reorganize from a mutual holding company structure to a stock form holding company structure. As part of the conversion, Peoples Bank formed Peoples United Financial. This conversion to a stock holding company structure also includes the offering by Peoples United Financial of its outstanding shares of its common stock to eligible depositors of Peoples Bank in a subscription offering and, if necessary, to the public in a syndicated offering or an underwritten public offering. In addition, public stockholders of Peoples Bank will receive shares in Peoples United Financial in exchange for their shares of Peoples Bank common stock based on an exchange ratio. Following the conversion and offering, Peoples Mutual Holdings will no longer exist and Peoples United Financial will be the parent company of Peoples Bank.
The conversion and offering will be effected as described under The Conversion and Offering in this proxy statement/prospectus or in any other manner that is permitted by the Office of Thrift Supervision and is consistent with the intent of the plan of conversion. See the subsection entitled Our Conversion and Offering in the Summary of this proxy statement/prospectus for a chart that shows our structure before and after the conversion and offering.
Purposes of the Conversion and Offering
The Board of Directors of Peoples Bank and the Board of Trustees of Peoples Mutual Holdings believe that a conversion of Peoples Mutual Holdings to stock form is in the best interests of Peoples Mutual Holdings and Peoples Bank, as well as in the best interests of the depositors and stockholders of Peoples Bank. The conversion and offering are intended to provide us with substantially greater access to capital than is currently available to us under the mutual holding company structure and are expected to significantly increase the liquidity of our common stock. In addition, the stock holding company structure will provide us with more flexibility in structuring mergers and acquisitions.
Funds raised in the offering will allow Peoples Bank and Peoples United Financial to:
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finance de novo expansion and support organic growth both inside and outside of the state of Connecticut; |
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acquire other financial institutions, branches of other financial institutions or business related to banking, although there is no specific agreement with any institution or business at this time; |
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increase lending to support continued growth in our commercial banking loan portfolios; |
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establish and fund a charitable foundation to benefit the communities we serve; and |
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use the additional capital for other general corporate purposes. |
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After considering the relative merits of the conversion and offering, as well as applicable fiduciary duties, the Board of Directors of Peoples Bank and the Board of Trustees of Peoples Mutual Holdings approved the plan of conversion as being in the best interests of the companies, the communities that they serve and the depositors, stockholders and employees of Peoples Bank.
Share Exchange Ratio
Under Office of Thrift Supervision regulations, as a result of the proposed conversion, you will exchange your shares of common stock of Peoples Bank for shares of common stock of Peoples United Financial. Each publicly-held share of Peoples Bank common stock (those not owned by Peoples Mutual Holdings) will, on the effective date of the conversion, be canceled. You will automatically receive the right to a number of shares of Peoples United Financial common stock in exchange for your shares of Peoples Bank. The number of new shares of common stock will be determined pursuant to an exchange ratio which ensures that the public stockholders of Peoples Bank common stock will own approximately the same percentage of common stock in Peoples United Financial after the conversion as they held in Peoples Bank immediately prior to the conversion, exclusive of any purchase of additional shares in the offering, and the receipt of cash in lieu of fractional shares. For more information on the exchange ratio, see the section of this proxy statement/prospectus captioned The Conversion and Offering The Share Exchange of Peoples Bank Common Stock for Peoples United Financial Common Stock .
Exchange of Shares
If you own shares of Peoples Bank common stock in street name through a brokerage firm, or if you hold your shares in book-entry form with our transfer agent, they will be promptly exchanged without any action on your part. Your new shares of Peoples United Financial common stock will be held in street name or in book-entry form in an account with our transfer agent, Mellon Investor Services LLC, as applicable.
If you hold a stock certificate representing your shares of Peoples Bank common stock, you will be mailed a transmittal form with instructions on how to exchange your shares. Your new shares of Peoples United Financial common stock will be issued in book-entry form. Your new shares will be deposited at an account at our transfer agent and you will not receive a stock certificate. The account statement you receive from our transfer agent will be accompanied by information telling you how to obtain a stock certificate and how to transfer your shares to a brokerage account.
No fractional shares of Peoples United Financial common stock will be issued to you when the conversion is completed. For each fractional share that would otherwise be issued, you will be paid by check an amount equal to the product obtained by multiplying the fractional share interest to which you would otherwise be entitled by $20.00. Stockholders with shares held in street name at a brokerage firm will receive these funds in their brokerage accounts. Stockholders with stock certificates or shares held in book-entry form will receive checks. For more information regarding the exchange of your shares, see the section of this proxy statement/prospectus captioned The Conversion and Offering The Share Exchange of Peoples Bank Common Stock for Peoples United Financial Common Stock .
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Purchase of Shares
Eligible depositors of Peoples Bank have priority subscription rights allowing them to purchase common stock in the subscription offering. Shares not purchased in the subscription offering may be available for sale to the public in a syndicated offering.
Conditions to the Conversion and Offering
Consummation of the conversion and offering is subject to the receipt of all requisite regulatory approvals, including various approvals of the Office of Thrift Supervision. No assurance can be given that all regulatory approvals will be received. Receipt of such approvals from the Office of Thrift Supervision will not constitute a recommendation or endorsement of the plan of conversion or the offering by the Office of Thrift Supervision. Consummation of the conversion and offering also are subject to approval by the stockholders and depositors of Peoples Bank.
Stock Compensation Plans
As part of the conversion, the Board of Directors of Peoples United Financial intends, subject to stockholder approval at a meeting to be held at least six months following the conversion and offering, to implement a stock option plan for key employees, officers and directors following the conversion and offering. Peoples United Financial expects to adopt a stock option plan that will authorize the grant of options to purchase authorized but unissued shares of up to 10% of the sum of the shares sold in the offering plus those issued to the charitable foundation. No options may be awarded under the stock option plan unless it is approved by the stockholders of Peoples United Financial. The exercise price of the options permitted thereby shall be the fair value on the date such options are granted and no option will have a term that is longer than ten years. The Board of Directors of Peoples United Financial also intends, subject to stockholder approval at a meeting to be held at least six months following the conversion, to implement a recognition and retention plan for key employees, officers and directors after the conversion and offering. Peoples United Financial expects to adopt a recognition and retention plan that will authorize the grant of restricted stock awards of up to 4% of the sum of the shares of common stock sold in the offering plus those issued to the charitable foundation. Peoples United Financials employee stock ownership plan intends to purchase up to 6% of the sum of the shares of common stock sold in the offering plus those issued to the charitable foundation. See Management of Peoples Bank Future Benefit Plans in this proxy statement/prospectus.
Amendment or Termination of the Plan of Conversion
All interpretations of the plan of conversion by the Board of Directors of Peoples Bank and the Board of Trustees of Peoples Mutual Holdings will be final, subject to the authority of the Office of Thrift Supervision. The plan of conversion provides that, if deemed necessary or desirable by the Board of Directors of Peoples Bank or the Board of Trustees of Peoples Mutual Holdings, the plan of conversion may be substantively amended by a majority vote of the Board of Directors and the Board of Trustees as a result of comments from regulatory authorities or otherwise, at any time prior to the submission of proxy materials to the depositors and stockholders of Peoples Bank. Amendment of the plan of conversion thereafter requires a majority vote of the Board of Directors and the Board of Trustees, with the concurrence of the Office of Thrift Supervision. The plan of conversion may be terminated by a majority vote of the Board of Directors and the Board of Trustees at any time prior to the earlier of the date of the Special Meeting and the date of the special meeting of depositors of Peoples Bank, and may be terminated by the Board of Directors of Peoples Bank and the Board of Trustees of Peoples Mutual
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Holdings at any time thereafter with the concurrence of the Office of Thrift Supervision. The plan of conversion shall be terminated if the conversion is not completed within 24 months from the date on which the depositors of Peoples Bank approve the plan of conversion, and may not be extended by us or the Office of Thrift Supervision.
The Board of Directors recommends that you vote FOR the adoption of the plan of conversion. See The Conversion And Offering Reasons For The Conversion in this proxy statement/prospectus.
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INTERESTS OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON
None of the directors or executive officers of Peoples Bank or Peoples United Financial, nor any person who has held such a position since January 1, 2006, nor any associate or affiliate of the foregoing persons, has any substantial or material interest, direct or indirect, by way of beneficial ownership of securities or otherwise, in any matter to be acted on at the special meeting of Peoples Bank stockholders other than the interests described below certain persons may receive if Proposal 1 Approval of the Plan of Conversion is approved and the conversion and offering is completed.
Stock Option Plan and Recognition and Retention Plan
Peoples United Financial intends to implement a stock option plan, providing for grants of stock options, and a recognition and retention plan, providing for awards of restricted stock to key employees, officers and directors. Applicable regulations prohibit the implementation of these plans until six months after the conversion and offering. Peoples United Financial must also obtain the approval of the holders of a majority of the outstanding shares of Peoples United Financial in order to implement these plans.
If the stock option plan and recognition and retention plan are implemented and approved by Peoples United Financial stockholders within one year of the completion of the conversion, the number of options granted or shares of restricted stock awarded under these stock-based incentive plans may not exceed 10% and 4%, respectively, of the shares of common stock sold in the offering and issued to the charitable foundation.
We expect that any shares required for restricted stock awards would be purchased in the open market or privately negotiated transactions following stockholder approval of the plan. Funds necessary for stock purchases would be provided by Peoples United Financial. We anticipate that awards under the stock option plan and recognition and retention plan would vest over a five-year period measured from the award date and that compensation expense would be recognized over the vesting period.
The following table summarizes the number of shares and aggregate dollar value of awards available for grant that are expected under the stock option and recognition and retention plans, if adopted as expected after the offering. A portion of the available stock grants shown in the table below may be made to non-executive employees.
(1) |
The actual value of restricted stock grants will be determined based on their fair value as of the date that grants are made. For purposes of this table, the fair value of the restricted stock grants is |
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assumed to be the same as the offering price of $20.00 per share. The fair value of stock options has been estimated at $3.31 per option using the Black-Scholes option pricing model with the following assumptions: a grant-date share price and option exercise price of $20.00; dividend yield of 3.0%; expected option life of 10 years; risk-free interest rate of 4.64%; and volatility rate of 11.3% based on an index of publicly-traded thrifts. The actual value of option grants will be determined by the grant-date fair value of the option, which will depend on a number of factors, including the valuation assumptions used in the option pricing model. |
(2) | Assumes shares are issued from authorized but unissued shares and dilution is calculated at the maximum and maximum, as adjusted of the offering range. |
Employee Stock Ownership Plan
Peoples United Financial intends to implement a tax-qualified employee stock ownership plan in connection with the offering which we expect will purchase an amount of common stock equal to up to 6% of the sum of the shares of common stock that are sold in the offering and those that are issued to the charitable foundation, or 11,246,250 shares of common stock, assuming 185,437,500 shares, the maximum of the offering range, are sold in the offering. The plan is a tax-qualified retirement plan for the benefit of all employees, including executive officers of Peoples Bank and Peoples United Financial, who meet certain eligibility requirements. For a detailed description of the employee stock ownership plan and its limitations see Management of Peoples Bank Future Benefit Plans Employee Stock Ownership Plan .
The following table presents information regarding the eligible participants in our contemplated employee stock ownership plan and our contemplated stock-based incentive plans, the percentage of outstanding shares of common stock after the offering assuming shares are sold at the maximum of the offering range and the dollar value of the common stock available for issuance or allocation under these plans.
Individuals
Eligible to Participate |
Number of
Shares at the Maximum of Offering Range |
Number of
Shares at the Maximum, as adjusted of Offering Range |
Percentage of
Total Shares Outstanding (including shares issued to the charitable foundation) |
Percentage of
Shares Sold in the Offering (including shares issued to the charitable foundation) |
Estimated
Value of Shares at the Maximum of the Offering Range(1) |
Estimated Value
of Shares at the Maximum, as adjusted of Offering Range(1) |
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Employee stock ownership plan |
Officers and
Employees |
11,246,250 | 12,915,188 | 3.48% | 6.0% | $ | 224,925,000 | $ | 258,303,760 | |||||||
Stock option plan |
Directors,
Officers and Employees |
18,743,750 | 21,525,313 | 5.80% | 10.0% | $ | 62,041,813 | $ | 71,248,786 | |||||||
Recognition and retention plan |
Directors,
Officers and Employees |
7,497,500 | 8,610,125 | 2.32% | 4.0% | $ | 149,950,000 | $ | 172,202,500 |
(1) |
The actual value of restricted stock grants will be determined based on their fair value as of the date that grants are made. For purposes of this table, the fair value of the restricted stock grants is assumed to be the same as the offering price of $20.00 per share. The fair value of stock options has been estimated at $3.31 per option using the Black-Scholes option pricing model with the following assumptions: a grant-date share price and option exercise price of $20.00; dividend yield of 3.0%; expected option life of 10 years; risk free interest rate of 4.64%; and a volatility rate of 11.3% based |
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on an index of publicly-traded thrifts. The actual value of option grants will be determined by the grant-date fair value of the option, which will depend on a number of factors, including the valuation assumptions used in the option pricing model. For a detailed description of the stock option plan and the recognition and retention plan and their applicable limitations see Management of Peoples Bank Future Benefit Plans Stock Option Plan and Management of Peoples Bank Future Benefit Plans Recognition and Retention Plan . |
Change-In-Control Employee Severance Plan
Upon consummation of the conversion, we intend to establish the Peoples Bank Change-in-Control Employee Severance Plan which will provide eligible employees with severance pay benefits in the event of a change in control, as defined in the plan, of Peoples Bank or Peoples United Financial.
Generally, all employees, other than executive officers with individual employment or change in control agreements, who are employed at Peoples Bank as of the date of the conversion will be eligible to participate in the plan. Once a change in control occurs, the severance plan vests in each participant a contractual right to the benefits such participant is entitled to thereunder. Cash severance benefits payable under the plan depend on the participants position and the number of full years of service with Peoples Bank. The plan provides that we will maintain medical and dental plan coverage for a period of six months following the employees date of termination, or until comparable benefits are provided by a new employer, whichever occurs first, at no greater cost to the employee than the employee is paying as of the date of termination. For a detailed description of the Change-in-Control Employee Severance Plan and its limitations see Management of Peoples Bank Future Benefit Plans Change-In-Control Employee Severance Plan .
Employment Agreement and Change of Control Agreements
Peoples Bank has entered into an employment agreement with Mr. Klein and change of control agreements with each of Messrs. Klein, Sherringham, DAmore, Dreyer and Kosturko. These agreements provide that, under certain circumstances, certain benefits must be paid to these officers in the event of a change of control (as defined in the agreements) of Peoples Bank. Payments and benefits under these agreements will not be triggered by the conversion and the offering. However, the elimination of Peoples Mutual Holdings, which currently owns 57.7% of Peoples Banks outstanding common stock, as part of the conversion and offering increases the likelihood that a change of control would occur in the future, thus triggering payments to these executives under the employment agreement and/or change of control agreements. However, for a period of three years following the conversion, change of control transactions would effectively be prohibited by Office of Thrift Supervision regulations, which will prevent any person from acquiring the beneficial ownership of more than 10% of Peoples United Financials outstanding common stock without prior approval of the Office of Thrift Supervision. For a detailed description of these agreements, see Management of Peoples Bank Potential Payments Upon Termination or Change in Control Employment Agreement and Management of Peoples Bank Potential Payments Upon Termination or Change in Control Change of Control Agreements .
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The Board of Trustees of Peoples Mutual Holdings and the Board of Directors of Peoples Bank adopted the plan of conversion on September 19, 2006, and amended and restated the plan of conversion on October 26, 2006. The plan of conversion must also be approved by the depositors and stockholders of Peoples Bank. A special meeting of the depositors and a special meeting of stockholders has been called for this purpose on April 5, 2007. The Office of Thrift Supervision has conditionally approved the plan of conversion; however, such approval does not constitute a recommendation or endorsement of the plan of conversion by that agency.
General
Pursuant to the plan of conversion, our organization will convert from the mutual holding company form of organization, which is 42.3% owned by public stockholders, to the full stock form, which will be 100% owned by public stockholders. Peoples Mutual Holdings, the mutual holding company parent of Peoples Bank, will convert from a federally chartered mutual holding company to a federally chartered interim stock savings bank (Interim A) and simultaneously merge with and into Peoples Bank, with Peoples Bank as the surviving entity; thereafter, Peoples Mutual Holdings will no longer exist as a separate entity. The common stock of Peoples Bank held by Peoples Mutual Holdings will be canceled and a liquidation account will be established for the benefit of the depositors of Peoples Bank as of specified dates. Immediately thereafter, Peoples United Financial, a newly formed Delaware-chartered stock corporation and wholly owned subsidiary of Peoples Bank, will form a federally chartered interim stock savings bank as a wholly owned subsidiary (Interim B), which will merge with and into Peoples Bank, with Peoples Bank as the surviving entity. The shares of common stock of Interim B held by Peoples United Financial will be converted, on a one-to-one basis, into shares of common stock of Peoples Bank. The public stockholders of Peoples Bank will exchange their shares of the common stock of Peoples Bank for shares of the common stock of Peoples United Financial, based on an exchange ratio. See The Share Exchange of Peoples Bank Common Stock for Peoples United Financial Common Stock.
As a result, all of the common stock of Peoples Bank will be owned by Peoples United Financial and the public stockholders will own approximately the same percentage of the common stock of Peoples United Financial as the percentage of the common stock of Peoples Bank owned by them prior to the conversion, exclusive of their purchase of additional shares of Peoples United Financial common stock in the offering and their receipt of cash in lieu of fractional shares. In connection with the conversion, shares of common stock of Peoples United Financial representing the 57.7% ownership interest of Peoples Mutual Holdings will be offered for sale in the offering. In addition, the plan of conversion provides for the establishment of The Peoples Community Foundation and our funding of this charitable foundation with 2,000,000 shares of Peoples United Financial common stock and $20.0 million in cash from the offering proceeds. The establishment and funding of The Peoples Community Foundation is subject to a separate vote of Peoples Banks depositors and stockholders.
When the conversion and offering are completed, all of the capital stock of Peoples Bank will be owned by Peoples United Financial and all of the common stock of Peoples United Financial will be owned by public stockholders, including the charitable foundation. A diagram of our corporate structure before and after the conversion is set forth in the Summary section of this proxy statement/prospectus.
Peoples United Financial intends to contribute 50% of the net proceeds of the offering to Peoples Bank. We also intend to lend our employee stock ownership plan cash to enable the plan to buy up to 6% of the sum of the shares sold in the offering and those issued to the charitable foundation. Peoples United Financial will retain the balance of the net proceeds minus the cash contribution to the
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charitable foundation. The conversion will be completed only upon completion of the issuance of at least the minimum number of shares of Peoples United Financial common stock to be offered pursuant to the plan of conversion.
The plan of conversion provides that Peoples United Financial will offer shares of its common stock in the subscription offering in the order of priority listed below:
(1) | Depositors with accounts at Peoples Bank with aggregate balances of at least $50 on June 30, 2005; |
(2) | Our tax-qualified employee stock benefit plans; |
(3) | Depositors with accounts at Peoples Bank with aggregate balances of at least $50 on December 31, 2006; and |
(4) | Peoples Banks depositors as of February 5, 2007. |
Shares of common stock not purchased in the subscription offering will be offered for sale to the general public in a syndicated offering through a syndicate of selected dealers. Morgan Stanley & Co. Incorporated will act as sole book-running manager and Keefe, Bruyette & Woods, Inc., Lehman Brothers and Ryan Beck & Co., Inc. will act as joint lead managers for the syndicated offering, and each firm will assist us in selling our common stock in the syndicated offering on a best efforts basis. Alternatively, we may sell any remaining shares in an underwritten public offering. None of Morgan Stanley & Co. Incorporated, Ryan Beck & Co., Inc. or any other member of the syndicate is required to purchase any shares of the common stock in the syndicated offering. The syndicated offering will terminate no later than 45 days after the expiration of the subscription offering, unless extended by us, with approval of the Office of Thrift Supervision.
We determined the number of shares of common stock to be offered in the offering based upon an independent appraisal of the estimated pro forma market value of our common stock, giving effect to the conversion, the purchase price per share and Peoples Mutual Holdings 57.7% ownership interest in Peoples Bank. All shares of common stock to be sold in the offering will be sold at $20.00 per share. No commission will be charged to purchasers. The independent valuation will be updated and the final number of the shares to be issued in the offering will be determined at the completion of the offering. See Stock Pricing and Number of Shares to be Issued for more information as to the determination of the estimated pro forma market value of our common stock.
The following is a brief summary of the conversion, which is qualified in its entirety by reference to the provisions of the plan of conversion. A copy of the plan of conversion is available for inspection at each branch office of Peoples Bank and at the Northeast Regional and the Washington, D.C. offices of the Office of Thrift Supervision. The plan of conversion is also filed as an exhibit to the application to convert from mutual to stock form of which this proxy statement/prospectus is a part, copies of which may be obtained from the Office of Thrift Supervision. See Where You Can Find Additional Information .
Reasons for the Conversion
The conversion and offering are intended to provide us with substantially greater access to capital resources than is available to us under the mutual holding company structure. We believe that the conversion and offering will result in a more active and liquid trading market for the common stock of Peoples United Financial than currently exists for the common stock of Peoples Bank. In addition, the stock holding company structure will provide us with more flexibility in structuring mergers and acquisitions.
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The net proceeds raised in the offering will allow us to:
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finance de novo expansion and support organic growth both inside and outside of the state of Connecticut; |
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acquire other financial institutions, branches or other businesses related to banking, although there is no specific agreement with any institution at this time; |
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increase lending to support continued growth in our commercial banking loan portfolios; |
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form a charitable foundation to benefit the communities we serve; and |
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use the additional capital for other general corporate purposes. |
Since its mutual holding company reorganization in 1988, Peoples Bank has gained experience as a public company complying with the Securities Exchange Act of 1934, as amended, and in conducting stockholder meetings and other stockholder matters, such as communications, press releases, stock repurchases and dividend payments. For all the foregoing reasons, and after considering the relative merits of the conversion and offering, as well as applicable fiduciary duties, the Board of Trustees of Peoples Mutual Holdings and the Board of Directors of Peoples Bank approved the conversion and offering as being in the best interests of each such institution, the communities they serve and the depositors, stockholders and employees of Peoples Bank.
Approvals Required
The affirmative vote of a majority of the total number of votes eligible to be cast by the depositors of Peoples Bank at the special meeting of depositors is required to approve the plan of conversion and the establishment and funding of the charitable foundation. By their approval of the plan of conversion, the depositors of Peoples Bank will also be approving the various transactions required to accomplish the conversion, including the formation of the interim institutions and the mergers of the interim institutions with and into Peoples Bank. The affirmative vote of the holders of a majority of the outstanding shares of Peoples Bank common stock entitled to vote at a meeting of stockholders of Peoples Bank and the affirmative vote of a majority of the outstanding shares of Peoples Bank common stock, excluding shares held by Peoples Mutual Holdings, are also required to approve the plan of conversion and the establishment and funding of the charitable foundation. The plan of conversion and the establishment and funding of the charitable foundation also must both be approved by the Office of Thrift Supervision.
The Share Exchange of Peoples Bank Common Stock for Peoples United Financial Common Stock
Office of Thrift Supervision regulations provide that, in a conversion of a mutual holding company to fully stock form, the public stockholders will exchange their existing shares of common stock for shares issued in the conversion by the new holding company, provided that the mutual holding company demonstrates to the satisfaction of the Office of Thrift Supervision that the basis for the share exchange is fair and reasonable. Each share of Peoples Bank common stock outstanding as of the date of completion of the conversion (other than shares held by Peoples Mutual Holdings, which will be canceled as a result of the conversion of Peoples Mutual Holdings to a federal interim stock savings bank
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and simultaneous merger into Peoples Bank) will be subject to the exchange, pursuant to which each stockholder will automatically be entitled to exchange his or her shares of Peoples Bank common stock for shares of Peoples United Financial common stock, pursuant to an exchange ratio.
Shares of Peoples Bank common stock held by stockholders as of the date of completion of the conversion and offering will be canceled and exchanged for new shares of Peoples United Financial common stock. The number of shares received will be based on an exchange ratio which will be determined as of the date of completion of the conversion and offering and will be based on the percentage of Peoples Bank common stock held by the public prior to the conversion, the final independent appraisal of Peoples United Financial common stock prepared by RP Financial and the number of shares of common stock sold in the offering. The exchange ratio will ensure that existing public stockholders of Peoples Bank common stock will own approximately the same percentage of Peoples United Financial common stock after the conversion and offering as they owned of Peoples Bank common stock immediately prior to completion of the conversion and offering, exclusive of the effect of their purchase of additional shares in the offering and the receipt of cash in lieu of fractional shares. The exchange ratio does not depend on the market price of Peoples Bank common stock.
The following table shows how many shares a hypothetical owner of Peoples Bank common stock would receive in the share exchange, based on the number of shares sold in the offering.
Shares to be sold in
the offering |
Shares to be
exchanged for shares of Peoples Bank common stock |
Shares to be
issued to the foundation |
Total shares
of common stock to be outstanding after the conversion |
Exchange
ratio |
Equivalent
per share current market price (1) |
Shares that
would be exchanged per 100 shares of Peoples Bank common stock |
||||||||||||||||||
Amount | Percent | Amount | Percent | Amount | Percent | |||||||||||||||||||
Minimum |
137,062,500 | 57.22 | % | 100,491,584 | 41.95 | % | 2,000,000 | 0.83 | % | 239,554,084 | 1.6712 | $ | 33.42 | 167 | ||||||||||
Midpoint |
161,250,000 | 57.29 | % | 118,225,393 | 42.00 | % | 2,000,000 | 0.71 | % | 281,475,393 | 1.9662 | $ | 39.32 | 196 | ||||||||||
Maximum |
185,437,500 | 57.34 | % | 135,959,202 | 42.04 | % | 2,000,000 | 0.62 | % | 323,396,702 | 2.2611 | $ | 45.22 | 226 | ||||||||||
Maximum, as adjusted |
213,253,125 | 57.39 | % | 156,353,083 | 42.07 | % | 2,000,000 | 0.54 | % | 371,606,208 | 2.6003 | $ | 52.01 | 260 |
(1) | Represents the value of shares of Peoples United Financial common stock and cash in lieu of fractional shares received in the share exchange by a holder of one share of Peoples Bank common stock at the exchange ratio, assuming a market price of $20.00 per share. |
For example, at the midpoint shown in the preceding table, a stockholder owning 100 shares of Peoples Bank common stock would receive 196 shares of Peoples United Financial common stock plus $12.40 in cash, which is equivalent to a value of $39.32 per share of Peoples Bank common stock based on the $20.00 per share offering price of Peoples United Financial common stock. At the maximum shown in the preceding table, a stockholder owning 100 shares of Peoples Bank common stock would receive 226 shares of Peoples United Financial common stock plus $2.20 in cash, which is equivalent to a value of $45.22 per share of Peoples Bank common stock based on the $20.00 per share offering price of Peoples United Financial common stock. Based on the $[ ] per share closing price of Peoples Bank common stock as of the last trading day prior to the date of this proxy/prospectus, unless at least [ ] shares of Peoples United Financial common stock are sold in the offering (close to the maximum of the offering range), the initial value of the Peoples United Financial common stock you receive in the share exchange would be less than the market value of the Peoples Bank common stock you currently own. See Risk FactorsThe Market Value of Peoples United Financial Common Stock Received in the Share Exchange May Be Less than the Market Value of Peoples Bank Common Stock Exchanged.
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No fractional shares of our common stock will be issued. For each fractional share that would otherwise be issued, we will pay by check an amount equal to the product obtained by multiplying the fractional share interest to which the holder would otherwise be entitled by the $20.00 per share purchase price. Holders with shares held in street name will receive these funds in their brokerage accounts. Holders with certificated shares and shares held in book-entry form will receive checks.
As of the completion of the conversion, if you own shares of Peoples Bank common stock in street name through a brokerage firm, the shares will be promptly exchanged in that account, without any action on your part. Likewise, if you hold your shares in book-entry form with our transfer agent, they will be promptly exchanged without any action on your part, and an account statement will be mailed to you, indicating the number of shares of Peoples United Financial common stock owned as a result of the exchange.
If you hold a stock certificate representing your shares of Peoples Bank common stock, you will receive a transmittal form, with instructions on how to surrender your certificate to our transfer agent, acting as exchange agent. The transmittal form will be mailed to you as soon as practicable after the completion of the conversion. Do not forward a stock certificate without a transmittal form. Shares of Peoples United Financial common stock issued to you in the exchange will be issued in book-entry form, meaning that you will not receive a stock certificate. Within three business days after the exchange agent receives your properly executed transmittal form, accompanied by a stock certificate, you will be mailed an account statement. The account statement will indicate the number of shares of Peoples United Financial common stock owned as a result of the exchange and held in book-entry form with our transfer agent. The account statement will be accompanied by information telling you how to obtain a stock certificate, and how to transfer your shares to a brokerage account.
If a certificate for Peoples Bank common stock has been lost, stolen or destroyed, our transfer agent will issue shares of Peoples United Financial common stock in book-entry form upon receipt of appropriate evidence as to the loss, theft or destruction of the Peoples Bank stock certificate, appropriate evidence as to the ownership of the certificate by the claimant, and appropriate and customary indemnification, which is normally effected by the purchase of a bond from a surety company at the stockholders expense.
All shares of Peoples United Financial common stock issued in exchange for existing shares of Peoples Bank common stock will be considered to have been issued in full satisfaction of all rights pertaining to such shares, subject, however, to our obligation to pay any dividends or make any other distributions with a record date prior to the effective date of the conversion and offering, which may have been declared by us on or prior to the effective date and which remain unpaid at the effective date.
We also will convert options previously awarded under the Peoples Bank 1998 Long-Term Incentive Plan into options to purchase Peoples United Financial common stock. At September 30, 2006, there were outstanding options to purchase 1,435,055 shares of Peoples Bank common stock. The number of outstanding options and related per share exercise prices will be adjusted based on the exchange ratio. The aggregate exercise price, term and vesting period of the outstanding options will remain unchanged. If any options are exercised before we complete the offering, the number of shares of Peoples Bank common stock outstanding will increase and the exchange ratio could be adjusted. If all currently outstanding options are exercised, stockholders will experience dilution of approximately 1.00% in their ownership interest in Peoples Bank common stock.
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Effects of the Conversion
Continuity. While the conversion is being accomplished, the normal business of Peoples Bank of accepting deposits and making loans will continue without interruption. Peoples Bank will continue to be a federally chartered savings bank and will continue to be regulated by the Office of Thrift Supervision. After the conversion, Peoples Bank will continue to offer existing services to depositors, borrowers and other customers. Directors and officers of Peoples Bank prior to the conversion will continue to serve as directors and officers of Peoples Bank after the conversion. Directors and certain officers of Peoples Bank prior to the conversion will serve as directors and officers of Peoples United Financial after the conversion. Corporators of Peoples Mutual Holdings will cease to hold such office following the conversion; Peoples United Financial will not have a Board of Corporators. Trustees of Peoples Mutual Holdings who are not directors of Peoples Bank will become Advisory Board members of Peoples Bank.
Effect on Deposit Accounts . Under the plan of conversion, each depositor in Peoples Bank at the time of the conversion will automatically continue as a depositor after the conversion, and the deposit balance, interest rate and other terms of such deposit accounts will not change as a result of the conversion. Each such account will be insured by the Federal Deposit Insurance Corporation to the same extent as before the conversion. Depositors will continue to hold their existing certificates, passbooks and other evidences of their accounts.
Effect on Loans. No loan outstanding from Peoples Bank will be affected by the conversion, and the amount, interest rate, maturity and security for each loan will remain as it was contractually fixed prior to the conversion.
Effect on Voting Rights of Depositors . At present, depositors of Peoples Bank have no voting rights in Peoples Mutual Holdings, except as provided in the plan of conversion. Upon completion of the conversion, Peoples Mutual Holdings will cease to exist as a separate entity and depositors, in their capacity as such, will have no voting rights in Peoples United Financial or Peoples Bank. Upon completion of the conversion, all voting rights in Peoples Bank shall be held and exercised exclusively by Peoples United Financial, as the sole stockholder of Peoples Bank. The stockholders of Peoples United Financial will possess exclusive voting rights with respect to Peoples United Financial common stock.
Effect on Peoples Bank Stockholders. The conversion will increase the stockholders equity per share and earnings per share of the current stockholders of Peoples Bank, as adjusted for the exchange offer. The following table compares historical information for Peoples Bank with similar information on a pro forma and per equivalent Peoples United Financial share basis. The information listed as Pro Forma Per One Share of Peoples Bank Common Stock was obtained by multiplying the Pro Forma Per One Share of Peoples United Financial Common Stock amounts by the exchange ratio indicated in the table.
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Historical
Per One Share of Peoples Bank Common Stock |
Pro Forma
Per One Share of Peoples United Financial Common Stock (1) |
Exchange
Ratio |
Pro Forma
Per One Share of Peoples Bank Common Stock (2) |
||||||||
Stockholders equity at September 30, 2006: |
|||||||||||
Sale of 137,062,500 shares |
$ | 9.51 | $ | 15.61 | 1.6712 | $ | 26.09 | ||||
Sale of 161,250,000 shares |
9.51 | 14.76 | 1.9662 | 29.02 | |||||||
Sale of 185,437,500 shares |
9.51 | 14.14 | 2.2611 | 31.97 | |||||||
Sale of 213,253,125 shares |
9.51 | 13.59 | 2.6003 | 35.34 | |||||||
Earnings for the nine months ended September 30, 2006: |
|||||||||||
Sale of 137,062,500 shares |
$ | 0.59 | $ | 0.55 | 1.6712 | $ | 0.92 | ||||
Sale of 161,250,000 shares |
0.59 | 0.50 | 1.9662 | 0.98 | |||||||
Sale of 185,437,500 shares |
0.59 | 0.46 | 2.2611 | 1.04 | |||||||
Sale of 213,253,125 shares |
0.59 | 0.42 | 2.6003 | 1.09 | |||||||
Market price (3): |
|||||||||||
Sale of 137,062,500 shares |
$ | 37.39 | $ | 20.00 | 1.6712 | $ | 33.42 | ||||
Sale of 161,250,000 shares |
37.39 | 20.00 | 1.9662 | 39.32 | |||||||
Sale of 185,437,500 shares |
37.39 | 20.00 | 2.2611 | 45.22 | |||||||
Sale of 213,253,125 shares |
37.39 | 20.00 | 2.6003 | 52.01 |
(1) | This column shows the pro forma effect of the conversion and offering (including the sale of shares in the offering, the issuance of shares to the charitable foundation and the share exchange) per share of Peoples United Financial common stock. The stockholders equity and earnings numbers can also be found in the pro forma tables contained in the Pro Forma Data section of this proxy statement/prospectus. |
(2) | This column shows the pro forma effect of the conversion and offering on one share of Peoples Bank common stock and takes into account the fact that, because of the share exchange, a current Peoples Bank stockholder will own a greater number of Peoples United Financial shares than the number of shares of Peoples Bank common stock he or she held prior to the conversion and offering. |
(3) | Based on the $37.39 closing price of Peoples Bank common stock on September 19, 2006, which was the business day immediately preceding the public announcement of the conversion. |
Tax Effects. We have received an opinion of counsel or tax advisor with regard to federal and state income taxation to the effect that the conversion will not be taxable for federal or state income tax purposes to Peoples Mutual Holdings, Peoples Bank, Peoples United Financial, the public stockholders of Peoples Bank and Peoples United Financial (except to the extent of any cash received in lieu of a fractional share interest in Peoples United Financial), depositors of Peoples Bank, eligible account holders, or supplemental eligible account holders. See Tax Aspects and United States Federal Tax Considerations Applicable to Non-U.S. Holders of the Common Stock.
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Effect on Liquidation Rights . Each qualifying depositor in Peoples Bank has both a deposit account in Peoples Bank and a pro rata ownership interest in the net worth of Peoples Mutual Holdings based upon the balance in his or her account. This ownership interest is tied to the depositors account and has no tangible market value separate from the deposit account. This interest may only be recognized in the unlikely event of a complete liquidation of Peoples Mutual Holdings and Peoples Bank. Any depositor who opens a qualifying deposit account in Peoples Bank obtains a pro rata ownership interest in Peoples Mutual Holdings without any additional payment beyond the amount of the deposit. A depositor who reduces or closes his or her account receives a portion or all of the balance in the deposit account but nothing for his or her ownership interest in the net worth of Peoples Mutual Holdings, which is extinguished to the extent that the balance in the account is reduced or closed.
Consequently, depositors in a stock subsidiary savings bank of a mutual holding company normally have no way of realizing the value of their ownership interest, which has realizable value only in the unlikely event that Peoples Mutual Holdings and Peoples Bank are liquidated. If this occurs, the depositors of record at that time would share pro rata in any residual surplus and reserves of Peoples Mutual Holdings after other claims, including claims of depositors to the amounts of their deposits, are paid.
In the unlikely event that Peoples Bank were to liquidate after the conversion, all claims of creditors, including those of depositors, would be paid first, followed by distribution of the liquidation account to depositors as of June 30, 2005 and December 31, 2006 who continue to maintain their deposit accounts as of the date of liquidation, with any assets remaining thereafter distributed to Peoples United Financial as the holder of Peoples Banks capital stock. See Liquidation Rights.
Effect on Existing Equity-Based Compensation Plans . Following the conversion, Peoples Banks existing 1998 Long-Term Incentive Plan and Directors Equity Compensation Plan will continue in accordance with their terms as then in effect, except that the Peoples Bank Directors Equity Compensation Plan will be assumed by Peoples United Financial. Upon completion of the conversion, the number of shares of Peoples Bank common stock currently reserved for or held by these benefit plans will be exchanged for shares of Peoples United Financial common stock based upon the exchange ratio. All outstanding grants and awards will be adjusted pursuant to customary anti-dilution provisions.
Stock Pricing and Number of Shares to be Issued
The plan of conversion requires that the aggregate purchase price of the Peoples United Financial common stock to be sold in the offering must be based on the appraised pro forma market value of our common stock, as determined on the basis of an independent valuation. We have retained RP Financial, LC., an appraisal firm experienced in appraisals of financial institutions, to prepare an independent valuation appraisal. There has been no material relationship between Peoples Bank and RP Financial for the past two years. RP Financials fees for its services in preparing this appraisal are estimated to be $900,000. We have agreed to indemnify RP Financial and its employees and affiliates against specified losses (including any losses in connection with claims under the federal securities laws) arising out of its services as independent appraiser, except where RP Financials liability results from its negligence or bad faith.
Consistent with Office of Thrift Supervision appraisal guidelines, the independent appraisal applied three primary methodologies to estimate the pro forma market value of our common stock: the pro forma price-to-book value approach applied to both reported book value and tangible book value; the pro forma price-to-earnings approach applied to reported and estimated core earnings; and the pro forma price-to-assets approach. The market value ratios applied in the three methodologies were based upon the current market valuations of a peer group of companies considered by RP Financial to be comparable to
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us, subject to valuation adjustments applied by RP Financial to account for differences between Peoples Bank and the peer group. The peer group analysis conducted by RP Financial included a total of 12 publicly-traded financial institutions with assets of more than $4.0 billion and market capitalizations of at least $400 million. The peer group is comprised of six publicly-traded thrifts and six publicly-traded commercial banks, all selected based on asset size, market area (two Connecticut institutions are included) and operating strategy. In preparing its appraisal, RP Financial placed the greatest emphasis on the price-to-earnings approach and placed lesser emphasis on the price-to-book and price-to-assets approaches in estimating pro forma market value.
RP Financial prepared the independent valuation in reliance upon the information contained in this proxy statement/prospectus, including the consolidated financial statements of Peoples Bank. RP Financial also considered the following factors, among others:
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our present and projected operating results and financial condition and proposed use of proceeds; |
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the economic and demographic conditions in our existing market area; |
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historical, financial and other information relating to us; |
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a comparative evaluation of our operating and financial characteristics with those of other similarly situated publicly-traded banks and savings institutions; |
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the aggregate size of the offering of the common stock; |
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the impact of the conversion and offering on our equity and earnings potential; |
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our proposed dividend policy; and |
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the trading market for securities of comparable institutions and general conditions in the market for such securities. |
RP Financials independent valuation also utilized certain assumptions as to the pro forma earnings of Peoples United Financial after the offering. These assumptions included estimated expenses, an assumed after-tax rate of return on the net offering proceeds and expenses related to the stock-based benefit plans of Peoples United Financial, including the employee stock ownership plan, the recognition and retention plan and the stock option plan. The employee stock ownership plan and recognition and retention plan are assumed to purchase 6% and 4%, respectively, of the sum of the shares sold in the offering and those issued to the charitable foundation. The stock option plan is assumed to grant options to purchase the equivalent of 10% of the sum of the shares sold in the offering and those issued to the charitable foundation. See Pro Forma Data for additional information concerning these assumptions. The use of different assumptions may yield different results.
RP Financial also considered that we intend to contribute cash and issue shares of common stock to The Peoples Community Foundation, a charitable foundation that will be established in connection with the conversion. The intended contribution of cash and shares of common stock to the charitable foundation has the effect of reducing the estimated size of the offering of our common stock. See Comparison of Valuation and Pro Forma Information With and Without the Charitable Foundation .
RP Financial prepared an original valuation dated October 16, 2006. RP Financial subsequently prepared an updated valuation dated January 18, 2007 taking into account recent developments through
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December 31, 2006 and updated stock prices. Based on their updated independent valuation dated January 18, 2007, RP Financial has advised us that, as of January 18, 2007, the estimated pro forma market value, or valuation range, of our common stock, including offering shares, exchange shares and shares issued to the charitable foundation, ranged from a minimum of $4.791 billion to a maximum of $6.468 billion, with a midpoint of $5.630 billion. The Board of Trustees of Peoples Mutual Holdings and the Board of Directors of Peoples Bank have decided to offer the shares for a price of $20.00 per share. RP Financial has advised us that, as of January 18, 2007, the exchange ratio ranged from a minimum of 1.6712 to a maximum of 2.2611, with a midpoint of 1.9662, shares of Peoples United Financial common stock per share of Peoples Bank common stock. The aggregate offering price of the shares of common stock will be equal to the valuation range net of the value of the shares issued to the charitable foundation multiplied by the 57.7% ownership interest that Peoples Mutual Holdings has in Peoples Bank. The number of shares offered will be equal to the aggregate offering price divided by the price per share. Based on the valuation range, the value of shares issued to the charitable foundation, the percentage of Peoples Bank common stock owned by Peoples Mutual Holdings and the $20.00 price per share, the minimum of the offering range is 137,062,500 shares, the midpoint of the offering range is 161,250,000 shares, the maximum of the offering range is 185,437,500 shares and 15% above the maximum of the offering range is 213,253,125 shares. RP Financials independent valuation will be updated before we complete our offering.
The Board of Directors of Peoples Bank and the Board of Trustees of Peoples Mutual Holdings reviewed the independent valuation and, in particular, considered the following:
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Peoples Banks financial condition and results of operations; |
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comparison of financial performance ratios of Peoples Bank to those of other financial institutions of similar size; |
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market conditions generally and in particular for financial institutions; |
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the historical trading price of the publicly held shares of Peoples Bank common stock; and |
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comparison of Peoples United Financials pro forma pricing multiples to the average and median pricing multiples of the peer group companies. |
All of these factors are set forth in the independent valuation. The Board of Trustees of Peoples Mutual Holdings and the Board of Directors of Peoples Bank also reviewed the methodology and the assumptions used by RP Financial in preparing the independent valuation and the Board of Trustees and the Board of Directors believe that such assumptions are reasonable. The offering range may be amended with the approval of the Office of Thrift Supervision, if required, as a result of subsequent developments in our financial condition or market conditions generally. In the event the independent valuation is updated to amend the pro forma market value of our common stock, including offering shares, exchange shares and shares issued to the charitable foundation, to less than $4.791 billion or more than $7.432 billion, the appraisal will be filed with the Securities and Exchange Commission by a post-effective amendment to our registration statement.
The following table presents a summary of selected pricing ratios for the peer group companies used by RP Financial in its independent appraisal report and the resulting pricing ratios for Peoples United Financial reflecting the pro forma impact of the offering, as calculated in the table in the section of this proxy statement/prospectus entitled Pro Forma Data . Compared to the median pricing ratios of the peer group, Peoples United Financials pro forma pricing ratios at the midpoint of the offering range
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indicated a premium of 88% on a price-to-earnings basis and discounts of 34% on a price-to-book basis and 45% on a price-to-tangible book value basis. The estimated appraised value and the resulting premiums or discounts took into consideration the potential financial impact of the conversion and offering.
Price to | ||||||||
Earnings
Multiple (1) |
Book
Value Ratio |
Tangible
Book Value Ratio |
||||||
Peoples United Financial (pro forma) (2) : |
||||||||
Minimum |
27.27x | 128.12 | % | 131.84 | % | |||
Midpoint |
30.00x | 135.50 | % | 138.99 | % | |||
Maximum |
32.61x | 141.44 | % | 144.82 | % | |||
Maximum, as adjusted |
35.71x | 147.17 | % | 150.26 | % | |||
All publicly-traded thrifts as of January 18, 2007: |
||||||||
Average |
18.27x | 139.71 | % | 163.83 | % | |||
Median |
15.84x | 131.62 | % | 144.78 | % | |||
All publicly-traded banks as of January 18, 2007: |
||||||||
Average |
17.05x | 187.80 | % | 231.22 | % | |||
Median |
16.03x | 179.90 | % | 221.20 | % | |||
Valuation of peer group as of January 18, 2007 (3) : |
||||||||
Average |
17.53x | 209.12 | % | 269.15 | % | |||
Median |
15.96x | 205.31 | % | 250.45 | % |
(1) | Multiples calculated by RP Financial in the January 18, 2007 appraisal are based on an estimate of core, or recurring, earnings for the 12 months ended December 31, 2006 and on total pro forma outstanding shares of common stock, including all shares owned by our employee stock ownership plan, whether or not allocated to participants and including shares issued to the charitable foundation, and equal 24.86, 27.75, 30.38 and 33.10, respectively, at the minimum, midpoint, maximum and adjusted maximum of the offering range. Because this is a different method than used by us in calculating the numbers included in this table and in the pro forma information included under Pro Forma Data , the pro forma price-to-earnings multiples in the table do not correspond to the multiples in the appraisal. See note 1 to the pro forma information included under Pro Forma Data for more information on our treatment of shares owned by our employee stock ownership plan for purposes of this calculation. |
(2) | Based on Peoples Banks financial data as of and for the nine months ended September 30, 2006. Price-to-earnings multiples for Peoples United Financial are shown on an annualized basis. |
(3) | Reflects earnings for the most recent 12-month period for which data were publicly available. |
The independent valuation prepared by RP Financial is not intended, and must not be construed, as a recommendation of any kind as to the advisability of purchasing shares of our common stock. RP Financial did not independently verify the consolidated financial statements
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and other information provided by Peoples Bank, nor did RP Financial value independently the assets or liabilities of Peoples Bank. The independent valuation considers Peoples Bank as a going concern and should not be considered as an indication of the liquidation value of Peoples Bank. Moreover, because the valuation is necessarily based upon estimates and projections of a number of matters, all of which are subject to change from time to time, no assurance can be given that persons purchasing Peoples United Financial common stock in the offering will thereafter be able to sell their shares at prices at or above the $20.00 purchase price.
Following commencement of the subscription offering, the maximum of the valuation range may be increased by up to 15% to up to $7.432 billion, as a result of regulatory considerations, demand for the shares or changes in market conditions, which would result in a corresponding increase of up to 15% in the maximum of the offering range to up to 213,253,125 shares and of the exchange ratio to 2.6003 shares of Peoples United Financial common stock per share of Peoples Bank common stock. The price of $20.00 per share will remain fixed.
If the update to the independent valuation at the conclusion of the offering results in an increase in the maximum of the valuation range to more than $7.432 billion and a corresponding increase in the offering range to more than 213,253,125 shares, or a decrease in the minimum of the valuation range to less than $4.791 billion and a corresponding decrease in the offering range to fewer than 137,062,500 shares, then, after consulting with the Office of Thrift Supervision, we may terminate the plan of conversion, cancel all deposit account withdrawal authorizations and promptly return by check all funds received in the subscription offering with interest at Peoples Banks passbook savings rate of interest calculated from the date of receipt of the stock order. Alternatively, we may hold a new offering or establish a new offering range, extend the offering period and commence a resolicitation of subscribers or take other actions as permitted by the Office of Thrift Supervision in order to complete the conversion and offering. If a resolicitation is commenced, we will notify all subscribers, and subscribers will have the right to change (increase or decrease) or rescind their purchase orders during a resolicitation period. If we do not receive a response from a subscriber to any resolicitation, the subscribers order will be rescinded, all withdrawal authorizations will be canceled and all funds received will be returned promptly with interest at Peoples Banks passbook savings rate. The conversion must be completed by April 5, 2009, which is two years after the special meeting of depositors of Peoples Bank to vote on the conversion.
We reserve the right in our sole discretion to terminate the offering at any time and for any reason, in which case we will cancel all deposit account withdrawal authorizations and return by check all funds submitted in the subscription offering, plus interest at Peoples Banks passbook savings rate from the date of receipt.
An increase in the number of shares to be issued in the offering would decrease both a purchasers ownership interest and our pro forma earnings and stockholders equity on a per share basis while increasing pro forma earnings and stockholders equity on an aggregate basis. A decrease in the number of shares to be issued in the offering would increase both a purchasers ownership interest and our pro forma earnings and stockholders equity on a per share basis, while decreasing pro forma earnings and stockholders equity on an aggregate basis. For a presentation of the effects of these changes, see Pro Forma Data .
Copies of the independent valuation appraisal report of RP Financial, including any amendments thereto, and the detailed memorandum of RP Financial setting forth the method and assumptions for the appraisal are available for inspection at our administrative offices and as specified under Where You Can Find Additional Information .
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Other Purchase Arrangements
If we are unable to find purchasers from the general public for unsubscribed shares up to the minimum of the offering range, we may make other purchase arrangements, if feasible. Other purchase arrangements must be approved by the Office of Thrift Supervision and may provide for purchases by trustees, directors, officers, their associates and other persons in excess of the limitations provided in the plan of conversion and in excess of the proposed purchases discussed under Proposed Purchases of Common Stock by Management , although no such additional purchases are currently planned. If other purchase arrangements cannot be made, we may do any of the following: terminate the offering and promptly return all funds or cancel deposit account withdrawals, as the case may be; set a new offering range, notify all subscribers and give them the opportunity to increase, decrease or rescind their orders; or take such other actions as may be permitted by the Office of Thrift Supervision.
Limitation on Common Stock Ownership
The number of shares of Peoples United Financial common stock that a stockholder receives in the share exchange, individually and together with associates or persons acting in concert with such stockholder, when combined with any shares that the stockholder and his or her associates and persons acting in concert with him or her will purchase in the offering, may not exceed 5% of the total shares of the Peoples United Financial common stock to be issued and outstanding at the completion of the conversion and offering. However, current stockholders will not have to sell any Peoples Bank common stock or be limited in receiving shares of Peoples United Financial common stock in the share exchange even if their ownership of Peoples United Financial common stock after the share exchange would exceed an applicable purchase limitation.
The term associate means:
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any corporation or organization, other than Peoples Mutual Holdings, Peoples Bank, Peoples United Financial or a majority-owned subsidiary of Peoples Bank or Peoples United Financial, of which the stockholder is a senior officer or partner or are directly or indirectly the beneficial owner of 10% or more of any class of equity securities; |
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any trust or other estate in which the stockholder has a substantial beneficial interest or serve as a trustee or in a similar fiduciary capacity, but excluding (1) any employee stock benefit plan in which the stockholder has a substantial beneficial interest or serve as trustee or in a similar fiduciary capacity, and (2) any other person who has a substantial beneficial interest or serves as a trustee or in a similar fiduciary capacity for any such employee stock benefit plan, solely as a result of having such interest or serving in such capacity; and |
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the stockholder, his or her spouse or a relative of the stockholder or his or her spouse, who either has the same home as you or who is a trustee, director or officer of Peoples Mutual Holdings, Peoples Bank, Peoples United Financial or any of the subsidiaries of the foregoing. |
The term acting in concert means:
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knowing participation in a joint activity or interdependent conscious parallel action towards a common goal whether or not pursuant to an express agreement; or |
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a combination or pooling of voting or other interests in the securities of an issuer for a common purpose pursuant to any contract, understanding, relationship, agreement or other arrangement, whether written or otherwise. |
Any persons or companies having the same address on an account or stock order form are considered to be acting in concert. A person or company which acts in concert with another person or company (other party) shall also be deemed to be acting in concert with any person or company who is also acting in concert with that other party, except that any tax-qualified employee stock benefit plan will not be deemed to be acting in concert with its trustee or a person who serves in a similar capacity solely for the purpose of determining whether common stock held by the trustee and common stock held by the employee stock benefit plan will be aggregated, and participants or beneficiaries of the employee stock benefit plan will not be deemed to be acting in concert solely as a result of their common interest as participants or beneficiaries. We will presume that certain persons are acting in concert based upon various facts, including the fact that persons have joint account relationships or the fact that such persons have filed joint Schedules 13D with the Securities and Exchange Commission with respect to other companies. We reserve the right to make an independent investigation of any facts or circumstances brought to our attention that indicate that one or more persons acting independently or as a group acting in concert may be attempting to violate or circumvent the regulatory prohibition on the transferability of subscription rights or ownership limitations. We have the right, in our sole discretion, to determine whether persons are associates or acting in concert. Our trustees, directors, officers and employees are not treated as associates of each other solely because of their capacity as such.
Selling Agent Compensation
Subscription Offering. Under the terms of an agency agreement, which is filed as an exhibit to the registration statement relating to this proxy statement/prospectus, we have retained Ryan Beck & Co., Inc. to assist us with the subscription offering. The agency agreement provides that Ryan Beck & Co., Inc. will assist us on a best efforts basis in the marketing of our common stock in the subscription offering, including by:
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acting as our financial advisor for the subscription offering; |
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providing administrative services and managing the Stock Information Center; and |
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targeting our sales efforts, including assisting in the preparation of marketing materials and soliciting orders for common stock. |
For these services, Ryan Beck & Co., Inc. will receive a marketing fee equal to 1.0% of the dollar amount of common stock sold in the subscription offering, subject to a maximum marketing fee of $12.0 million. No marketing fee will be payable to Ryan Beck & Co., Inc. with respect to shares sold in the subscription offering to officers, trustees, directors and employees, the immediate families of such officers, trustees, directors or employees or employee benefit plans.
Morgan Stanley & Co. Incorporated will also provide us with advisory services in connection with the subscription offering. In the event the gross proceeds from the subscription offering equal or exceed $1.75 billion, Morgan Stanley & Co. Incorporated will receive an advisory fee equal to $5 million. In the event the gross proceeds from the subscription offering equal or exceed $2.5 billion, Peoples Bank may, in its sole discretion, pay Morgan Stanley & Co. Incorporated an additional advisory fee of $2.5 million.
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The following table shows the estimated commissions to be paid by us to Ryan Beck & Co., Inc. in the subscription offering, both on a per share basis and on an aggregate basis, assuming (1) that 60,000,000 shares of common stock are sold in the subscription offering and between 67,500,000 and 112,500,000 shares are sold in the syndicated offering and (2) that our officers, trustees, directors, employees and their immediate families purchase 387,500 shares in the subscription offering and our employee benefit plans do not purchase any shares in the subscription offering. We are unable to determine the exact fees and commissions because these amounts will depend on the allocation of the shares sold in the subscription offering and in the syndicated offering, among other factors. See Pro Forma Data .
Per Share | Total | |||||
Marketing fee |
$ | 0.199 | $ | 11,922,500 |
Syndicated Offering.
General. The agency agreement provides that Morgan Stanley & Co. Incorporated, Ryan Beck & Co., Inc. and the other agents named therein will assist us in the marketing of our common stock in the syndicated offering, including by managing a syndicate of selected dealers to offer the common stock in the syndicated offering. Morgan Stanley & Co. Incorporated will serve as global coordinator and sole book-running manager, Keefe, Bruyette & Woods, Inc., Lehman Brothers and Ryan Beck & Co., Inc. will act as joint lead managers, and Sandler ONeill & Partners, L.P. will act as co-manager for the syndicated offering. The syndicated offering is being made on a best efforts basis, and accordingly none of Morgan Stanley & Co. Incorporated, Ryan Beck & Co., Inc. or any other member of the syndicate is required to purchase any shares of the common stock in the syndicated offering.
In connection with the syndicated offering, we will pay Morgan Stanley & Co. Incorporated and Ryan Beck & Co., Inc. an aggregate management fee equal to 1.0% of the aggregate dollar amount received in exchange for shares sold in the syndicated offering. In addition, we will pay to the syndicate, which will include Morgan Stanley & Co. Incorporated and Ryan Beck & Co., Inc., a sales concession equal to 3.0% of the aggregate dollar amount received in exchange for shares sold in the syndicated offering. The members of the syndicate will allow a concession not in excess of $[ ] per share to other members of the syndicate. The members of the syndicate may allow, and the other dealers may reallow, a discount not in excess of $[ ] per share to other dealers.
In the event that we sell common stock in an underwritten public offering, we have agreed that Morgan Stanley & Co. Incorporated will have the right to serve as sole book-running manager and Ryan Beck & Co., Inc. will have the right to act as joint lead manager for the offering. We will pay underwriters (which we expect would include Morgan Stanley & Co. Incorporated and Ryan Beck & Co., Inc.) that sell shares of our common stock in such offering an underwriting discount, to be negotiated by us prior to such an offering. If we determine to sell stock in an underwritten public offering, the terms of such offering, including the names of the underwriters participating in such offering, will be described in a supplement to this proxy statement/prospectus.
The following table shows the estimated fees and commissions to be paid by us to Morgan Stanley & Co. Incorporated, Ryan Beck & Co., Inc. and the other members of the syndicate in the syndicated offering, both on a per share basis and on an aggregate basis, assuming that 60,000,000 shares of common stock are sold in the subscription offering and between 77,062,500 and 125,437,500 shares are sold in the syndicated offering. We are unable to determine the exact fees and commissions because these amounts will depend on the allocation of the shares sold in the subscription offering and in the syndicated offering, among other factors. See Pro Forma Data .
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Total | |||||||||||||||
Per Share |
Minimum of the
Offering Range (77,062,500 shares sold in syndicated offering) |
Midpoint of the
Offering Range (101,250,000 shares sold in syndicated offering) |
Maximum of the
Offering Range (125,437,500 shares sold in syndicated offering) |
15% Above the
Maximum of the Offering Range (153,253,125 shares sold in syndicated offering) |
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Management fee to Morgan Stanley & Co. Incorporated and Ryan Beck & Co., Inc. |
$ | 0.20 | $ | 15,412,500 | $ | 20,250,000 | $ | 25,087,500 | $ | 30,650,625 | |||||
Sales concession to syndicate |
$ | 0.60 | $ | 46,237,500 | $ | 60,750,000 | $ | 75,262,500 | $ | 91,951,875 |
We estimate that the expenses of the offering, not including the fees and commissions described above or under Subscription Offering , will be approximately $10.0 million. These expenses will be payable by us.
Indemnification
We have agreed to indemnify Morgan Stanley & Co. Incorporated and Ryan Beck & Co., Inc., as well as the other members of the syndicate, against liabilities and expenses relating to the offering, including liabilities under the Securities Act of 1933, or to contribute to payments that Morgan Stanley & Co. Incorporated, Ryan Beck & Co., Inc. and such other members of the syndicate may be required to make for these liabilities.
Lock-up Agreements
We and our directors and executive officers have agreed not to directly or indirectly offer, sell, pledge or otherwise dispose of any shares of our common stock or any securities convertible into or exchangeable for our common stock without the prior written consent of Morgan Stanley & Co. Incorporated and Ryan Beck & Co., Inc. for a period commencing on the date of this proxy statement/prospectus and continuing until 90 days after the closing of the conversion and the offering.
Relationships
Morgan Stanley & Co. Incorporated, Ryan Beck & Co., Inc., some of the other members of the syndicate and their respective affiliates have performed investment banking and financial advisory services for us for which they have received customary fees and reimbursements of expenses and may in the future provide additional services for which it is anticipated they will receive compensation.
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Certain Restrictions on Purchase or Transfer of Our Shares After Conversion
Common stock purchased in the offering or issued in the share exchange will be freely transferable except for shares purchased by directors and executive officers of Peoples Bank as described below. All shares of common stock purchased in the offering by our directors or executive officers generally may not be sold for a period of one year following the closing of the conversion, except in the event of the death of the director or executive officer. Each certificate (if any) for shares purchased by such persons in the offering will bear a legend giving notice of this restriction on transfer, and instructions will be issued to the effect that any transfer within this time period of any certificate or record ownership of the shares other than as provided above is a violation of the restriction. Any shares of common stock issued at a later date as a stock dividend, stock split or otherwise with respect to the shares purchased by such persons in the offering will be similarly restricted. Our directors and executive officers also will be restricted by the insider trading rules promulgated pursuant to the Securities Exchange Act of 1934, as amended.
Purchases of shares of our common stock by our directors and executive officers and their associates during the three-year period following the closing of the conversion may be made only through a broker or dealer registered with the Securities and Exchange Commission, except with the prior written approval of the Office of Thrift Supervision. This restriction does not apply, however, to negotiated transactions involving more than 1% of our outstanding common stock or to purchases of our common stock pursuant to our stock option plan or any of our tax-qualified employee stock benefit plans or non-tax-qualified employee stock benefit plans, including any recognition and retention plans or restricted stock plans.
We have filed with the Securities and Exchange Commission a registration statement under the Securities Act of 1933 for the registration of the common stock to be sold in the offering. This registration does not cover the resale of such shares. Shares of common stock owned or purchased by persons who are not affiliates of Peoples United Financial may be resold without registration. Shares owned (including shares received in exchange for shares of Peoples Bank common stock) or purchased by affiliates of Peoples United Financial will be subject to resale restrictions under Rule 144 of the Securities Act of 1933. If we meet the current public information requirements of Rule 144, each of our affiliates who complies with the other conditions of Rule 144, including those that require the affiliates sale to be aggregated with those of certain other persons, would be able to sell in the public market, without registration, a number of shares not to exceed, in any three-month period, the greater of 1% of our outstanding shares or the average weekly volume of trading in the shares during the preceding four calendar weeks. Provision may be made in the future to permit our affiliates to register their shares for sale under the Securities Act of 1933 under certain circumstances.
Liquidation Rights
In the unlikely event of a complete voluntary liquidation of Peoples Mutual Holdings in its present mutual form, depositors of Peoples Bank would receive a pro rata share of any assets of Peoples Mutual Holdings remaining after payment of claims of all creditors. Each depositors pro rata share of such remaining assets would be in the same proportion as the value of his or her deposit account was to the total value of all deposit accounts in Peoples Bank at the time of liquidation. After the conversion and offering, each depositor, in the event of a complete liquidation of Peoples Bank, would have a claim as a creditor of the same general priority as the claims of all other general creditors of Peoples Bank. However, except as described below, each claim would be solely in the amount of the balance in the deposit account(s) plus accrued interest. The depositor would not have an interest in the value or assets of Peoples Bank or Peoples Mutual Holdings above that amount.
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The plan of conversion provides for the establishment, following the conversion of Peoples Mutual Holdings from a federally chartered mutual holding company to a federally chartered interim stock savings bank and simultaneous merger with and into Peoples Bank, of a special liquidation account for the benefit of eligible account holders and supplemental eligible account holders in an amount equal to Peoples Banks total stockholders equity as reflected in its latest statement of financial condition contained in this proxy statement/prospectus. The liquidation account will be established and maintained by Peoples Bank. In the unlikely event of a complete liquidation of Peoples Bank after the completion of the conversion at a time when Peoples Bank has a positive net worth (and only in such event), each eligible account holder and supplemental eligible account holder would be entitled, upon a complete liquidation of Peoples Bank after the conversion and offering, to an interest in the liquidation account prior to any liquidation distribution with respect to the capital stock of Peoples Bank. Each eligible account holder and supplemental eligible account holder would have an initial interest in such liquidation account for each deposit account, including passbook accounts, transaction accounts such as checking accounts, money market deposit accounts and certificates of deposit, held in Peoples Bank at the close of business on June 30, 2005 or December 31, 2006, as the case may be. Each eligible account holder and supplemental eligible account holder will have a pro rata interest in the total liquidation account for each of his or her deposit accounts based on the proportion that the balance of each such deposit account on June 30, 2005 or December 31, 2006, as the case may be, bore to the balance of all deposit accounts in Peoples Bank on such date.
If, however, on any December 31 annual closing date of Peoples Bank, commencing December 31, 2007, the amount in any deposit account is less than the amount that was in such deposit account on June 30, 2005 or December 31, 2006, as the case may be, or any other annual closing date, then the interest in the liquidation account relating to such deposit account would be reduced by the proportion of any such reduction, and such interest will cease to exist if such deposit account is closed. In addition, no interest in the liquidation account would ever be increased despite any subsequent increase in the related deposit account.
Any assets remaining after the above liquidation rights of eligible account holders and supplemental eligible account holders are satisfied would be distributed to Peoples United Financial as the sole stockholder of Peoples Bank.
Pursuant to the rules and regulations of the Office of Thrift Supervision, a post-conversion merger, consolidation, sale of bulk assets or similar combination or transaction with another insured savings institution would not be considered a liquidation and, in such a transaction, the liquidation account would be assumed by the surviving institution, except to the extent otherwise approved by the Office of Thrift Supervision.
Accounting Consequences
The conversion will be accounted for at historical cost in accordance with accounting principles generally accepted in the United States. Accordingly, the carrying value of the assets, liabilities, and capital of Peoples Bank and Peoples Mutual Holdings will be unaffected by the conversion and offering and will be reflected in our consolidated financial statements based on their historical amounts.
Tax Aspects
Completion of the conversion is conditioned upon prior receipt of either a ruling from the Internal Revenue Service or an opinion of its counsel with respect to federal income tax laws and either a ruling from the State of Connecticut or an opinion of its tax advisor with respect to Connecticut income tax laws, substantially to the effect that consummation of the transactions qualifies as a tax-free transaction
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for federal income tax purposes and will not result in any adverse federal or Connecticut state income tax consequences before or after the conversion, except to the extent, if any, that subscription rights are deemed to have fair market value on the date such rights are issued. We believe that the tax opinions summarized below address all material federal and state income tax consequences that are generally applicable to the primary parties and the persons receiving subscription rights.
Thacher Proffitt & Wood LLP has issued an opinion to us to the effect that, for federal income tax purposes:
(1) | the conversion of Peoples Mutual Holdings from a federally chartered mutual holding company to a federally chartered interim stock savings bank (Interim A) will qualify as a reorganization within the meaning of Section 368(a)(1)(F) of the Internal Revenue Code, and no gain or loss will be recognized by Peoples Mutual Holdings by reason of such conversion; |
(2) | the merger of Interim A with and into Peoples Bank will qualify as a reorganization within the meaning of Section 368(a)(1)(A) of the Internal Revenue Code, and no gain or loss will be recognized by Interim A or Peoples Bank by reason of such merger; |
(3) | the merger of the federally chartered interim stock savings bank, newly formed as a wholly owned subsidiary of Peoples United Financial (Interim B), with and into Peoples Bank pursuant to which shares of Peoples Bank will be converted into shares of common stock of Peoples United Financial, will qualify as a reorganization within the meaning of Section 368(a)(2)(E) or Section 351 of the Internal Revenue Code, and no gain or loss will be recognized by Interim B, Peoples Bank or Peoples United Financial by reason of such merger; |
(4) | no gain or loss will be recognized by the current stockholders of Peoples Bank upon the receipt of shares of common stock of Peoples United Financial pursuant to the share exchange, except to the extent of any cash received in lieu of a fractional share interest in Peoples United Financial; |
(5) | the aggregate tax basis of the shares of Peoples United Financial common stock held by the current stockholders of Peoples Bank after the share exchange will be equal to the aggregate tax basis of Peoples Bank common stock held immediately before the share exchange, reduced by the basis allocable to a fractional share interest in Peoples United Financial for which cash is received; |
(6) | the holding period of the shares of Peoples United Financial common stock to be received by the current stockholders of Peoples Bank in the share exchange will include the holding period of the shares of Peoples Bank common stock held immediately before the share exchange, provided that Peoples Bank common stock was held as a capital asset on the date of the share exchange; |
(7) |
a holder of shares of Peoples United Financial who receives cash in lieu of a fractional share of Peoples United Financial common stock in the share exchange will recognize gain or loss equal to the difference between the amount of cash received and the portion of such holders tax basis of the shares of Peoples Bank allocable to the fractional share; such gain or loss will be capital gain or loss if such shares were held as a capital asset as of the date of the share exchange, and will be long-term capital gain or loss if such |
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holders holding period in the shares of Peoples Bank common stock is more than one year on the date of the share exchange; |
(8) | no gain or loss will be recognized by Peoples United Financial upon the sale of shares of common stock in the offering; |
(9) | no gain or loss will be recognized by depositors of Peoples Bank upon the issuance to them of interests in the liquidation account in Peoples Bank established pursuant to the merger of Interim A with and into Peoples Bank; |
(10) | it is more likely than not that the fair market value of the nontransferable subscription rights to purchase shares of common stock of Peoples United Financial to be issued to eligible account holders, supplemental eligible account holders and other depositors is zero and accordingly, that no income will be recognized by eligible account holders, supplemental eligible account holders and other depositors upon the issuance to them of subscription rights or upon the exercise of the subscription rights; |
(11) | it is more likely than not that the tax basis to the holders of shares of Peoples United Financial common stock purchased in the offering pursuant to the exercise of subscription rights will be the amount paid therefor, and that the holding period for such shares of common stock will begin on the date of the completion of the offering; and |
(12) | the holding period for shares of common stock of Peoples United Financial purchased in the syndicated offering will begin on the day after the date of purchase. |
The opinions set forth in (10) and (11), above, are based on the position that the subscription rights do not have any market value at the time of distribution or at the time they are exercised. Whether subscription rights have a market value for federal income tax purposes is a question of fact, depending upon all relevant facts and circumstances. According to our counsel, the Internal Revenue Service will not issue rulings on whether subscription rights have a market value. Counsel has also advised us that they are unaware of any instance in which the Internal Revenue Service has taken the position that nontransferable subscription rights issued by a converting financial institution have a market value. Counsel also noted that the subscription rights will be granted at no cost to the recipients, will be nontransferable and of short duration, and will afford the recipients the right only to purchase common stock of Peoples United Financial at a price equal to its estimated fair market value, which will be the same price as the purchase price for the unsubscribed shares of common stock. Counsel believes that it is more likely than not (i.e., there is a more than a 50% likelihood) that the subscription rights have no market value for federal income tax purposes. Such conclusion of counsel is supported by a letter from RP Financial furnished to us which states that the subscription rights do not have any value when they are distributed or exercised. If the subscription rights are found to have a market value greater than zero, income may be recognized by various recipients of the subscription rights (whether or not the rights are exercised) and Peoples United Financial may be taxed on the distribution of the subscription rights. Participants are encouraged to consult with their own tax advisor as to the tax consequences in the event that the subscription rights are deemed to have an ascertainable value.
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PricewaterhouseCoopers LLP has issued an opinion to us to the effect that, for Connecticut State income tax purposes, and assuming that the federal income tax consequences described above are correct in all material respects:
(1) | the conversion of Peoples Mutual Holdings from a federally chartered mutual holding company to a federally chartered interim stock savings bank (Interim A) should be treated as a tax-free reorganization for Connecticut state income tax purposes; |
(2) | the merger of Interim A with and into Peoples Bank, should be treated as a tax-free reorganization for Connecticut state income tax purposes; |
(3) | the merger of the federally chartered interim stock savings bank, newly formed as a wholly owned subsidiary of Peoples United Financial (Interim B), with and into Peoples Bank, pursuant to which shares of Peoples Bank will be converted into shares of common stock of Peoples United Financial, should be treated as a tax-free reorganization or as a tax-free contribution for Connecticut state income tax purposes; |
(4) | no gain or loss should be recognized by the current stockholders of Peoples Bank upon the receipt of shares of common stock of Peoples United Financial pursuant to the share exchange, except to the extent of any cash received in lieu of a fractional share interest in Peoples United Financial; |
(5) | the aggregate tax basis of the shares of Peoples United Financial common stock held by the current stockholders of Peoples Bank after the share exchange should be equal to the aggregate tax basis of Peoples Bank common stock held immediately before the share exchange, reduced by the basis allocable to a fractional share interest in Peoples United Financial for which cash is received; |
(6) | the holding period of the shares of Peoples United Financial common stock to be received by the current stockholders of Peoples Bank in the share exchange should include the holding period of the shares of Peoples Bank common stock held immediately before the share exchange; |
(7) | a holder of shares of Peoples United Financial who receives cash in lieu of a fractional share of Peoples United Financial common stock in the share exchange should recognize gain or loss equal to the difference between the amount of cash received and the portion of such holders tax basis of the shares of Peoples Bank allocable to the fractional share; |
(8) | no gain or loss should be recognized by Peoples United Financial upon the sale of shares of common stock in the offering; |
(9) | no gain or loss should be recognized by depositors of Peoples Bank upon the issuance to them of interests in the liquidation account in Peoples Bank established pursuant to the merger of Interim A with and into Peoples Bank; |
(10) | it is more likely than not that the fair market value of the nontransferable subscription rights to purchase shares of common stock of Peoples United Financial to be issued to eligible account holders and supplemental eligible account holders is zero and accordingly, that no income will be recognized by eligible account holders and supplemental eligible account holders upon the issuance to them of subscription rights or upon the exercise of the subscription rights; |
(11) |
it is more likely than not that the tax basis to the holders of shares of Peoples United Financial common stock purchased in the offering pursuant to the exercise of |
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subscription rights will be the amount paid therefor, and that the holding period for such shares of common stock will begin on the date of the completion of the offering; and |
(12) | the holding period for shares of common stock of Peoples United Financial purchased in the syndicated offering should begin on the day after the date of purchase. |
Unlike private rulings, an opinion is not binding on the Internal Revenue Service or the Connecticut Department of Revenue Services, and the Internal Revenue Service or the Connecticut Department of Revenue Services could disagree with the conclusions reached therein. In the event of such disagreement, there can be no assurance that the Internal Revenue Service or the Connecticut Department of Revenue Services would not prevail in a judicial or administrative proceeding. If the Internal Revenue Service or the Connecticut Department of Revenue Services determines that the tax effects of the transactions contemplated by the plan of conversion are to be treated differently from those presented in the opinions, we may be subject to adverse tax consequences as a result of the conversion.
United States Federal Tax Considerations Applicable to Non-U.S. Holders of the Common Stock
The following discusses the material United States federal income and estate tax consequences of the ownership and disposition of common stock applicable to Non-U.S. Holders who are beneficial owners of Peoples United Financial common stock and who acquire and own such common stock as a capital asset within the meaning of section 1221 of the Internal Revenue Code. A Non-U.S. Holder is a holder of common stock other than (1) an individual citizen or resident of the United States; (2) a corporation, or an entity treated as a corporation for United States federal income tax purposes, that is created or organized in or under the laws of the United States or of any state thereof or the District of Columbia; (3) an estate, the income of which is subject to United States federal income taxation regardless of its source; or (4) a trust if (a) a court within the United States is able to exercise primary supervision over the administration of the trust and one or more United States persons have the authority to control all substantial decisions of the trust; or (b) it has a valid election in effect under applicable Treasury regulations to be treated as a United States person.
The following discussion does not consider specific facts and circumstances that may be relevant to a particular Non-U.S. Holders tax position. For example, the discussion does not address United States federal income and estate tax rules applicable to any person who holds common stock through entities treated as partnerships for United States federal income tax purposes or who holds common stock through entities which are disregarded for United States federal income tax purposes. The discussion does not address any tax consequences arising under the laws of any state, local or tax jurisdiction outside the United States. Further, the discussion does not consider Non-U.S. Holders to whom special tax rules may apply (including controlled foreign corporations, passive foreign investment companies, banks or other financial institutions, insurance companies, dealers in securities or foreign currencies, common trust funds, holders who hold common stock as part of a straddle, hedge, or conversion transaction, tax-exempt organizations and United States expatriates).
The following discussion is based on provisions of the Internal Revenue Code, United States Treasury regulations, Internal Revenue Service rulings and pronouncements, and judicial interpretations as of the date hereof, all of which are subject to change, possibly on a retroactive basis. Any change could affect the continuing validity of this discussion. We have not sought any ruling from the Internal Revenue Service or an opinion of counsel with respect to the federal tax consequences discussed below and there can be no assurance that the Internal Revenue Service or a court will not take a position contrary to the federal tax consequences discussed herein or that any such contrary position taken by the Internal Revenue Service or a court would not be sustained.
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The description set forth below is included for general information only and may not be applicable to a prospective Non-U.S. Holders particular situation. Prospective Non-U.S. Holders are urged to consult their own tax advisor with respect to the United States Federal tax consequences of owning and disposing of common stock, as well as any tax consequences that may arise under the laws of any state, local or non-United States taxing jurisdiction or under any applicable tax treaty.
For purposes of the following discussion, dividends and gain on the sale or other disposition of common stock will be considered to be U.S. trade or business income if such income or gain is (1) effectively connected with the conduct of a United States trade or business; and (2) in the case of a treaty resident, attributable to a permanent establishment in the United States.
Dividends. Distributions on Peoples United Financial common stock will constitute dividends for United States federal income tax purposes to the extent of Peoples United Financials current or accumulated earnings and profits as determined for United States federal income tax purposes.
In general, dividends paid to a Non-U.S. Holder that do not constitute U.S. trade or business income will be subject to withholding of United States federal income tax at a 30% rate unless such rate is reduced by an applicable income tax treaty. In order to obtain a reduced rate of withholding under an income tax treaty, a Non-U.S. Holder generally will be required to provide a properly completed and executed Internal Revenue Service Form W-8BEN (or successor form) to us or our paying agent, or similar appropriate documentation or substitute form, certifying the Non-U.S. Holders entitlement to benefits under an applicable income tax treaty. A Non-U.S. Holder that is eligible for a reduced rate of United States withholding tax pursuant to an income tax treaty generally may obtain a refund of any excess amounts withheld by filing an appropriate claim for a refund with the IRS.
Dividends that do constitute U.S. trade or business income generally will not be subject to withholding of United States federal income tax if the Non-U.S. Holder provides a properly completed and executed Internal Revenue Service Form W-8ECI (or successor form) to us or our paying agent, or similar appropriate documentation or substitute form, certifying that the dividends are U.S. trade or business income. Instead, dividends that are U.S. trade or business income generally will be subject to United States federal income tax on a net income basis at the regular graduated United States federal income tax rates. Any dividends that constitute U.S. trade or business income received by a Non-U.S. Holder that is a corporation may also, under certain circumstances, be subject to an additional branch profits tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty.
Sale or Other Disposition. A Non-U.S. Holder generally will not be subject to United States federal income tax on the sale or other disposition of common stock unless:
(1) | such gain is U.S. trade or business income, in which case the Non-U.S. Holder would be taxed on the net gain derived from the sale or other disposition under the regular graduated United States federal income tax rates (in addition, a Non-U.S. Holder that is a corporation may be subject to an additional branch profits tax at a rate of 30% or a lower rate as may be specified by an applicable income tax treaty); |
(2) | the Non-U.S. Holder is a non-resident alien individual who holds the common stock as a capital asset, is present in the United States for 183 days or more during the taxable year of the disposition, and certain other conditions are present, in which case such Non-U.S. Holder generally will be subject to a flat 30% tax on the gain derived from the sale or other disposition of the common stock; or |
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(3) | Peoples United Financial has been a United States real property holding corporation within the meaning of section 897(c) (2) of the Internal Revenue Code. |
Peoples United Financial believes that it has not been, is not currently, and is not likely to become in the future, a United States real property holding corporation within the meaning of section 897(c) (2) of the Internal Revenue Code.
Federal Estate Tax. Common stock owned or treated as owned by an individual who is not a citizen or resident of the United States for United States federal tax purposes at the time of death (or common stock previously held by such an individual who transferred such stock subject to certain retained rights or powers) will be included in such individuals gross estate for United States federal estate tax purposes and may be subject to U.S. federal estate tax, unless otherwise provided by an applicable estate tax treaty.
Information Reporting and Backup Withholding. In general, backup withholding will not apply to dividends on common stock paid by Peoples United Financial or by Peoples United Financials paying agent, in its capacity as such, to a Non-U.S. Holder if the holder has provided the required certification that it is not a United States person and neither Peoples United Financial nor Peoples United Financials paying agent has actual knowledge or reason to know that the holder is a United States person. If a Non-U.S. Holder fails to provide the required certification, dividends on common stock may be subject to backup withholding in certain circumstances. Nevertheless, Peoples United Financial must report annually to the Internal Revenue Service and to each Non-U.S. Holder any dividend income that is subject to withholding, or that is exempt from United States withholding tax pursuant to a tax treaty. Copies of these information returns may also be made available, under the provisions of a specific treaty or agreement, to the tax authorities of the country in which the Non-U.S. Holder resides.
In general, backup withholding and information reporting will not apply to the proceeds from the disposition of common stock paid to a Non-U.S. Holder if the holder has provided the required certification that it is not a United States person and neither the broker nor other paying agent has actual knowledge or reason to know that the holder is a United States person. If a non-corporate Non-U.S. Holder fails to provide the required certification proceeds from the disposition of common stock may be subject to backup withholding and information reporting in certain circumstances.
The backup withholding rate is currently 28%. Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules from a payment to a Non-U.S. Holder will be allowed as a refund or a credit against such Non-U.S. Holders United States federal income tax liability provided the requisite procedures are followed.
Interpretation, Amendment And Termination
All interpretations of the plan of conversion by Peoples Mutual Holdings Board of Trustees or Peoples Banks Board of Directors will be final, subject to the authority of the Office of Thrift Supervision. The plan of conversion provides that, if deemed necessary or desirable by Peoples Mutual Holdings Board of Trustees or Peoples Banks Board of Directors, the plan of conversion may be substantively amended by a majority vote of the Board of Trustees or the Board of Directors as a result of comments from regulatory authorities or otherwise, at any time prior to submission of definitive proxy materials to depositors of Peoples Bank and stockholders of Peoples Bank. Amendment of the plan of conversion thereafter requires the concurrence of the Office of Thrift Supervision. The plan of conversion may be terminated by a majority vote of the Board of Trustees or the Board of Directors at any time prior to the date of the special meeting of depositors of Peoples Bank and the special meeting of stockholders of Peoples Bank, and may be terminated at any time thereafter with the concurrence of the
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Office of Thrift Supervision. The plan of conversion shall be terminated if the conversion and offering is not completed within 24 months from the date on which the depositors of Peoples Bank approve the plan of conversion, and may not be further extended by us or the Office of Thrift Supervision.
Appraisal Rights
Stockholders of a corporation that is proposing to merge or consolidate with another entity are sometimes entitled under relevant state or federal laws to appraisal or dissenters rights in connection with the proposed transaction depending on the circumstances. However, Peoples Bank has determined that, pursuant to 12 C.F.R. § 552.14, the regulations regarding appraisal rights promulgated by the Office of Thrift Supervision, appraisal rights are not available to Peoples Bank stockholders in connection with the conversion.
COMPARISON OF STOCKHOLDERS RIGHTS FOR EXISTING PEOPLES BANK STOCKHOLDERS
As a result of the conversion, Peoples Bank stockholders, whose rights are presently governed by the Charter and Bylaws of Peoples Bank as a federal stock savings bank, will become stockholders of Peoples United Financial whose rights will be governed by the Certificate of Incorporation and Bylaws of Peoples United Financial as a Delaware corporation. The following is a discussion of the differences between rights of stockholders of Peoples Bank and Peoples United Financial. This discussion is not intended to be a complete statement of the differences affecting the rights of stockholders, but rather summarizes the material differences affecting the rights of stockholders. The identification of specific provisions or differences is not meant to indicate that other equally or more significant differences do not exist. This discussion is qualified in its entirety by reference to the Charter and Bylaws of Peoples Bank and the Certificate of Incorporation and Bylaws of Peoples United Financial. See Where You Can Find Additional Information for procedures for obtaining a copy of those documents.
There will be additional differences between the rights of stockholders of Peoples Bank and Peoples United Financial that result from Office of Thrift Supervision rules governing the conversion. This portion of the discussion is qualified in its entirety by reference to applicable Office of Thrift Supervision regulations. See Restrictions on Acquisition of Peoples United Financial and Peoples Bank Regulatory Restrictions.
Authorized Capital Stock
Peoples Banks Charter authorizes Peoples Bank to issue 450,000,000 shares of common stock, without par value, as well as 50,000,000 shares of preferred stock, without par value. Peoples United Financials Certificate of Incorporation authorizes Peoples United Financial to issue 1.95 billion shares of common stock, par value $0.01 per share, and 50,000,000 shares of preferred stock, par value $0.01 per share. We currently expect to sell up to 185,437,500 shares of common stock (or 213,253,125 shares in the event of an increase of 15% in the estimated valuation range) in the offering and issue up to 135,959,202 shares of common stock (or 156,353,083 shares in the event of an increase of 15% in the estimated valuation range) in the share exchange. We also expect to issue 2,000,000 shares of common stock to The Peoples Community Foundation.
Issuance of Capital Stock
Currently, pursuant to applicable laws and regulations, Peoples Mutual Holdings is required to own not less than a majority of the outstanding common stock of Peoples Bank. There will be no such
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restriction applicable to us following completion of the conversion and the offering, as Peoples Mutual Holdings will cease to exist.
Following the conversion and the offering, Peoples United Financial will have a significant number of authorized but unissued shares of preferred stock and common stock. The Board of Directors may authorize the issuance of one or more series of preferred stock without stockholder approval. We may issue preferred stock with such preferences and designations as the Board of Directors may from time to time determine. The Board of Directors can, without stockholder approval, issue preferred stock with voting, dividend, redemption, liquidation and conversion rights which could dilute the voting strength of the holders of the common stock and may assist management in impeding an unfriendly takeover or attempted change in control. Peoples United Financials Board of Directors currently has no plans for the issuance of additional shares, other than the issuance of shares of restricted stock pursuant to the terms of the 1998 Long-Term Incentive Plan, the Peoples United Financial Directors Equity Compensation Plan and the proposed recognition and retention plan and upon exercise of stock options issued and to be issued pursuant to the 1998 Long-Term Incentive Plan and the proposed stock option plan.
Preemptive Rights
Neither Peoples Banks Charter nor Peoples United Financials Certificate of Incorporation provide stockholders with preemptive rights.
Cumulative Voting
Neither Peoples Banks Charter nor Peoples United Financials Certificate of Incorporation provide for cumulative voting in the election of directors. The absence of cumulative voting means that the holders of a majority of the issued and outstanding shares of common stock may elect all the directors of Peoples United Financial, thereby precluding minority stockholder representation on the Board of Directors.
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Board of Directors
Vacancies. Peoples Banks Charter and Peoples United Financials Certificate of Incorporation provide that a majority vote of directors then in office may appoint new directors to fill vacancies on the Board of Directors, including a vacancy created by an increase in the number of directors or resulting from death, resignation, retirement, disqualification, removal from office or other cause, and directors so chosen shall hold office for the remainder of the full term of the class of directors in which the new directorship was created or the vacancy occurred.
Number and Term of Directors . Peoples Banks Charter and Peoples United Financials Certificate of Incorporation each provide that the number of directors shall be fixed from time to time exclusively by the Board of Directors and that the directors shall be divided into three classes, as nearly equal in number as possible. One of the three classes of directors is required to be elected annually by the stockholders for a three-year term. A classified board promotes continuity and stability of management but makes it more difficult for stockholders to change a majority of the Board of Directors because it generally takes at least two annual elections of directors for this to occur. Peoples Bank currently has ten directors. The conversion and the offering will not result in any change in the composition of the Board of Directors or the terms of individual directors.
Removal of Directors . The Certificate of Incorporation of Peoples United Financial provides that a director may be removed from the Board of Directors prior to the expiration of his or her term only for cause and upon the affirmative vote of at least two-thirds of the outstanding shares of voting stock. In the absence of these provisions, the vote of the holders of a majority of Peoples United Financials shares could remove the entire Board of Directors, with cause, and replace it with persons of such holders choice. Peoples Banks Bylaws provide that any director, or the entire Board of Directors, may be removed from office at any time, with cause, by the affirmative vote of the holders of at least a majority of the outstanding shares entitled to vote for the election of directors.
Amendment of Certificate of Incorporation and Bylaws
Peoples Banks Charter may be amended in accordance with applicable law and rules if such amendment is approved by a majority of the Board of Directors, by approval of a majority of the
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outstanding shares, and by the Office of Thrift Supervision. Peoples Banks Bylaws may be amended by vote of the majority of the directors or by affirmative vote of the holders of a majority of the outstanding shares of Peoples Bank common stock. Any action taken by the stockholders with respect to the amendment of Peoples Banks Bylaws will prevail over any inconsistent action taken by the Board of Directors with respect to the Bylaws.
The Certificate of Incorporation of Peoples United Financial provides that certain provisions of the Certificate of Incorporation may not be altered, amended, repealed or rescinded without the affirmative vote of either (1) not less than a majority of the authorized number of directors and, if one or more Interested Shareholders exist, by not less than a majority of the Disinterested Directors (as defined in the Certificate of Incorporation) or (2) the holders of not less than two-thirds of the total votes eligible to be cast by the holders of all outstanding shares of Peoples United Financial capital stock entitled to vote thereon and, if the alteration, amendment, repeal, or rescission is proposed by or on behalf of an Interested Shareholder or a director who is an Affiliate or Associate (each as defined in the Certificate of Incorporation) of an Interested Shareholder, by the affirmative vote of the holders of not less than a majority of the total votes eligible to be cast by holders of all outstanding shares entitled to vote thereon not beneficially owned by an Interested Shareholder or an Affiliate or Associate thereof. Amendment of the provision of the Certificate of Incorporation relating to Business Combinations (as defined below) must also be approved by either (i) a majority of the Disinterested Directors, or (ii) the affirmative vote of not less than two-thirds of the total number of votes eligible to be cast by the holders of all outstanding shares of the voting stock, voting together as a single class, together with the affirmative vote of not less than fifty percent (50%) of the total number of votes eligible to be cast by the holders of all outstanding shares of the voting stock not beneficially owned by any Interested Shareholder or Affiliate or Associate thereof, voting together as a single class.
Furthermore, the Certificate of Incorporation provides that provisions of the Bylaws that contain supermajority voting requirements may not be altered, amended, repealed or rescinded without a vote of the Board of Directors or holders of capital stock entitled to vote thereon that is not less than the super-majority specified in such provision. Absent these provisions, the Delaware General Corporation Law provides that a corporations certificate of incorporation and bylaws may be amended by the holders of a majority of the corporations outstanding capital stock. The Certificate of Incorporation also provides that the Board of Directors is authorized to make, alter, amend, rescind or repeal any of the Bylaws in accordance with the terms thereof. Except in circumstances specifically provided in the Delaware General Corporation Law, this provision applies to Bylaws, whether initially adopted or amended by the Board of Directors or by the stockholders. This authorization neither divests the stockholders of their right, nor limits their power, to adopt, amend, rescind or repeal any Bylaw under the Delaware General Corporation Law. These provisions could have the effect of discouraging a tender offer or other takeover attempt where the ability to make fundamental changes through Bylaw amendments is an important element of the takeover strategy of the acquiror.
Stockholder Vote Required to Approve Business Combinations with Interested Shareholders
The Certificate of Incorporation of Peoples United Financial requires the approval of the holders of at least two-thirds of Peoples United Financials outstanding shares of voting stock, together with the affirmative vote of at least 50% of the outstanding shares of voting stock not beneficially owned by an Interested Shareholder (defined below) to approve certain Business Combinations and related transactions. Under Delaware law, absent this provision, Business Combinations, which include mergers, consolidations and sales of all or substantially all of the assets of a corporation must, subject to certain exceptions, be approved by the vote of the holders of only a majority of the outstanding shares of common stock and any other affected class of stock.
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Approval by the holders of at least two-thirds of Peoples United Financials shares is required in connection with any transaction involving an Interested Shareholder except (1) in cases where the proposed transaction has been approved in advance by a majority of those members of the Board of Directors who are unaffiliated with the Interested Shareholder and were directors prior to the time when the Interested Shareholder became an Interested Shareholder or (2) if the proposed transaction meets certain conditions set forth therein which are designed to afford the stockholders a fair price in consideration for their shares in which case, if a stockholder vote is required, approval of only a majority of the outstanding shares of voting stock would be sufficient.
The term Interested Shareholder is defined to include any individual, corporation, partnership or other entity (other than Peoples United Financial or its subsidiaries or any employee benefit plan maintained by Peoples United Financial or its subsidiaries) which owns beneficially or controls, directly or indirectly, 15% or more of the outstanding shares of Peoples United Financial voting stock.
A Business Combination means:
(1) | any merger or consolidation of Peoples United Financial or any of its subsidiaries with or into any Interested Shareholder or its affiliate; |
(2) | any sale, lease, exchange, mortgage, pledge, transfer, or other disposition to or with any Interested Shareholder or its affiliate of 10% or more of Peoples United Financials assets or combined assets of Peoples United Financial and its subsidiaries; |
(3) | the issuance or transfer to any Interested Shareholder or its affiliate by Peoples United Financial (or any subsidiary) of any of Peoples United Financials securities other than on a pro rata basis to all stockholders; |
(4) | the adoption of any plan for our liquidation or dissolution proposed by or on behalf of any Interested Shareholder or its affiliate; |
(5) | any reclassification of securities, recapitalization, merger or consolidation of Peoples United Financial which has the effect of increasing the proportionate share of common stock or any class of Peoples United Financials equity or convertible securities owned directly or indirectly by an Interested Shareholder or its affiliate; and |
(6) | the acquisition by Peoples United Financials subsidiaries of any securities of an Interested Shareholder or its affiliates or associates. |
Peoples Banks Charter does not contain similar provisions regarding Business Combinations involving Interested Shareholders.
Evaluation of Certain Business Combinations
Peoples Banks Charter requires the Board of Directors to evaluate any proposed business combination, any proposal by another person or persons acting as a group to effect a business combination, or a tender or exchange offer involving Peoples Bank or any subsidiary thereof, in light of various business and non-business factors. Factors which the Board of Directors must consider, in addition to the adequacy of the amount to be paid in connection with any such transaction, include (1) the social and economic effects of the transaction on Peoples Bank and its subsidiaries, affiliates, employees, depositors, borrowers from and other customers of Peoples Bank, creditors, and the relevant constituencies of the communities in which Peoples Bank and its subsidiaries and affiliates operate or are
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located; (2) the business and financial condition and earnings prospects (present and anticipated) of Peoples Bank and its subsidiaries and affiliates; (3) the business and financial condition and earnings prospects of the acquiring person or group, including, but not limited to, debt service and other existing financial obligations, financial obligations to be incurred in connection with the acquisition, and other foreseeable financial obligations of the acquiring person or group, and the possible effects of such factors upon Peoples Bank and its subsidiaries and affiliates and the relevant constituencies of the communities in which Peoples Bank and its subsidiaries and affiliates operate or are located; and (4) the competence, experience, and integrity of the acquiring person or group and its management.
The Certificate of Incorporation of Peoples United Financial provides that the Board of Directors, when evaluating any offer from another party to make a tender or exchange offer for any outstanding equity security of Peoples United Financial, merge or consolidate Peoples United Financial with another corporation or entity, or purchase or otherwise acquire all or substantially all of Peoples United Financials properties and assets, shall in connection with the exercise of its judgment in determining what is in the best interest of Peoples United Financial and Peoples United Financials stockholders, give due consideration, to the extent permitted by law, to all relevant factors, including, without limitation, the financial and managerial resources and future prospects of the other party, the possible effects on Peoples United Financials business and its subsidiaries and on its employees, customers, suppliers and creditors and its subsidiaries, and the effects on the communities in which Peoples United Financial and Peoples United Financials subsidiaries facilities are located. By including these standards in the Certificate of Incorporation, the Board of Directors may be in a stronger position to oppose such a transaction if it concludes that the transaction would not be in Peoples United Financials best interests, even if the price offered is significantly greater than the then market price of Peoples United Financials equity securities.
Special Meetings of Stockholders; Action by Written Consent Without a Meeting
The Bylaws of both Peoples Bank and Peoples United Financial provide that special meetings of stockholders may be called at any time by the Board of Directors, the Chairman of the Board of Directors or the President. The Certificate of Incorporation of Peoples United Financial also provides that any action required or permitted to be taken by stockholders may be taken only at an annual or special meeting and prohibits stockholder action by written consent in lieu of a meeting.
Limitation of Directors Liability
Peoples Banks Charter and the Certificate of Incorporation of Peoples United Financial each include provisions limiting the financial liability of a director for breach of his or her fiduciary duty as a director. The limitations on directors liability set forth in Peoples Banks Charter are based on the standards articulated in the Connecticut Business Corporation Act, which were retained when Peoples Bank converted from its Connecticut savings bank charter to a federal savings bank charter in August 2006. The limitations on directors liability set forth in Peoples United Financials Certificate of Incorporation are based on the standards articulated in the Delaware General Corporation Law.
Peoples Banks Charter limits liability to the amount of compensation paid to the director during the year in which the act occurred, while Peoples United Financials Certificate of Incorporation eliminates financial exposure entirely. Exceptions to the limitation of liability exist under both. While not identical, the exceptions are similar in nature and include, among other things, acts or omissions not in good faith or involving intentional misconduct or a knowing violation of law and actions from which the director derived an improper personal benefit.
The initial Board of Directors of Peoples United Financial will be identical to the current Board of Directors of Peoples Bank. Therefore, the limitation on liability under Peoples Bank Charter will continue to apply to directors with respect to their actions as directors of Peoples Bank.
Indemnification
Peoples Banks Charter and the Certificate of Incorporation of Peoples United Financial each include provisions providing for the indemnification of directors, officers, and other specified persons. The indemnification provisions set forth in Peoples Banks Charter are based on the standards articulated in the Connecticut Business Corporation Act, which were retained when Peoples Bank converted from its Connecticut savings bank charter to a federal savings bank charter in August 2006. The indemnification provisions set forth in Peoples United Financials Certificate of Incorporation are based on the standards articulated in the Delaware General Corporation Law. There are numerous technical differences between the two. Examples of these differences include:
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who may be indemnified (broadened under the Certificate of Incorporation to include prospective directors, officers, employees and agents); |
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discretion to indemnify (the Certificate of Incorporation permits, but does not require, indemnification in circumstances where the Charter mandates indemnification); |
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judicial discretion (the Charter allows indemnification by court order if there is a finding that indemnification would be fair and reasonable under the circumstances, even where ordinarily applicable indemnification standards have not been satisfied); and |
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what conditions may be placed on advancement of expenses (the Certificate of Incorporation does not permit Peoples United Financial to condition advancement on the individuals financial ability to repay, and may not require security for repayment). |
Some of these differences, whether or not specifically set forth in this section, could lead to different results depending on the exact circumstances presented.
The initial Board of Directors of Peoples United Financial will be identical to the current Board of Directors of Peoples Bank. Therefore, the indemnification provisions under the Peoples Bank Charter will continue to apply to directors with respect to their actions as directors of Peoples Bank.
RESTRICTIONS ON ACQUISITION OF PEOPLES UNITED FINANCIAL AND PEOPLES BANK
General
The principal federal regulatory restrictions which affect the ability of any person, firm or entity to acquire Peoples United Financial or shares of Peoples United Financial capital stock are described below. Also discussed are certain provisions in Peoples United Financials Certificate of Incorporation and Bylaws which may be deemed to affect the ability of a person, firm or entity to acquire us.
Peoples United Financial Certificate of Incorporation and Bylaws
Peoples United Financials Certificate of Incorporation and Bylaws contain a number of provisions, relating to corporate governance and certain rights of stockholders, that might discourage future takeover attempts. As a result, stockholders who might desire to participate in such transactions may not have an opportunity to do so. In addition, such provisions will also render the removal of the Board of Directors or management more difficult.
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The following description is necessarily general and qualified by reference to the Certificate of Incorporation and Bylaws. See Where You Can Find Additional Information as to how to obtain a copy of these documents.
Classified Board; Power of Directors to Fill Vacancies . The Board of Directors is required by the Certificate of Incorporation to be divided into three classes which are as equal in size as is possible. One of the three classes of directors is required to be elected annually by the stockholders for a three-year term. A classified board promotes continuity and stability of management but makes it more difficult for stockholders to change a majority of the Board of Directors because it generally takes at least two annual elections of directors for this to occur. In addition, any vacancy occurring on the Board of Directors, including a vacancy created by an increase in the number of directors or resulting from death, resignation, retirement, disqualification, removal from office or other cause, shall be filled for the remainder of the unexpired term exclusively by the directors then in office.
Removal of Directors . The Certificate of Incorporation provides that a director may be removed from the Board of Directors prior to the expiration of his or her term only for cause and upon the affirmative vote of at least two-thirds of the outstanding shares of voting stock. In the absence of these provisions, the vote of the holders of a majority of Peoples United Financials shares could remove the entire Board of Directors, with cause, and replace it with persons of such holders choice.
Votes of Stockholders. The Certificate of Incorporation provides that any action required or permitted to be taken by stockholders may be taken only at an annual or special meeting and prohibits stockholder action by written consent in lieu of a meeting.
Authorized but Unissued Shares of Capital Stock . Following the offering, Peoples United Financial will have authorized but unissued shares of preferred stock and common stock. The board may authorize the issuance of one or more series of preferred stock without stockholder approval. See Description of Capital Stock of Peoples United Financial . These shares could be used by the Board of Directors to make it more difficult or to discourage an attempt to obtain control of Peoples United Financial through a merger, tender offer, proxy contest or otherwise.
Stockholder Vote Required to Approve Business Combinations with Interested Shareholders . The Certificate of Incorporation requires the approval of the holders of at least two-thirds of Peoples United Financials outstanding shares of voting stock, together with the affirmative vote of at least 50% of the outstanding shares of voting stock not beneficially owned by an Interested Shareholder (defined below)
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to approve certain Business Combinations and related transactions. Under Delaware law, absent this provision, Business Combinations, which include mergers, consolidations and sales of all or substantially all of the assets of a corporation must, subject to certain exceptions, be approved by the vote of the holders of only a majority of the outstanding shares of common stock and any other affected class of stock.
The vote of the holders of at least two-thirds of Peoples United Financials shares is required in connection with any transaction involving an Interested Shareholder except (1) in cases where the proposed transaction has been approved in advance by a majority of those members of the Board of Directors who are unaffiliated with the Interested Shareholder and were directors prior to the time when the Interested Shareholder became an Interested Shareholder or (2) if the proposed transaction meets certain conditions set forth therein which are designed to afford the stockholders a fair price in consideration for their shares in which case, if a stockholder vote is required, approval of only a majority of the outstanding shares of voting stock would be sufficient.
The term Interested Shareholder is defined to include any individual, corporation, partnership or other entity (other than Peoples United Financial or its subsidiaries or any employee benefit plan maintained by Peoples United Financial or its subsidiaries) which owns beneficially or controls, directly or indirectly, 15% or more of the outstanding shares of Peoples United Financial voting stock.
A Business Combination means:
(1) | any merger or consolidation of Peoples United Financial or any of its subsidiaries with or into any Interested Shareholder or its affiliate; |
(2) | any sale, lease, exchange, mortgage, pledge, transfer, or other disposition to or with any Interested Shareholder or its affiliate of 10% or more of Peoples United Financials assets or combined assets of Peoples United Financial and its subsidiaries; |
(3) | the issuance or transfer to any Interested Shareholder or its affiliate by Peoples United Financial (or any subsidiary) of any of Peoples United Financials securities other than on a pro rata basis to all stockholders; |
(4) | the adoption of any plan for our liquidation or dissolution proposed by or on behalf of any Interested Shareholder or its affiliate; |
(5) | any reclassification of securities, recapitalization, merger or consolidation of Peoples United Financial which has the effect of increasing the proportionate share of common stock or any class of Peoples United Financials equity or convertible securities owned directly or indirectly by an Interested Shareholder or its affiliate; and |
(6) | the acquisition by Peoples United Financials subsidiaries of any securities of an Interested Shareholder or its affiliates or associates. |
Evaluation of Offers . The Certificate of Incorporation provides that the Board of Directors, when evaluating any offer from another party to
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make a tender or exchange offer for any outstanding equity security of Peoples United Financial; |
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merge or consolidate Peoples United Financial with another corporation or entity; or |
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purchase or otherwise acquire all or substantially all of Peoples United Financials properties and assets, |
shall in connection with the exercise of its judgment in determining what is in the best interest of Peoples United Financial and Peoples United Financials stockholders, give due consideration, to the extent permitted by law, to all relevant factors, including, without limitation, the financial and managerial resources and future prospects of the other party, the possible effects on Peoples United Financials business and its subsidiaries and on its employees, customers, suppliers and creditors and its subsidiaries, and the effects on the communities in which Peoples United Financial and Peoples United Financials subsidiaries facilities are located.
By including these standards in the Certificate of Incorporation, the Board of Directors may be in a stronger position to oppose such a transaction if it concludes that the transaction would not be in Peoples United Financials best interests, even if the price offered is significantly greater than the then market price of Peoples United Financials equity securities.
Amendment of Certificate of Incorporation and Bylaws . The Certificate of Incorporation provides that certain provisions of the Certificate of Incorporation may not be altered, amended, repealed or rescinded without the affirmative vote of either (1) not less than a majority of the authorized number of directors and, if one or more Interested Shareholders exist, by not less than a majority of the Disinterested Directors (as defined in the Certificate of Incorporation); or (2) the holders of not less than two-thirds of the total votes eligible to be cast by the holders of all outstanding shares of Peoples United Financial capital stock entitled to vote thereon and, if the alteration, amendment, repeal, or rescission is proposed by or on behalf of an Interested Shareholder or a director who is an Affiliate or Associate (each as defined in the Certificate of Incorporation) of an Interested Shareholder, by the affirmative vote of the holders of not less than a majority of the total votes eligible to be cast by holders of all outstanding shares entitled to vote thereon not beneficially owned by an Interested Shareholder or an Affiliate or Associate thereof. Amendment of the provision of the Certificate of Incorporation relating to Business Combinations must also be approved by either (1) a majority of the Disinterested Directors; or (2) the affirmative vote of not less than two-thirds of the total number of votes eligible to be cast by the holders of all outstanding shares of the voting stock, voting together as a single class, together with the affirmative vote of not less than fifty percent (50%) of the total number of votes eligible to be cast by the holders of all outstanding shares of the voting stock not beneficially owned by any Interested Shareholder or Affiliate or Associate thereof, voting together as a single class.
Furthermore, the Certificate of Incorporation provides that provisions of the Bylaws that contain supermajority voting requirements may not be altered, amended, repealed or rescinded without a vote of the Board of Directors or holders of capital stock entitled to vote thereon that is not less than the super-majority specified in such provision. Absent these provisions, the Delaware General Corporation Law provides that a corporations certificate of incorporation and bylaws may be amended by the holders of a majority of the corporations outstanding capital stock. The Certificate of Incorporation also provides that the Board of Directors is authorized to make, alter, amend, rescind or repeal any of the Bylaws in accordance with the terms thereof. Except in circumstances specifically provided in the Delaware General Corporation Law, this provision applies to Bylaws, whether initially adopted or amended by the Board of Directors or by the stockholders. This authorization neither divests the stockholders of their right, nor limits their power, to adopt, amend, rescind or repeal any Bylaw under the Delaware General Corporation Law. These provisions could have the effect of discouraging a tender offer or other takeover attempt where the ability to make fundamental changes through Bylaw amendments is an important element of the takeover strategy of the acquiror.
Stockholder Nominations and Proposals. The Certificate of Incorporation requires a stockholder who intends to nominate a candidate for election to the Board of Directors
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at an annual stockholders meeting to give approximately 120 days notice in advance of the annual stockholders meeting to the Secretary. This advance notice provision requires a stockholder who wishes to nominate any person for election as a director to provide certain information to Peoples United Financial concerning the nominee and the proposing stockholder. Similarly, the Bylaws require a stockholder who intends to raise new business at an annual meeting to give approximately 90 days notice in advance of the anniversary of the prior years annual meeting to the corporate secretary. This advance notice provision requires a stockholder who desires to raise new business to provide certain information to Peoples United Financial concerning the nature of the new business, the stockholder and the stockholders interest in the matter.
Anti-Takeover Effects of Our Certificate of Incorporation and Bylaws
The provisions described above are intended to reduce Peoples United Financials vulnerability to takeover attempts and certain other transactions which have not been negotiated with and approved by members of the Board of Directors. The provisions also will assist Peoples United Financial in the orderly deployment of the conversion proceeds into productive assets during the initial period after the conversion. The Board of Directors believes these provisions are in the best interests of Peoples United Financial and its stockholders. An unsolicited non-negotiated proposal can seriously disrupt the business and management of a corporation and cause it great expense. Accordingly, the Board of Directors believes it is in the best interests of Peoples United Financial and its stockholders to encourage potential acquirors to negotiate directly with management and the Board of Directors and that these provisions will encourage such negotiations and discourage non-negotiated takeover attempts. It is also the Board of Directors view that these provisions should not discourage persons from proposing a merger or other transaction at a price that reflects the true value of Peoples United Financial and that otherwise is in the best interests of all stockholders.
Delaware Corporate Law
Delaware has a statute designed to provide Delaware corporations with additional protection against hostile takeovers. The takeover statute, which is codified in Section 203 of the Delaware General Corporation Law, is intended to discourage certain takeover practices by impeding the ability of a hostile acquiror to engage in certain transactions with the target company.
In general, Section 203 provides that a Person who owns 15% or more of the outstanding voting stock of a Delaware corporation may not consummate a merger or other business combination transaction with such corporation at any time during the three-year period following the date such Person acquired 15% of the outstanding voting stock. The term business combination is defined broadly to cover a wide range of corporate transactions including mergers, sales of assets, issuances of stock, transactions with subsidiaries and the receipt of disproportionate financial benefits.
The statute exempts the following transactions from the requirements of Section 203:
(1) | any business combination if, prior to the date a person acquired 15% of the outstanding voting stock, the Board of Directors approved either the business combination or the transaction which resulted in the stockholder acquiring 15%; |
(2) | any business combination involving a person who acquired at least 85% of the outstanding voting stock in the same transaction in which 15% of the outstanding voting stock was acquired (with the number of shares outstanding calculated without regard to those shares owned by the corporations directors who are also officers and by certain employee stock plans); |
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(3) | any business combination that is approved by the board of directors and by a two-thirds vote of the outstanding voting stock not owned by the interested party; and |
(4) | certain business combinations that are proposed after the receipt by the corporation of certain other acquisition proposals which are approved or not opposed by a majority of certain continuing members of the board of directors. |
A corporation may exempt itself from the requirement of the statute by adopting an amendment to its certificate of incorporation or bylaws electing not to be governed by Section 203 of the Delaware General Corporation Law. At the present time, the Board of Directors does not intend to propose any such amendment.
Regulatory Restrictions
Conversion Regulations . Office of Thrift Supervision regulations provide that for a period of three years following the date of the completion of the conversion, no person may, directly or indirectly, acquire or offer to acquire the beneficial ownership of more than 10% of any class of Peoples United Financials equity securities without the prior written approval of the Office of Thrift Supervision. If any person violates this prohibition, the securities beneficially owned by such person in excess of 10% will not be voted by any person or counted as voting shares in connection with any matter submitted to the stockholders for a vote, and will not be counted as outstanding for purposes of determining the affirmative vote necessary to approve any matter submitted to the stockholders for a vote.
Change of Control Regulations. The Change in Bank Control Act provides that no person, acting directly or indirectly or through or in concert with one or more other persons, may acquire control of a savings institution unless the Office of Thrift Supervision has been given 60 days prior written notice. The Home Owners Loan Act provides that no company may acquire control of a savings institution without the prior approval of the Office of Thrift Supervision. Any company that acquires such control becomes a savings and loan holding company subject to registration, examination and regulation by the Office of Thrift Supervision. Pursuant to federal regulations, control of a savings institution is conclusively deemed to have been acquired by, among other things, the acquisition of more than 25% of any class of voting stock of the institution or the ability to control the election of a majority of the directors of an institution. Moreover, control is presumed to have been acquired, subject to rebuttal, upon the acquisition of more than 10% of any class of voting stock, or of more than 25% of any class of stock of a savings institution, where certain enumerated control factors are also present in the acquisition.
The Office of Thrift Supervision may prohibit an acquisition of control if:
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it would result in a monopoly or substantially lessen competition; |
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the financial condition of the acquiring person might jeopardize the financial stability of the institution; or |
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the competence, experience or integrity of the acquiring person indicates that it would not be in the interest of the depositors or of the public to permit the acquisition of control by such person. |
These restrictions do not apply to the acquisition of a savings institutions capital stock by one or more tax-qualified employee stock benefit plans, provided that the plans do not have beneficial ownership of more than 25% of any class of equity security of the savings institution.
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DESCRIPTION OF CAPITAL STOCK OF PEOPLES UNITED FINANCIAL
General
We will be authorized to issue 1.95 billion shares of common stock, par value $0.01 per share and 50,000,000 shares of preferred stock, par value $0.01 per share. We currently expect to sell up to 185,437,500 shares of common stock (or 213,253,125 shares in the event of an increase of 15% in the estimated valuation range) in the offering and issue up to 135,959,202 shares of common stock (or 156,353,083 shares in the event of an increase of 15% in the estimated valuation range) in the share exchange. We also expect to issue 2,000,000 shares of common stock to The Peoples Community Foundation. We will not issue any shares of preferred stock in the offering. Except as discussed above in Restrictions on Acquisition of Peoples United Financial and Peoples Bank , each share of Peoples United Financial common stock will have the same relative rights as, and will be identical in all respects with, every other share of common stock. Upon payment of the purchase price for the common stock in accordance with the plan of conversion, all such stock will be duly authorized, fully paid and non-assessable.
The shares of Peoples United Financial common stock:
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are not deposit accounts and are subject to investment risk; |
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are not insured or guaranteed by the Federal Deposit Insurance Corporation, or any other government agency; and |
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are not guaranteed by Peoples United Financial or Peoples Bank. |
Common Stock
Dividends. We can pay dividends out of statutory surplus or from net profits if, as and when declared by the Board of Directors. The payment of dividends is subject to limitations which are imposed by law. See Our Policy Regarding Dividends and Regulation of Peoples Bank and Peoples United Financial . The holders of Peoples United Financial common stock will be entitled to receive and share equally in such dividends as may be declared by the Board of Directors out of funds legally available therefor. If Peoples United Financial issues preferred stock, the holders of the preferred stock may have a priority over the holders of the common stock with respect to dividends.
Voting Rights . Upon the effective date of the conversion and offering, the holders of Peoples United Financial common stock will possess exclusive voting rights in Peoples United Financial. They will elect the Board of Directors and act on such other matters as are required to be presented to them under Delaware law or the Certificate of Incorporation or as are otherwise presented to them by the Board of Directors. Each holder of common stock will be entitled to one vote per share and will not have any right to cumulate votes in the election of directors. Also, the Board of Directors is divided into three classes which are as equal in size as is possible and only one class is required to be elected annually by the stockholders. If Peoples United Financial issues preferred stock, holders of the preferred stock may also possess voting rights. Certain matters, including the removal of directors, the approval of business combinations and amending the Certificate of Incorporation or Bylaws, may require a two-thirds stockholder vote. See Restrictions on Acquisition of Peoples United Financial and Peoples Bank .
Liquidation. In the event of any liquidation, dissolution or winding up of Peoples Bank, we, as sole owner of Peoples Banks capital stock, would be entitled to receive, after payment or provision for
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payment of all debts and liabilities of Peoples Bank (including all deposit accounts and accrued interest thereon) and after distribution of the balance in the special liquidation account to eligible account holders and supplemental eligible account holders (see The Conversion and OfferingEffects of the ConversionEffect on Liquidation Rights ), all assets of Peoples Bank available for distribution. In the event of Peoples United Financials liquidation, dissolution or winding up, the holders of Peoples United Financials common stock would be entitled to receive, after payment or provision for payment of all debts and liabilities, all of Peoples United Financials assets available for distribution. If Peoples United Financial issues preferred stock, the holders thereof may have a priority over the holders of the common stock in the event of liquidation or dissolution.
Preemptive Rights; Redemption . Holders of Peoples United Financial common stock will not be entitled to preemptive rights with respect to any shares which may be issued. Peoples United Financial common stock is not subject to redemption.
Preferred Stock
Peoples United Financial will not issue any shares of authorized preferred stock in the offering. We may issue preferred stock with such preferences and designations as the Board of Directors may from time to time determine. The Board of Directors can, without stockholder approval, issue preferred stock with voting, dividend, liquidation and conversion rights which could dilute the voting strength of the holders of the common stock and may assist management in impeding an unfriendly takeover or attempted change in control.
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PROPOSAL 2 THE ESTABLISHMENT AND FUNDING OF THE PEOPLES COMMUNITY FOUNDATION
General
In furtherance of our commitment to our local communities, the plan of conversion provides that we will establish The Peoples Community Foundation as a non-stock Delaware corporation in connection with the conversion and offering. The charitable foundation will be funded with 2,000,000 shares of Peoples United Financial common stock and $20.0 million in cash from the offering proceeds, as described below. By further enhancing our visibility and reputation in our local communities, we believe that the charitable foundation will enhance the long-term value of our community banking franchise. The conversion and offering presents us with a unique opportunity to provide a substantial and continuing benefit to our communities and to receive the associated tax benefits.
Purpose of the Charitable Foundation
Although we intend to continue to emphasize community lending and community activities following the offering, such activities are not our sole corporate purpose. The Peoples Community Foundation will be dedicated completely to community activities and the promotion of charitable causes, and may be able to support such activities in manners that are not presently available to us. We believe that The Peoples Community Foundation will enable us to assist the communities within our market area in areas beyond community development and lending and will enhance our current activities under the Community Reinvestment Act.
We further believe that the funding of The Peoples Community Foundation with Peoples United Financial common stock and cash from the offering proceeds will allow our communities to share in our potential growth and success long after the offering. The Peoples Community Foundation will accomplish that goal by providing for continued ties between it and us, thereby forming a partnership with the communities in which we operate.
While it is expected that Peoples Bank will engage in limited charitable activities in the future, it is also expected that The Peoples Community Foundation will undertake the majority of such activities in the future. In connection with the completion of the conversion, we intend to contribute to The Peoples Community Foundation 2,000,000 shares of Peoples United Financial common stock and $20.0 million in cash from the offering proceeds. The common stock contributed to the charitable foundation is in addition to the shares being offered for sale and will not be included in determining whether the minimum number of shares of common stock has been sold in order to complete the offering. The shares issued to the charitable foundation would have a value of $40 million, based on the stock price of $20.00 per share.
Structure of the Charitable Foundation
The Peoples Community Foundation will be incorporated under Delaware law as a non-stock corporation. The Peoples Community Foundations Certificate of Incorporation will provide that The Peoples Community Foundation is organized exclusively for charitable purposes as set forth in Section 501(c)(3) of the Internal Revenue Code. The Certificate of Incorporation will further provide that no part of the net earnings of the charitable foundation will inure to the benefit of, or be distributable to, its directors, officers or members.
We will select one of our current directors and two officers of Peoples Bank to serve on the initial Board of Directors of the charitable foundation. As required by Office of Thrift Supervision
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regulations, we also will select one additional person to serve on the initial Board of Directors of the charitable foundation who will not be one of our officers, directors or employees and who will have experience with local charitable organizations and grant making. While there are no plans to change the size of the initial Board of Directors during the year following the completion of the conversion and offering, following the first anniversary of the conversion and offering, the charitable foundation may alter the size and composition of its Board of Directors. For five years after the conversion, one seat on the charitable foundations Board of Directors will be reserved for a person from our local community who has experience with local community charitable organizations and grant making and who is not one of our or any of our affiliates officers, directors or employees, and one seat on the charitable foundations Board of Directors will be reserved for one of our directors.
The Board of Directors of The Peoples Community Foundation will be responsible for establishing its grant and donation policies, consistent with the purposes for which it was established. As directors of a nonprofit corporation, directors of The Peoples Community Foundation will always be bound by their fiduciary duty to advance the charitable foundations charitable goals, to protect its assets and to act in a manner consistent with the charitable purposes for which the charitable foundation is established. The directors of The Peoples Community Foundation also will be responsible for directing the activities of the charitable foundation, including the management and voting of the common stock held by the charitable foundation. However, as required by Office of Thrift Supervision regulations, all shares of common stock of Peoples United Financial held by The Peoples Community Foundation must be voted in the same ratio as all other shares of Peoples United Financial common stock on all proposals considered by Peoples United Financials stockholders.
The Peoples Community Foundations place of business will be located at our administrative office. The Board of Directors of The Peoples Community Foundation will appoint such officers and employees as may be necessary to manage its operations. To the extent applicable, we will comply with the affiliates restrictions set forth in Sections 23A and 23B of the Federal Reserve Act and the Office of Thrift Supervision regulations governing transactions between us and the charitable foundation.
The Peoples Community Foundation will receive working capital from the initial cash contribution of $20.0 million and:
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any dividends that may be paid on Peoples United Financials common stock in the future; |
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within the limits of applicable federal and state laws, loans collateralized by the common stock; |
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the proceeds of the sale of any of the common stock in the open market from time to time; or |
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other investment income. |
As a private foundation under Section 501(c)(3) of the Internal Revenue Code, The Peoples Community Foundation will be required to distribute annually in grants or donations a minimum of 5% of the average fair market value of its net investment assets. One of the conditions imposed on the gift of common stock by us is that the amount of common stock that may be sold by The Peoples Community Foundation in any one year shall not exceed 5% of the average market value of the assets held by The Peoples Community Foundation, except where the Board of Directors of the charitable foundation determines that the failure to sell an amount of common stock greater than such amount would result in a long-term reduction of the value of its assets and/or would otherwise jeopardize its capacity to carry out its charitable purposes.
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Tax Considerations
Our independent tax advisor has advised us that an organization created for the above purposes should qualify as a Section 501(c)(3) exempt organization under the Internal Revenue Code and should be classified as a private foundation. The Peoples Community Foundation will submit a timely request to the Internal Revenue Service to be recognized as an exempt organization. As long as The Peoples Community Foundation files its application for tax-exempt status within 15 months from the date of its organization, and provided the Internal Revenue Service approves the application, its effective date as a Section 501(c)(3) organization will be the date of its organization. Our independent tax advisor, however, has not rendered any advice on whether The Peoples Community Foundations tax exempt status will be affected by the regulatory requirement that all shares of Peoples United Financial common stock held by The Peoples Community Foundation must be voted in the same ratio as all other outstanding shares of common stock on all proposals considered by our stockholders.
We are authorized under federal law to make charitable contributions. We believe that the offering presents a unique opportunity to establish and fund a charitable foundation given the substantial amount of additional capital being raised. In making such a determination, we considered the dilutive impact of the contribution of common stock to The Peoples Community Foundation on the amount of common stock to be sold in the offering. See Capitalization, Bank Regulatory Capital Compliance, and Comparison of Valuation and Pro Forma Information With and Without the Charitable Foundation. The amount of the contribution will not adversely impact our financial condition. We therefore believe that the amount of the charitable contribution is reasonable given our pro forma capital position and does not raise safety and soundness concerns.
We have received an opinion from our independent tax advisor that the contribution of cash and Peoples United Financial common stock to The Peoples Community Foundation should not constitute an act of self-dealing and that Peoples United Financial should be entitled to a deduction in the amount of the cash contributed and the fair market value of the stock at the time of the contribution less the nominal amount that The Peoples Community Foundation is required to pay for such stock. Peoples United Financial is permitted to deduct only an amount equal to 10% of our annual taxable income in any one year. Peoples United Financial is permitted under the Internal Revenue Code to carry the excess contribution over the five-year period following the contribution to The Peoples Community Foundation. Peoples United Financial estimates that substantially all of the contribution should be deductible over the six-year period. However, we do not have any assurance that the Internal Revenue Service will grant tax-exempt status to the charitable foundation. Furthermore, even if the contribution is deductible, we may not have sufficient earnings to be able to use the deduction in full. We do not expect to make any further contributions to The Peoples Community Foundation within the first five years following the initial contribution, unless such contributions would be deductible under the Internal Revenue Code. Any such decisions would be based on an assessment of, among other factors, our financial condition at that time, the interests of our stockholders and depositors, and the financial condition and operations of the charitable foundation.
Although we have received an opinion from our independent tax advisor that we should be entitled to a deduction for the charitable contribution, there can be no assurances that the Internal Revenue Service will recognize The Peoples Community Foundation as a Section 501(c)(3) exempt organization or that the deduction will be permitted. In such event, our contribution to The Peoples Community Foundation would be expensed without tax benefit, resulting in a reduction in earnings in the year in which the Internal Revenue Service makes such a determination.
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As a private foundation, earnings and gains, if any, from the sale of common stock or other assets are exempt from federal and state income taxation. However, investment income, such as interest, dividends and capital gains, is generally taxed at a rate of 2.0%. Within four and one-half months after the close of its fiscal year, The Peoples Community Foundation will be required to make its annual return available for public inspection. The annual return for a private foundation includes, among other things, an itemized list of all grants made or approved, showing the amount of each grant, the recipient, any relationship between a grant recipient and the charitable foundations managers and a concise statement of the purpose of each grant.
Regulatory Conditions Imposed on the Charitable Foundation
Office of Thrift Supervision regulations will impose the following conditions on the establishment of The Peoples Community Foundation:
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the Office of Thrift Supervision can examine the charitable foundation; |
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the charitable foundation must comply with all supervisory directives imposed by the Office of Thrift Supervision; |
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the charitable foundation must provide annually to the Office of Thrift Supervision a copy of the annual report that the charitable foundation submits to the Internal Revenue Service; |
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the charitable foundation must operate according to written policies adopted by its Board of Directors, including a conflict of interest policy; |
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the charitable foundation may not engage in self-dealing and must comply with all laws necessary to maintain its tax-exempt status under the Internal Revenue Code; and |
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the charitable foundation must vote its shares of Peoples United Financial in the same ratio as all of the other shares voted on each proposal considered by Peoples United Financials stockholders. |
In addition, within six months of completing the conversion, The Peoples Community Foundation must submit to the Office of Thrift Supervision a three-year operating plan.
Additionally, the establishment and funding of The Peoples Community Foundation must be separately approved by at least a majority of the total number of votes eligible to be cast by depositors of Peoples Bank at the special meeting of depositors and must be separately approved by at least a majority of the outstanding shares of Peoples Bank common stock entitled to vote at a meeting of the stockholders of Peoples Bank and the affirmative vote of a majority of the outstanding shares of Peoples Bank common stock, excluding shares held by Peoples Mutual Holdings. If the establishment and funding of The Peoples Community Foundation is not approved by Peoples Bank stockholders and depositors, the foundation will not be established.
Consummation of the conversion and related offering of common stock is not conditioned upon depositors and stockholders approval of the charitable foundation. Failure to approve the charitable foundation may, however, materially increase our pro forma market value. See Comparison of Valuation and Pro Forma Information With and Without the Charitable Foundation.
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INFORMATIONAL PROPOSALS RELATED TO THE CERTIFICATE OF INCORPORATION OF
PEOPLES UNITED FINANCIAL, INC.
By
their approval of the Plan of Conversion as set forth in Proposal 1, the Board of Directors of Peoples Bank has approved each
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As a result of the conversion, Peoples Bank stockholders, whose rights are presently governed by the Charter and Bylaws of Peoples Bank as a federal stock savings bank, will become stockholders of Peoples United Financial, whose rights will be governed by the Certificate of Incorporation and Bylaws of Peoples United Financial as a Delaware corporation. The following series of informational proposals focus on the material differences between the provisions of Peoples Banks Charter and the Certificate of Incorporation of Peoples United Financial. These informational proposals and the accompanying discussion do not address differences in the rights of stockholders arising from differences between the laws of the United States and applicable Office of Thrift Supervision regulations under which Peoples Bank is chartered compared to the Delaware General Corporation Law, under which Peoples United Financial is organized or differences in the Bylaws of Peoples Bank compared to the Bylaws of Peoples United Financial. See Comparison of Stockholders Rights. This discussion is qualified in its entirety by reference to the Charter of Peoples Bank and the Certificate of Incorporation of Peoples United Financial. See Where You Can Find Additional Information for procedures for obtaining a copy of those documents.
There will be additional differences between the rights of stockholders of Peoples Bank and Peoples United Financial that result from Office of Thrift Supervision rules governing the conversion. This portion of the discussion is qualified in its entirety by reference to applicable Office of Thrift Supervision regulations. See Restrictions on Acquisition of Peoples United Financial and Peoples Bank Regulatory Restrictions.
The provisions of Peoples United Financials Certificate of Incorporation which are summarized as informational proposals 1 through 5 were approved as part of the process in which the Board of Directors of Peoples Bank approved the Plan of Conversion. These proposals are informational in nature only, because the Office of Thrift Supervisions regulations governing mutual-to-stock conversions do not provide for votes on matters other than the plan of conversion and the establishment and funding of the charitable foundation. Peoples Bank stockholders are not being asked to approve these informational proposals at the Special Meeting.
INFORMATIONAL PROPOSAL 1 INCREASE IN AUTHORIZED COMMON STOCK
Peoples Bank is authorized to issue 450,000,000 shares of common stock and 50,000,000 shares of preferred stock. As of September 30, 2006, Peoples Bank had approximately 142,100,000 shares of common stock issued and outstanding. Approximately 5,500,000 additional shares of common stock were reserved for issuance upon exercise of outstanding stock options, pursuant to future awards under the 1998 Long-Term Incentive Plan, and pursuant to future awards under the Peoples Bank Directors Equity Compensation Plan. No shares of preferred stock were issued and outstanding.
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Section 4.01 of the Certificate of Incorporation authorizes Peoples United Financial to issue 1.95 billion shares of common stock, and 50,000,000 shares of preferred stock.
At the maximum of the offering range, we expect to sell 185,437,500 shares of Peoples United Financial common stock in the offering, issue 135,959,202 shares of common stock in exchange for outstanding shares of Peoples Bank common stock, and issue 2,000,000 shares of common stock to The Peoples Community Foundation. Peoples United Financial would also reserve an additional 12,389,809 shares of its common stock in exchange for shares of Peoples Bank common stock currently reserved for issuance as described in the preceding paragraph. If Peoples United Financials Certificate of Incorporation did not authorize the issuance of more shares of common stock than can be issued by Peoples Bank, Peoples United Financial would have only approximately 114,200,000 shares of common stock available for issuance for any other purpose.
If the maximum number of shares to be sold in the offering were increased by 15% to 213,253,125, Peoples United Financial would issue 156,353,083 shares of common stock in exchange for outstanding shares of Peoples Bank common stock and 2,000,000 shares of common stock to The Peoples Community Foundation. Peoples United Financial would also reserve 14,248,281 shares of its common stock in exchange for shares of Peoples Bank common stock currently reserved for issuance as described above. If Peoples United Financials Certificate of Incorporation did not authorize it to issue more shares of common stock than can be issued by Peoples Bank, Peoples United Financial would have only approximately 64,100,000 shares available for issuance for any other purpose.
Peoples United Financials Board of Directors currently has no plans for the issuance of additional shares of common stock, other than the issuance of shares of restricted stock pursuant to the terms of the 1998 Long-Term Incentive Plan and the proposed recognition and retention plan and upon exercise of stock options issued and to be issued pursuant to the proposed stock option plan, the Peoples United Financial Directors Equity Compensation Plan. However, the Board of Directors believes it is desirable to have additional authorized shares of common stock available in order to meet a variety of business needs as they may arise and to enhance Peoples United Financials flexibility in connection with possible future actions. These business needs and actions may include capital raising, stock dividends, stock splits, corporate business combinations, funding of business acquisitions, employee benefit programs and other corporate purposes. Peoples United Financials ability to use its common stock for the purposes set forth above could be limited if we did not increase the number of authorized shares of common stock beyond the number currently authorized under the Peoples Bank Charter.
All authorized and unissued shares of Peoples United Financial common stock following the conversion and offering will be available for issuance without further action of the stockholders, unless such action is required by applicable law or the listing standards of The Nasdaq Stock Market or the listing standards of any stock exchange on which Peoples United Financial securities may then be listed.
An increase in the number of authorized shares of common stock may have the effect of deterring or rendering more difficult attempts by third parties to obtain control of Peoples United Financial, if such attempts are not approved by the Board of Directors. In the event that a tender offer or other takeover attempt is threatened, the Board of Directors could issue shares of common stock from authorized and unissued shares in order to dilute the stock ownership of persons seeking to take control of the company.
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On balance, however, the Board of Directors believes the advantages of flexibility to meet the business needs and take the actions described above outweigh the disadvantages to the stockholders.
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INFORMATIONAL PROPOSAL 2 PROVISIONS GOVERNING
BUSINESS COMBINATIONS WITH INTERESTED STOCKHOLDERS
Article VII of the Certificate of Incorporation of Peoples United Financial requires the approval of the holders of at least two-thirds of Peoples United Financials outstanding shares of voting stock, together with the affirmative vote of at least 50% of the outstanding shares of voting stock not beneficially owned by an Interested Shareholder (defined below) to approve certain Business Combinations and related
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transactions. Under Delaware law, absent this provision, Business Combinations, which include mergers, consolidations and sales of all or substantially all of the assets of a corporation must, subject to certain exceptions, be approved by the vote of the holders of only a majority of the outstanding shares of common stock and any other affected class of stock.
Approval by the holders of at least two-thirds of Peoples United Financials shares is required in connection with any transaction involving an Interested Shareholder except (1) in cases where the proposed transaction has been approved in advance by a majority of those members of the Board of Directors who are unaffiliated with the Interested Shareholder and were directors prior to the time when the Interested Shareholder became an Interested Shareholder; or (2) if the proposed transaction meets certain conditions set forth therein which are designed to afford the stockholders a fair price in consideration for their shares in which case, if a stockholder vote is required, approval of only a majority of the outstanding shares of voting stock would be sufficient.
The term Interested Shareholder is defined to include any individual, corporation, partnership or other entity (other than Peoples United Financial or its subsidiaries or any employee benefit plan maintained by Peoples United Financial or its subsidiaries) which owns beneficially or controls, directly or indirectly, 15% or more of the outstanding shares of Peoples United Financial voting stock.
A Business Combination means:
(1) | any merger or consolidation of Peoples United Financial or any of its subsidiaries with or into any Interested Shareholder or its affiliate; |
(2) | any sale, lease, exchange, mortgage, pledge, transfer, or other disposition to or with any Interested Shareholder or its affiliate of 10% or more of Peoples United Financials assets or combined assets of Peoples United Financial and its subsidiaries; |
(3) | the issuance or transfer to any Interested Shareholder or its affiliate by Peoples United Financial (or any subsidiary) of any of Peoples United Financials securities other than on a pro rata basis to all stockholders; |
(4) | the adoption of any plan for the liquidation or dissolution of Peoples United Financial proposed by or on behalf of any Interested Shareholder or its affiliate; |
(5) | any reclassification of securities, recapitalization, merger or consolidation of Peoples United Financial which has the effect of increasing the proportionate share of common stock or any class of Peoples United Financials equity or convertible securities owned directly or indirectly by an Interested Shareholder or its affiliate; and |
(6) | the acquisition by Peoples United Financials subsidiaries of any securities of an Interested Shareholder or its affiliates or associates. |
This provision is intended to limit the ability of any person who acquires a significant number of shares of Peoples United Financial common stock to effect a transaction that may not be in the best interests of Peoples United Financial and its stockholders generally. This will not prevent a significant stockholder from seeking approval of a Business Combination, but it will make it more difficult for such a stockholder to influence the outcome of a stockholder vote simply by acquiring a large number of shares of common stock but without persuading other stockholders of the merits of its proposed course of action.
Article VII of the Certificate of Incorporation can not be repealed or amended without approval by (1) a majority of the Disinterested Directors; (2) two-thirds of the outstanding voting shares; and (3) a
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majority of the voting shares owned by stockholders who are not Interested Shareholders. A Disinterested Director is one who is not affiliated with an Interested Shareholder and who either was a member of the Board of Directors prior to the date the Interested Shareholder acquired that status, or was recommended for election by a majority of the Disinterested Directors in office at the time he or she was nominated for election.
The limitations on amendment of Article VII are intended to preserve the protections of the other provisions of Article VII by preventing circumvention of such provisions by a simple majority vote. These limitations are consistent with other provisions in Article X of the Certificate of Incorporation as discussed further in informational proposal 5 below.
Peoples Banks Charter does not contain similar provisions regarding Business Combinations involving Interested Shareholders. This has not been necessary under the mutual holding company structure, in which the mutual holding company owns a majority of all voting shares and can prevent a third party from effecting a transaction that may be in its own self-interest but which may not be in the best interests of all other stockholders. Similarly, the mutual holding company can prevent amendment of Peoples Banks Charter to remove other provisions which function for the protection of other stockholders.
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INFORMATIONAL PROPOSAL 3 PROVISIONS PRECLUDING STOCKHOLDER ACTION WITHOUT A MEETING
Article VI of the Certificate of Incorporation of Peoples United Financial provides that any action required or permitted to be taken by stockholders may be taken only at an annual or special meeting and prohibits stockholder action by written consent in lieu of a meeting. The Charter of Peoples Bank does not include a comparable provision. This has not been necessary under the mutual holding company structure, in which the mutual holding company owns a majority of all voting shares and would therefore have to participate in any written stockholder consent in lieu of a meeting.
This provision has the effect of requiring a person who seeks the election of one or more candidates to the Board of Directors, or to effect a transaction requiring stockholder approval, to present his or her proposal at a duly called annual or special meeting of stockholders. This requirement coupled with the provisions of the Bylaws of Peoples United Financial limiting the ability to call a special meeting of stockholders may deter or delay efforts by a stockholder who wishes to present matters for approval by the stockholders and could therefore have an anti-takeover effect.
The Board of Directors believes that this provision may have the effect of giving the Board of Directors more time to evaluate an offer, further strengthen its defenses, negotiate with the bidder or solicit competing bids or proposals in order to maximize stockholder value.
INFORMATIONAL PROPOSAL 4 PROVISIONS LIMITING CERTAIN AMENDMENTS TO BYLAWS
Peoples Banks Bylaws may be amended by vote of the majority of the directors or by affirmative vote of the holders of a majority of the outstanding shares of Peoples Bank common stock. Any action taken by the stockholders with respect to the amendment of Peoples Banks Bylaws will prevail over any inconsistent action taken by the Board of Directors with respect to the Bylaws.
Section 10.02 of the Certificate of Incorporation of Peoples United Financial provides that the Board of Directors is authorized to make, alter, amend, rescind or repeal any of the Bylaws with the approval of two-thirds of the directors then in office, and a bylaw so adopted may be altered, amended, rescinded or repealed by action of the holders of two-thirds of the common stock. Section 10.02 of the Certificate of Incorporation also provides that provisions of the Bylaws that contain supermajority voting requirements may not be altered, amended, repealed or rescinded without a vote of the Board of Directors or holders of capital stock entitled to vote thereon that is not less than the super-majority specified in such provision. Absent these provisions, the Delaware General Corporation Law provides that a corporations bylaws may be amended by the holders of a majority of the corporations outstanding capital stock. Except in circumstances specifically provided in the Delaware General Corporation Law, this provision applies to Bylaws, whether initially adopted or amended by the Board of Directors or by the stockholders.
This authorization neither divests the stockholders of their right, nor limits their power, to adopt, amend, rescind or repeal any Bylaw under the Delaware General Corporation Law. Although the stockholders will have the ability to make changes to the Bylaws, the ability of the Board of Directors to do so without the approval of stockholders raises the possibility that not all stockholders will agree with
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the changes made by the Board of Directors. Furthermore, some changes made by the Board of Directors may be deemed undesirable or disadvantageous by stockholders. These provisions could have the effect of discouraging a tender offer or other takeover attempt where the ability to make fundamental changes through Bylaw amendments is an important element of the takeover strategy of the acquiror.
The Board of Directors believes that the provision limiting certain amendments to the Bylaws will put the Board of Directors in a stronger position to negotiate with third parties with respect to transactions potentially affecting the corporate structure of Peoples United Financial (including its subsidiaries) and the fundamental rights of its stockholders, and to preserve the ability of all stockholders to have an effective voice in the outcome of such matters.
INFORMATIONAL PROPOSAL 5 PROVISIONS LIMITING CERTAIN AMENDMENTS TO CERTIFICATE OF INCORPORATION
Peoples Banks Charter may be amended in accordance with applicable law and rules if such amendment is approved by a majority of the Board of Directors, by approval of a majority of the outstanding shares, and by the Office of Thrift Supervision. Additional restrictions have not been necessary under the mutual holding company structure, in which the mutual holding company owns a majority of all voting shares and can prevent amendment of the Charter to remove provisions which function for the protection of other stockholders.
Section 10.01 of the Certificate of Incorporation of Peoples United Financial provides that certain provisions of the Certificate of Incorporation may not be altered, amended, repealed or rescinded without the affirmative vote of either (1) not less than a majority of the authorized number of directors and, if one or more Interested Shareholders exist, by not less than a majority of the Disinterested Directors (as defined in the Certificate of Incorporation); or (2) the holders of not less than two-thirds of the total votes eligible to be cast by the holders of all outstanding shares of Peoples United Financial capital stock entitled to vote thereon and, if the alteration, amendment, repeal, or rescission is proposed by or on behalf of an Interested Shareholder or a director who is an Affiliate or Associate (each as defined in the Certificate of Incorporation) of an Interested Shareholder, by the affirmative vote of the holders of not less than a majority of the total votes eligible to be cast by holders of all outstanding shares entitled to vote thereon not beneficially owned by an Interested Shareholder or an Affiliate or Associate thereof. Amendment of the provision of the Certificate of Incorporation relating to Business Combinations (as defined in informational proposal 2 above) must also be approved by either (i) a majority of the Disinterested Directors; or (ii) the affirmative vote of not less than two-thirds of the total number of votes eligible to be cast by the holders of all outstanding shares of the voting stock, voting together as a single class, together with the affirmative vote of not less than fifty percent (50%) of the total number of votes eligible to be cast by the holders of all outstanding shares of the voting stock not beneficially owned by any Interested Shareholder or Affiliate or Associate thereof, voting together as a single class.
Absent these provisions, the Delaware General Corporation Law provides that a corporations certificate of incorporation may be amended by the holders of a majority of the corporations outstanding capital stock. The limitations on amendments to the specified provisions of the Certificate of Incorporation are intended to preserve the protections of the other provisions of the Certificate of Incorporation by preventing circumvention of such provisions by a simple majority vote.
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This provision neither divests the stockholders of their right, nor limits their power, to adopt, amend, or rescind any provision of the Certificate of Incorporation, but does make such changes more difficult. These provisions could have the effect of discouraging a tender offer or other takeover attempt where the ability to make fundamental changes through amendments to the Certificate of Incorporation is an important element of the takeover strategy of the acquiror.
The Board of Directors believes that the provisions limiting certain amendments to the Certificate of Incorporation will put the Board of Directors in a stronger position to negotiate with third parties with respect to transactions potentially affecting the corporate structure of Peoples United Financial (including its subsidiaries) and the fundamental rights of its stockholders, and to preserve the ability of all stockholders to have an effective voice in the outcome of such matters.
INFORMATIONAL PROPOSAL 6PROVISIONS LIMITING STOCKHOLDERS ABILITY
TO REMOVE DIRECTORS
Section 5.07 of the Certificate of Incorporation of Peoples United Financial provides that a director may be removed from the Board of Directors prior to the expiration of his or her term only for cause and upon the affirmative vote of at least two-thirds of the outstanding shares of voting stock. Among other things the term cause includes removal of a person from the Board of Directors of Peoples Bank if such person was so serving. In the absence of these provisions the vote of the holders of a majority of People United Financials shares could remove the entire Board of Directors with cause and replace it with persons of such holders choice.
Peoples Banks Charter provides that any director or the entire Board of Directors may be removed from office at any time with cause, by the affirmative vote of the holders of at least fifty-one percent of the outstanding shares entitled to vote for the election of directors. This has provided an adequate degree of protection under the mutual holding company structure, in which the mutual holding company owns a majority of all voting shares and can prevent a third party from seeking removal of one or more directors in order to promote an agenda that may not be in the best interests of all other stockholders.
Section 5.07 of the Certificate of Incorporation of Peoples United Financial is intended to prevent sudden and fundamental changes to the composition of the Board of Directors except in the case of director misconduct or removal from office as a director of Peoples Bank. This provision does not prevent the replacement of one or more directors at an annual meeting of stockholders, and will not prevent replacement of the entire Board over the course of three years. This provision is intended to reduce the ability of anyone to coerce members of the Board of Directors by threatening them with removal from office, in cases where the directors are acting in good faith to discharge their duties to the corporation and to all stockholders as a group. This provision will not prevent a stockholder from conducting a proxy contest with respect to the election of directors at an annual meeting of stockholders.
Section 5.07 of the Certificate of Incorporation may make it more difficult to bring about a change in control of Peoples United Financial. One method for a hostile stockholder to take control of a company is to acquire a majority of the outstanding shares of the company through a tender offer or open market purchases and then use its voting power to remove the existing directors.
The Board of Directors believes that it is desirable to adopt this provision so that a directors continued service will be conditioned on his or her ability to serve and discharge his or her duties to the corporation and the stockholders in good faith, rather than his or her position relative to a dominant stockholder.
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The transfer agent and registrar for the common stock of Peoples Bank and Peoples United Financial is Mellon Investor Services LLC.
The legality of the issuance of the common stock being offered and certain matters relating to the conversion and offering and federal taxation will be passed upon for us by Thacher Proffitt & Wood LLP , Washington, D.C. Certain matters relating to state taxation will be passed upon for us by PricewaterhouseCoopers LLP, Boston, Massachusetts. Certain legal matters will be passed upon for Morgan Stanley & Co. Incorporated, Ryan Beck & Co., Inc. and the other members of the syndicate by Cleary Gottlieb Steen & Hamilton LLP, New York, New York.
Our consolidated financial statements as of December 31, 2005 and 2004, and for each of the years in the three-year period ended December 31, 2005, and managements assessment of the effectiveness of internal control over financial reporting as of December 31, 2005 have been included herein in reliance upon the reports of KPMG LLP, an independent registered public accounting firm, and upon the authority of said firm as experts in accounting and auditing.
RP Financial has consented to the publication in this document of a summary of its letter to us setting forth its opinion as to the estimated pro forma market value of our common stock after the conversion and offering and its letter with respect to the value of subscription rights and to the use of its name and statements with respect to it appearing in this document.
Peoples United Financials common stock is registered pursuant to Section 12(b) of the Securities Exchange Act of 1934, as amended. Peoples United Financial is subject to the information, proxy solicitation, insider trading restrictions, tender offer rules, periodic reporting and other requirements of the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended. Peoples United Financial may not deregister the common stock under the Securities Exchange Act of 1934, as amended, for a period of at least three years following the conversion and offering.
As of the date of this proxy statement/prospectus, Peoples Banks Board of Directors does not know of any matters that will be presented for consideration at the special meeting other than as described herein. However, if any other matter shall properly come before the special meeting or any adjournment or postponement thereof and shall be voted upon, the proposed proxy will be deemed to confer authority to the individuals named as authorized therein to vote the shares represented by the proxy as to any matters that fall within the purposes set forth in the notice of annual meeting. However, no proxy that is voted against the plan of conversion or the establishment and funding of the charitable foundation will be voted in favor of any adjournment or postponement of the special meeting to solicit additional votes on the plan of conversion or the establishment and funding of the charitable foundation.
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WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed a registration statement with the Securities and Exchange Commission under the Securities Act of 1933 with respect to the common stock offered through this proxy statement/prospectus. As permitted by the rules and regulations of the Securities and Exchange Commission, this proxy statement/prospectus does not contain all the information set forth in the registration statement. You may examine this information without charge at the public reference facilities of the Securities and Exchange Commission located at 100 F Street, N.E., Washington, D.C. 20549. You may obtain copies of the material from the Securities and Exchange Commission at prescribed rates. Please call the Securities and Exchange Commission at 1-800-SEC-0330 for further information on the Securities and Exchange Commissions public reference rooms. The registration statement also is available through the Securities and Exchange Commissions world wide web site on the internet at http://www.sec.gov.
This document contains a description of the material features of certain exhibits to the Registration Statement on Form S-1. The statements as to the contents of such exhibits, however, are, of necessity, brief descriptions and are not necessarily complete; each such statement is qualified by reference to such contract or document. Copies of Peoples United Financials Certificate of Incorporation and Bylaws, as well as the Charter and Bylaws of Peoples Bank, are available from us without charge and may be obtained by written request to Peoples United Financial Investor Relations, 850 Main St., Bridgeport, CT 06604 or by calling (203) 338-7228. A copy of the plan of conversion is also available from us without charge and is also available for inspection at each branch office of Peoples Bank. A copy of the independent appraisal report of RP Financial, including any amendments made to it, and the detailed memorandum of RP Financial setting forth the method and assumptions for such appraisal are available for inspection at our administrative offices.
We have filed an application with the Office of Thrift Supervision with respect to the conversion and offering. This proxy statement/prospectus omits certain information contained in that application. You may examine the application at the principal office of the Office of Thrift Supervision, 1700 G St., NW, Washington, D.C. 20552, and at the Northeast Regional Office of the Office of Thrift Supervision, Harborside Financial Center, Plaza Five, Suite 1600, Jersey City, NJ 07311.
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REVOCABLE PROXY
PEOPLES BANK
Proxy Solicited on Behalf of the Board of Directors
for the Special Meeting of Stockholders, April 5, 2007
The undersigned hereby appoints George P. Carter, Jerry Franklin, and Eunice S. Groark, or any two of them, and their respective substitutes or delegates, as proxies to represent and to vote, as specified on the reverse side hereof, all of the shares of capital stock of Peoples Bank which the undersigned may be entitled to vote at the Special Meeting of Stockholders to be held on April 5, 2007 and at any postponement or adjournment; and subject to direction by a majority of the Board of Directors, to vote such shares and to represent the undersigned in respect of other matters properly brought before the meeting.
WHEN PROPERLY EXECUTED, THIS PROXY WILL BE VOTED AS SPECIFIED BY THE SIGNING STOCK HOLDER ON THE REVERSE SIDE HEREOF . UNLESS A CONTRARY OR ABSTAIN VOTE IS SPECIFIED, THIS PROXY WILL BE VOTED FOR EACH OF PROPOSAL 1 AND PROPOSAL 2 . IF ANY OTHER MATTER IS PRESENTED A VOTE AT THE SPECIAL MEETING, THIS PROXY WILL BE VOTED AS A MAJORITY OF THE BOARD OF DIRECTORS DETERMINES.
Informational proposals 1 through 6 are listed on the reverse side of this proxy for informational purposes only and may not be voted on by stockholders because Office of Thrift Supervision regulations governing mutual-to-stock conversions do not provide for votes on matters other than Proposal 1 and Proposal 2.
If you hold shares of the Banks Common Stock in your Peoples Bank 401(k) Employee Savings Plan account, this card also provides voting instructions for shares held in your account in accordance with the Authorization to Trustee appearing below. Please note that voting instructions for shares of Common Stock held in the Plan must be received no later than March 15, 2007.
Authorization to Trustee : The undersigned hereby authorizes Mercer Trust Company, as Trustee of the Peoples Bank 401(k) Plan Employee Savings Plan, to vote all shares of the Banks Common Stock allocated to the undersigneds account under the Plan, at the Special Meeting of Stockholders or at any adjournment thereof, in accordance with the instructions on the reverse side. THE TRUSTEE WILL NOT VOTE ANY SHARES HELD IN ACCOUNTS UNDER THE PLAN FOR WHICH NO INSTRUCTIONS ARE SPECIFIED.
Continued on the reverse side
PLEASE MARK, SIGN AND DATE THIS PROXY ON THE REVERSE SIDE
AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE.
The Board of Directors unanimously recommends a vote FOR the approval of each of Proposal 1 and Proposal 2. |
I Will Attend the Special Meeting.
Please Mark Your Choice Like This in Blue or Black Ink. |
¨
x |
1. | Approval of the Plan of Conversion. |
For | Against | Abstain | ||
¨ | ¨ | ¨ |
2. | Establishment and Funding of The Peoples Community Foundation. |
For | Against | Abstain | ||
¨ | ¨ | ¨ |
Informational proposals:
1. | Increase in Authorized Common Stock. |
2. | Provisions Governing Business Combinations with Interested Stockholders. |
3. | Provisions Precluding Stockholder Action Without a Meeting. |
4. | Provisions Limiting Certain Amendments to the Bylaws. |
5. | Provisions Limiting Certain Amendments to the Certificate of Incorporation. |
6. | Provisions Limiting Stockholders Ability to Remove Directors. |
The undersigned hereby acknowledges receipt of the Notice of Special Meeting of Stockholders and the Proxy Statement/Prospectus for the Special Meeting dated [ ], 2007. | ||||
Please sign exactly as your name appears on this proxy. Joint owners should each sign personally. If signing as attorney, executor, administrator, trustee or guardian, please include your full title. Corporate or partnership proxies should be signed by an authorized officer.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.*
Description of Fee |
Fee | ||
OTS Application for Conversion and H-(e)1-S fee |
$ | 12,000 | |
SEC registration fee (1) |
795,238 | ||
NASDAQ Substitution Listing Event and annual fee |
82,500 | ||
NASD filing fee (2) |
75,000 | ||
Printing, postage and mailing |
2,800,000 | ||
Legal fees and expenses |
2,000,000 | ||
Accounting fees and expenses |
450,000 | ||
Proxy solicitation fees and expenses |
750,000 | ||
Appraisers fees and expenses |
900,000 | ||
Business plan fee |
75,000 | ||
Marketing fees, selling commissions, and underwriters expenses (including counsel fees) (3) |
135,442,500 | ||
Conversion agent fees and expenses |
760,000 | ||
Certificate printing |
50,000 | ||
Miscellaneous |
250,262 | ||
TOTAL |
$ | 144,442,500 |
* | Fees are estimated, except where indicated. |
(1) | Based on 371,606,207 shares of common stock at $20.00 per share. |
(2) | Based on 213,253,125 shares of common stock at $20.00 per share. |
Item 14. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law (DGCL), empowers a Delaware corporation to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that such person is or was a director, officer, employee or agent of such corporation, or is or was serving at the request of such corporation in such capacity for another corporation or other enterprise, against expenses (including attorneys fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him or her in connection with such action, suit or proceeding if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interest of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. Similar indemnity is authorized for such persons against expenses (including attorneys fees) actually and reasonably incurred in connection with the defense or settlement of any such threatened, pending or completed action or suit if such person acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the corporation, and provided further that (unless a court of competent jurisdiction otherwise provides) such person shall not have been adjudged liable to the corporation. Any such indemnification may be made only as authorized in each specific case upon a determination by the stockholders or disinterested directors or by independent legal counsel in a written opinion that indemnification is proper because the indemnitee has met the applicable standard of conduct.
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Section 145 further authorizes a corporation to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation of a director, officer, employee or agent of another corporation or enterprise, against any liability asserted against the person, and incurred by the person in any such capacity, or arising out of his or her status as such, whether or not the corporation would otherwise have the power to indemnify him or her under Section 145.
Article X, Section 9.01 of the Certificate of Incorporation of Peoples United Financial provides that Peoples United Financial shall indemnify to the fullest extent permitted by the DGCL, any person who is or was or has agreed to become a director or officer of Peoples United Financial, who was or is made a party to, or is threatened to be made a party to, any threatened, pending or completed action, suit or proceeding, other than actions or suits by or in the right of Peoples United Financial, by reason of such agreement or service or the fact that such person is, was or has agreed to serve as a director, officer, employee or agent of another corporation or organization at the request of Peoples United Financial against costs, charges, expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred by such person. This indemnification is conditioned upon the director or officer having acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, the best interest of Peoples United Financial and, with respect to any criminal proceeding, had no reasonable cause to believe that his or her conduct was unlawful. Peoples United Financial may, but is not required to, indemnify employees and agents under the same circumstances as directors and officers described in this paragraph.
Article X, Section 9.02 of the Certificate of Incorporation of Peoples United Financial provides that Peoples United Financial shall indemnify to the fullest extent permitted by the DGCL, any person who is or was or has agreed to become a director or officer of the Peoples United Financial, who was or is made a party to, or is threatened to be made a party to, any threatened, pending or completed action, suit or proceeding, by or in the right of Peoples United Financial, by reason of such agreement or service or the fact that such person is, was or has agreed to serve as a director, officer, employee or agent of another corporation or organization at the request of Peoples United Financial against costs, charges and expenses actually and reasonably incurred by such person in connection with the defense or settlement of such action or suit and any appeal therefrom. This indemnification is conditioned upon the director or officer having acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, the best interest of Peoples United Financial. No director or officer is entitled to indemnification under this section if the director or officer shall have been adjudged to be liable to Peoples United Financial unless a court deems that the director or officer is entitled to indemnification. Peoples United Financial may, but is not required to, indemnify employees and agents under the same circumstances as directors and officers described in this paragraph.
Article X, Section 9.03 of the Certificate of Incorporation of Peoples United Financial provides that Peoples United Financial shall indemnify any present or former director or officer of Peoples United Financial to the extent such person has been successful, on the merits or otherwise (including, without limitation, the dismissal of an action without prejudice), in defense of any action, suit or proceeding referred to in Sections 1 and 2 of Article IX, as described above, against all costs, charges and expenses actually and reasonably incurred by such person in connection therewith.
Article X, Section 9.04 of the Certificate of Incorporation of Peoples United Financial provides that Peoples United Financial shall indemnify any present or former director or officer of Peoples United Financial that is made a witness to any action, suit or proceeding to which he or she is not a party
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by reason of such agreement or service or the fact that such person is, was or has agreed to serve as a director, officer, employee or agent of another corporation or organization at the request of Peoples United Financial against all costs, charges and expenses actually and reasonably incurred by such person or on such persons behalf in connection therewith. Peoples United Financial may, but is not required to, indemnify employees and agents under the same circumstances as directors and officers described in this paragraph.
Article IX, Section 9.11 also empowers Peoples United Financial to purchase and maintain insurance to protect itself and its directors, officers, employees and agents and those who were or have agreed to become directors,
officers, employees or agents, against any liability, regardless of whether or not Peoples United Financial would have the power to indemnify those persons against such liability under the law or the provisions set forth in the Certificate of
Incorporation, provided that such insurance is available on acceptable terms as determined by a vote of the Board of Directors. Peoples United Financial is also authorized by its Certificate of Incorporation to enter into individual
indemnification contracts with directors, officers, employees and agents which may provide indemnification rights and procedures different from those set forth in the Certificate of Incorporation. Peoples United Financial has directors
Item 15. Recent Sales of Unregistered Securities.
Not Applicable.
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Item 16. Exhibits and Financial Statement Schedules.
The exhibits and financial statement schedules filed as a part of this Registration Statement are as follows:
(a) List of Exhibits. (Filed herewith unless otherwise noted)
1.1 | Engagement Letter by and among Ryan Beck & Co., Inc., Peoples Mutual Holdings and Peoples Bank, dated September 15, 2006.** | |
1.2 | Engagement Letter by and among Morgan Stanley & Co., Incorporated, Peoples Mutual Holdings and Peoples Bank, dated September 14, 2006.** | |
1.3 | Form of Agency Agreement to be entered into by Peoples United Financial, Inc., Peoples Mutual Holdings, Peoples Bank, Ryan Beck & Co., Inc., Morgan Stanley & Co., Incorporated, and other agents.# | |
2.1 | Amended and Restated Plan of Conversion and Reorganization of Peoples Mutual Holdings and Peoples Bank.*** | |
3.1 | Second Amended and Restated Certificate of Incorporation of Peoples United Financial, Inc. | |
3.2 | Second Amended and Restated Bylaws of Peoples United Financial, Inc. | |
4.1 | Form of Stock Certificate of Peoples United Financial, Inc. | |
4.2 | Reserved. | |
4.3 | Reserved. | |
4.4 | Fiscal and Paying Agency Agreement, dated as of November 16, 2000, between Peoples Bank and Bankers Trust Company as Fiscal and Paying Agent.# | |
4.5 | Form of Global Notes, registered in the name of the nominee of The Depository Trust Company (November 16, 2000).# | |
5.1 | Opinion of Thacher Proffitt & Wood LLP regarding legality of securities to be registered.# | |
8.1 | Opinion of Thacher Proffitt & Wood LLP regarding federal tax matters. | |
8.2 | Opinion of PricewaterhouseCoopers LLP regarding state tax matters. | |
10.1 | Executive Employment Agreement, dated effective June 1, 1999, between Peoples Bank and John A. Klein.# | |
10.1(a) | Amendment to Executive Employment Agreement, dated December 27, 2005, between Peoples Bank and John A. Klein. ** | |
10.2 |
Reserved. |
|
10.3 | Reserved. | |
10.4 | Summary of Compensation Arrangements for Named Executive Officers. ** | |
10.5 | Form of Agreement for Compensation on Discharge Subsequent to a Change in Control.# | |
10.5(a) | Form of Amendment to Agreement for Compensation on Discharge Subsequent to a Change in Control. ** | |
10.6 | Short Term Incentive Plan for Key Employees of Peoples Bank. ** |
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10.7 | Peoples Bank Deferred Compensation Plan for Certain Executive Officers.# | |
10.8 |
Reserved. |
|
10.9 | Amended and Restated Peoples Bank 1998 Long-Term Incentive Plan.# | |
10.10 |
Reserved. |
|
10.10(a) | Form of Amendment to Stock Option Agreements. ** | |
10.11 | Form of Grant Agreement for Restricted Stock. ** | |
10.12 |
Reserved. |
|
10.13 | Peoples Bank Cap Excess Plan.# | |
10.14 | The Peoples Bank Enhanced Senior Pension Plan.# | |
10.14(a) | Amendment One to The Peoples Bank Enhanced Senior Pension Plan.# | |
10.14(b) | Amendment Two to The Peoples Bank Enhanced Senior Pension Plan.** | |
10.15 | Non-Qualified Pension Trust Agreement, dated as of March 18, 1997, between Peoples Bank and Morgan Guaranty Trust Company of New York.# | |
10.16 | Amended and Restated Peoples Bank Supplemental Savings Plan.# | |
10.16(a) | First Amendment to Amended and Restated Peoples Bank Supplemental Savings Plan.# | |
10.16(b) | Second Amendment to Amended and Restated Peoples Bank Supplemental Savings Plan.# | |
10.17 | Peoples Bank Supplemental Savings Plan Non-Qualified Trust Agreement, dated as of July 23, 1998, between Peoples Bank and Morgan Guaranty Trust Company of New York.# | |
10.18 | Summary of Compensation Arrangements for Non-Employee Directors. ** | |
10.19 | Peoples Bank Amended and Restated Deferred Compensation Plan for Directors.# | |
10.20 | Third Amended and Restated Peoples Bank Directors Equity Compensation Plan.** | |
10.21 | The Norwich Savings Society Non-Qualified Deferred Compensation Plan.# |
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10.22 | The Norwich Savings Society Non-Qualified Deferred Compensation Trust Agreement, dated June 27, 1995, between The Norwich Savings Society and Sachem Trust National Association.# | |
10.23 | Amendment and Restatement of Deferred Compensation Agreements (undated) between The Norwich Savings Society and Jeremiah J. Lowney, Jr.# | |
10.24 | Employee Stock Ownership Plan of Peoples United Financial, Inc.**** | |
10.25 | Peoples Bank Change-in-Control Employee Severance Plan.** | |
21 | Subsidiaries. ** | |
23.1 | Consent of KPMG LLP. | |
23.2 | Consent of RP Financial, LC.# | |
23.3 | Consent of Thacher Proffitt & Wood LLP (see Exhibits 5.1 and 8.1). | |
23.4 | Consent of PricewaterhouseCoopers LLP (see Exhibit 8.2). | |
24 | Powers of Attorney (included in the Signature Page of this Registration Statement). | |
99.1 | Appraisal Report of RP Financial, LC. (portions filed in paper format only).** | |
99.2 |
Updated Appraisal Report of RP Financial, LC. (portions filed in paper format only)# |
|
99.3 | Form of Proxy Statement for Special Meeting of Depositors of Peoples Bank.*** | |
99.4 | Form of Marketing Materials to be used in connection with the offering.*** |
* | To be filed by amendment. |
** | Filed with initial filing of Registration Statement on Form S-1 on November 2, 2006. |
*** | Filed with Amendment No. 1 to Form S-1 on December 21, 2006. |
**** | Filed with Amendment No. 2 to Form S-1 on January 12, 2007. |
# | Filed with Amendment No. 3 to Form S-1 on February 2, 2007. |
(b) Financial Statement Schedules.
All schedules have been omitted as not applicable or not required under the rules of
Item 17. Undertakings.
The undersigned registrant hereby undertakes:
(1) | To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: |
(i) | To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; |
(ii) | To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the Calculation of Registration Fee table in the effective registration statement; |
II-6
(iii) | To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; |
(2) | That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. |
(3) | To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. |
The undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:
(i) | Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424; |
(ii) | Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant; |
(iii) | The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and |
(iv) | Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser. |
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(4) | For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. |
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(5) | For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. |
II-8
SIGNATURES
Pursuant to the requirements of Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Bridgeport, State of Connecticut, on February 12, 2007.
Peoples United Financial, Inc. |
/s/ John A. Klein |
By: John A. Klein |
Chairman, Chief Executive Officer and President |
(Duly Authorized Representative) |
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints John A. Klein, as their true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities to sign the Form S-1 Registration Statement and any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the U.S. Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or either one of his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, and any rules and regulations promulgated thereunder, this Registration Statement, has been signed by the following persons in the capacities and on the dates indicated.
Name |
Title |
Date |
||
/s/ John A. Klein John A. Klein |
Chairman, Chief Executive Officer and President |
February 12, 2007 | ||
/s/ Philip R. Sherringham Philip R. Sherringham |
Executive Vice President and Chief Financial Officer | February 12, 2007 | ||
/s/ Vincent J. Calabrese Vincent J. Calabrese |
Senior Vice President, Controller and Chief Accounting Officer |
February 12, 2007 |
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Name |
Title |
Date |
||
* Collin P. Baron |
Director |
February 12, 2007 |
||
* George P. Carter |
Director |
February 12, 2007 |
||
* Jerry Franklin |
Director |
February 12, 2007 |
||
* Eunice S. Groark |
Director |
February 12, 2007 |
||
* Janet M. Hansen |
Director |
February 12, 2007 |
||
* Richard M. Hoyt |
Director |
February 12, 2007 |
||
* Jeremiah J. Lowney, Jr. |
Director |
February 12, 2007 |
||
* Jack E. McGregor |
Director |
February 12, 2007 |
||
* James A. Thomas |
Director |
February 12, 2007 |
* By: | /s/ John A. Klein | |
John A. Klein | ||
Attorney-in-Fact |
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Exhibit 3.1
SECOND AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
PEOPLES UNITED FINANCIAL, INC.
PURSUANT TO SECTION 242 AND 245
OF THE GENERAL CORPORATION LAWS
OF THE STATE OF DELAWARE
Peoples United Financial, Inc., incorporated in the State of Delaware on
November 2, 2006, and amended and restated on February 2, 2007 hereby amends and restates its Certificate of Incorporation as follows:
ARTICLE I
NAME
The name of the corporation is PEOPLES UNITED FINANCIAL, INC. (the Corporation).
ARTICLE II
REGISTERED OFFICE AND AGENT
The address of the registered office of the Corporation in the State of Delaware is National Corporate Research, LTD, 615 South DuPont Highway, Dover, DE 19901. The name of its registered agent at such address is National Corporate Research, LTD.
ARTICLE III
PURPOSE
The purpose of the Corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of the State of Delaware (the GCL).
ARTICLE IV
CAPITAL STOCK
SECTION 4.01 - SHARES, CLASSES AND SERIES AUTHORIZED. The total number of shares of all classes of capital stock which the Corporation shall have authority to issue is Two Billion (2,000,000,000) shares, of which Fifty Million (50,000,000) shares shall be preferred stock, par value $0.01 per share (the Preferred Stock), and One Billion Nine Hundred Fifty Million (1,950,000,000) shares shall be common stock, par value $0.01 per share (the Common Stock). The Preferred Stock and Common Stock are sometimes hereinafter, collectively, referred to as the Capital Stock.
SECTION 4.02 - DESIGNATIONS, POWERS, PREFERENCES, RIGHTS, QUALIFICATIONS, LIMITATIONS AND RESTRICTIONS RELATING TO THE CAPITAL STOCK. The following is a statement of the designations, powers, preferences and rights in respect of the classes of the Capital Stock, and the
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qualifications, limitations or restrictions thereof, and of the authority with respect thereto expressly vested in the Board of Directors of the Corporation (the Board of Directors):
(a) Preferred Stock. The Preferred Stock may be issued from time to time in one or more series, the number of shares and any designation of each series and the powers, preferences and rights of the shares of each series, and the qualifications, limitations or restrictions thereof, to be as stated and expressed in a resolution or resolutions providing for the issue of such series adopted by the Board of Directors, subject to the limitations prescribed by law. The Board of Directors in any such resolution or resolutions is expressly authorized to state for each such series:
(i) the voting powers, if any, of the holders of shares of such series in addition to any voting rights affirmatively required by law;
(ii) the rights of shareholders in respect of dividends, including, without limitation, the rate or rates per annum and the time or times at which (or the formula or other method pursuant to which such rate or rates and such time or times may be determined) and conditions upon which the holders of shares of such series shall be entitled to receive dividends and other distributions, and whether any such dividends shall be cumulative or non-cumulative and, if cumulative, the terms upon which such dividends shall be cumulative;
(iii) whether any shares of the stock of each such series shall be redeemable by the Corporation at the option of the Corporation or the holder thereof and, if redeemable, the terms and conditions upon which any shares of the stock of such series may be redeemed;
(iv) the amount payable and the rights or preferences to which the holders of the stock of such series shall be entitled upon any voluntary or involuntary liquidation, dissolution or winding up of the Corporation;
(v) the terms, if any, upon which shares of stock of such series shall be convertible into, or exchangeable for, shares of stock of any other class or classes or of any other series of the same or any other class or classes, including the price or prices or the rate or rates of conversion or exchange and the terms of adjustment, if any; and
(vi) any other powers, designations, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, so far as they are not inconsistent with the provisions of this Certificate of Incorporation and to the full extent now or hereafter permitted by the GCL.
Subject to any limitations or restrictions stated in the resolution or resolutions of the Board of Directors originally fixing the number of shares constituting a series, the Board of Directors may by resolution or resolutions likewise adopted increase (but not above the total number of authorized shares of Preferred Stock) or decrease (but not below the number of shares of the series then outstanding) the number of shares of the series
2
subsequent to the issue of shares of that series; and, in case the number of shares of any series shall be so decreased, the shares constituting the decrease shall resume that status that they had prior to the adoption of the resolution originally fixing the number of shares constituting such series.
(b) Common Stock. Except as otherwise provided for by law, the shares of Common Stock shall entitle the holders thereof to one vote for each share on all matters on which shareholders have the right to vote. Notwithstanding the foregoing, except as otherwise required by law, holders of Common Stock, as such, shall not be entitled to vote on any amendment to this Certificate of Incorporation (including any Certificate of Designations relating to any series of Preferred Stock) that relates solely to the terms of one or more outstanding series of Preferred Stock if the holders of such affected series are entitled, either separately or together with the holders of one or more other such series, to vote thereon pursuant to this Certificate of Incorporation (including any Certificate of Designations relating to any series of Preferred Stock) or pursuant to the GCL.
Subject to the preferences, privileges and powers with respect to each class or series of Preferred Stock having any priority over the Common Stock, and the qualifications, limitations or restrictions thereof, the holders of the Common Stock shall have and possess all rights pertaining to the Capital Stock; provided however, that in the event of any liquidation, dissolution, or winding up of the Corporation, the holders of the Common Stock (and the holders of any class or series of stock entitled to participate with the Common Stock in the distribution of assets) shall be entitled to receive, in cash or in kind, the assets of the Corporation available for distribution remaining after:
(i) payment or provision for payment of the Corporations debts and liabilities;
(ii) distributions or provision for distributions in settlement of the liquidation account, if any, established by Peoples Bank, a savings bank organized under the laws of the United States (the Bank); and
(iii) distributions or provisions for distributions to holders of any class or series of Capital Stock having preference over the Common Stock in the liquidation, dissolution, or winding up of the Corporation.
( c) No Class Vote On Changes In Authorized Number Of Shares Of Preferred Stock. Subject to the rights of the holders of any series of Preferred Stock pursuant to the terms of this Certificate of Incorporation or any resolution or resolutions providing for the issuance of such series of stock adopted by the Board of Directors, the number of authorized shares of Preferred Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the capital stock of the Corporation entitled to vote generally in the election of directors irrespective of the provisions of Section 242(b)(2) of the GCL.
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ARTICLE V.
BOARD OF DIRECTORS
SECTION 5.01 - NUMBER OF DIRECTORS. The number of directors of the Corporation shall be as determined only by resolution of the Board of Directors, but shall not be less than five (5) nor more than fifteen (15) (other than directors elected by holders of shares of one or more series of Preferred Stock).
SECTION 5.02 - CLASSIFICATION OF BOARD . Subject to the rights of any holders of shares of any series of Preferred Stock that may be issued by the Corporation pursuant to a resolution or resolutions of the Board of Directors providing for such issuance, and subject to the provisions hereof, the directors of the Corporation shall be divided into three classes with respect to term of office, each class to contain, as near as may be possible, one-third of the entire number of the Board, with the terms of office of one class expiring each successive year. One class of directors shall be initially elected for a term expiring at the first annual meeting of shareholders, another class shall be initially elected for a term expiring at the annual meeting of shareholders to be held in the following year and another class shall be initially elected for a term expiring at the annual meeting of shareholders to be held two years thereafter. At each annual meeting of shareholders, the successors to the class of directors (other than directors elected by holders of shares of one or more series of Preferred Stock) whose term expires at that time shall be elected by the shareholders to serve until the annual meeting of shareholders held three years next following and until their successors shall be elected and qualified.
In the event of any intervening changes in the authorized number of directors (other than directors elected by holders of shares of one or more series of Preferred Stock), only the Board of Directors shall designate the class or classes to which the increases or decreases in directorships shall be apportioned in order to achieve, as near as may be possible, equality of number of directors among the classes; provided however, that no such apportionment or redesignation shall shorten the term of any incumbent director.
Unless and to the extent that the Bylaws so provide, elections of directors need not be by written ballot.
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SECTION 5.03 - VACANCIES. Subject to the limitations prescribed by law and this Certificate of Incorporation, all vacancies on the Board of Directors, including vacancies created by newly created directorships resulting from an increase in the number of directors (subject to the provisions of Section 4 of this Article V relating to directors elected by holders of shares of one or more series of Preferred Stock), shall be filled only by a vote of a majority of the directors then holding office, whether or not a quorum, and any director so elected shall serve for the remainder of the full term of the class of directors in which the new directorship was created or the vacancy occurred and until such directors successor shall be elected and qualified.
SECTION 5.04 - DIRECTORS ELECTED BY PREFERRED SHAREHOLDERS. Notwithstanding anything set forth in this Certificate of Incorporation to the contrary, the qualifications, term of office and provisions governing vacancies, removal and other matters pertaining to directors elected by holders of shares of one or more series of Preferred Stock shall be as set forth in a resolution or resolutions adopted by the Board of Directors setting forth the designations, preferences and rights relating to any such series of Preferred Stock pursuant to Article IV, Section 2 hereof.
SECTION 5.05 - EVALUATION OF ACQUISITION PROPOSALS. The Board of Directors of the Corporation, when evaluating any offer to the Corporation or to the shareholders of the Corporation from another party to (a) purchase for cash, or exchange any securities or property for, any outstanding equity securities of the Corporation, (b) merge or consolidate the Corporation with another entity or (c) purchase or otherwise acquire all or substantially all of the properties and assets of the Corporation, in connection with the exercise of its judgment in determining what is in the best interests of the Corporation and its shareholders, may give due consideration to the extent permitted by law not only to the price or other consideration being offered, but also to all other relevant factors, including, without limitation, the financial and managerial
5
resources and future prospects of the other party, the possible effects on the business of the Corporation and its subsidiaries and on the employees, customers, suppliers and creditors of the Corporation and its subsidiaries and the effects on the communities in which the Corporations and its subsidiaries facilities are located.
SECTION 5.06 - NOMINATIONS TO BOARD OF DIRECTORS. Nominations of candidates for election as directors may be made only by the Board of Directors or by a record owner of Common Stock. Any such holder of Common Stock, however, may nominate one or more persons for election as director at a meeting only if written notice of such holders intent to make such nomination or nominations has been given, either by personal delivery or by United States mail, postage prepaid to the Secretary of the Corporation not later than: (a) with respect to an election to be held at an annual meeting of shareholders, one hundred twenty (120) days in advance of such meeting; and (b) with respect to an election to be held at a special meeting of shareholders for the election of directors, the close of business on the seventh day following the earlier of: (i) the date on which notice of such meeting is first given to shareholders; or (ii) the date on which a public announcement of such meeting is first made. Each such notice shall include: (1) the name and address of each shareholder or record who intends to appear in person or by proxy to make the nomination and of the person or persons to be nominated; (2) a description of all arrangements or understandings between the shareholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the shareholder; (3) such other information regarding each nominee proposed by such shareholder as would have been required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission; and (4) the consent of each nominee to serve as a director of the Corporation if so elected. The chairman of the meeting may refuse to acknowledge the nomination of any person not made in compliance with the foregoing procedure.
SECTION 5.07 - REMOVAL OF DIRECTORS. Any or all of the directors (subject to the provisions of Article V, Section 4 of this Certificate of Incorporation relating to directors elected by holders of shares of one or more series of Preferred Stock) may be removed at any time, but only for cause, and any such removal shall require the vote, in addition to any vote required by law, of not less than two thirds (66.7%) of the total votes eligible to be case by the holders of all of the outstanding shares of Capital Stock entitled to vote generally in the election of directors at a meeting of shareholders expressly called for that purpose, voting together as a single class. For purposes of this Section 7, conduct worthy of removal for cause shall include, but not be limited to (a) conduct as a director of the Corporation or any subsidiary of the Corporation that involves willful material misconduct, breach of fiduciary duty involving personal pecuniary gain or gross negligence in the performance of duties, (b) conduct, whether or not as a director of the Corporation or a subsidiary of the Corporation, that involves dishonesty or breach of fiduciary duty and is punishable by imprisonment for a term exceeding one year under state or federal law or (c) removal of such person from the Board of Directors of the Bank, if such person is so serving, in accordance with the Certificate of Incorporation and Bylaws of the Bank.
ARTICLE VI.
ACTION BY SHAREHOLDERS WITHOUT A MEETING
Except as otherwise provided for or fixed pursuant to the provisions of Article IV of this Certificate of Incorporation relating to the rights of holders of shares of any series of Preferred Stock, no action that is required or permitted to be taken by the shareholders of the Corporation at any annual or special meeting of shareholders may be effected by written consent of shareholders in lieu of a meeting of shareholders.
ARTICLE VII.
CERTAIN BUSINESS COMBINATIONS
SECTION 7.01 - HIGHER VOTE REQUIRED FOR CERTAIN BUSINESS COMBINATIONS. In addition to any affirmative vote required by law, this Certificate of Incorporation or by the provisions of any series of Preferred Stock that may at the time be outstanding, and except as otherwise expressly provided for in Section 2 of this Article VIII, any Business Combination, as hereinafter defined, shall require the affirmative vote of not less than two thirds (66.67%) (to the extent permitted by law) of the total number of votes eligible to be cast by the holders of all outstanding shares of Voting Stock, voting together as a single class (it being understood, that for purposes of this Article VII, each share of Voting Stock shall have the number of votes granted to it pursuant to Article IV of this Certificate of Incorporation or in any resolution or resolutions of the Board of Directors for issuance of shares of Preferred Stock), together (to the extent permitted by law) with the affirmative vote of at least fifty percent (50%) of the total number of votes eligible to be cast by the holders of all outstanding shares of Voting Stock not beneficially owned by the Interested Shareholder involved or any Affiliate or Associate thereof, voting together as a single class. Such affirmative vote shall be required notwithstanding the fact that no vote may be required, or that a lesser percentage may be specified, by law or in any agreement with any national securities exchange or otherwise.
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SECTION 7.02 - WHEN HIGHER VOTE IS NOT REQUIRED. The provisions of Section 1 of this Article VII shall not be applicable to any particular Business Combination, and such Business Combination shall require only such affirmative vote as is required by law or any other provision of this Certificate of Incorporation, if either (i) the Business Combination shall have been approved by a majority of the Disinterested Directors then in office or (ii) all of the conditions specified in the following subsections (a) through (g) are met:
(a) The aggregate amount of the cash and the Fair Market Value as of the Consummation Date of consideration other than cash to be received per share by holders of Common Stock in such Business Combination shall be at least equal to the higher of the following:
(i) (if applicable) the highest per share price (including any brokerage commissions, transfer taxes, soliciting dealers fees, dealer-management compensation and other expenses, including, but not limited to, costs of newspaper advertisements, printing expenses and attorneys fees and expenses) paid by the Interested Shareholder for any shares of Common Stock acquired by it (A) within the two-year period immediately prior to the Announcement Date, or (B) in the transaction in which it became an Interested Shareholder, whichever is higher, plus interest compounded annually from the Determination Date through the Consummation Date at the prime rate of interest of Citibank, N.A. (or other major bank headquartered in New York City selected by a majority of the Disinterested Directors then in office) from time to time in effect in New York City, less the aggregate amount of any cash dividends paid and the Fair Market Value of any dividends paid, other than in cash, per share of Common Stock from the Determination Date through the Consummation Date in an amount up to but not exceeding the amount of such interest payable per share of Common Stock; or
(ii) the Fair Market Value per share of Common Stock on the Announcement Date or on the Determination Date, whichever is higher.
(b) The aggregate amount of the cash and the Fair Market Value as of the Consummation Date of consideration other than cash to be received per share by holders of shares of any class or series of outstanding Voting Stock, other than Common Stock, in such Business Combination shall be at least equal to the highest of the following (such requirement being applicable to each such class or series of outstanding Voting Stock, whether or not the Interested Shareholder has previously acquired any shares of such class or series of Voting Stock):
(i) (if applicable) the highest per share price (including any brokerage commissions, transfer taxes, soliciting dealers fees, dealer-management compensation, and other expenses, including, but not limited to, costs of newspaper advertisements, printing expenses and attorneys fees and expenses) paid by the Interested Shareholder for any shares of such class or series of Voting. Stock acquired by it (A) within the two-year period immediately prior to the Announcement Date, or (B) in the transaction in which it became an Interested Shareholder, whichever is higher, plus interest compounded annually from the Determination Date through the Consummation Date at the prime rate
7
of interest of Citibank, N.A. (or other major bank headquartered in New York City selected by a majority of the Disinterested Directors then in office) from time to time in effect in New York City, less the aggregate amount of any cash dividends paid, and the Fair Market Value of any dividends paid other than in cash, per share of such class or series of Voting Stock from the Determination Date through the Consummation Date in an amount up to but not exceeding the amount of such interest payable per share of such class or series of Voting Stock;
(ii) (if applicable) the highest preferential amount per share to which the holders of shares of such class or series of Voting Stock are entitled in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation; or
(iii) the Fair Market Value per share of such class or series of Voting Stock on the Announcement Date or on the Determination Date, whichever is higher.
(c) The consideration to be received by holders of any particular class or series of outstanding Voting Stock (including Common Stock) in such Business Combination shall be in cash or in the same form as the Interested Shareholder has previously paid for shares of such class or series of Voting Stock. If the Interested Shareholder has paid for shares of any class or series of Voting Stock with varying forms of consideration, the form of consideration for such class or series of Voting Stock in such Business Combination shall be either cash or the form used to acquire the largest number of shares of such class or series of Voting Stock previously acquired by it.
(d) The holders of all outstanding shares of Voting Stock not beneficially owned by the Interested Shareholder immediately prior to the Consummation Date shall be entitled to receive in such Business Combination cash or other consideration for their shares in compliance with subsections (a), (b) and (c) of this Section 2.
(e) | After the Determination Date and prior to the Consummation Date: |
(i) except as approved by a majority of the Disinterested Directors then in office, there shall have been no failure to declare and pay, or set aside for payment, at the regular date therefor any full quarterly dividends (whether or not cumulative) on any outstanding Preferred Stock;
(ii) there shall have been (A) no reduction in the annual rate of dividends paid on the Common Stock (except as necessary to reflect any subdivision of the Common Stock), except as approved by a majority of the Disinterested Directors then in office, and (B) an increase in such annual rate of dividends as necessary to reflect any reclassification (including any reverse stock split), recapitalization, reorganization or any similar transaction that has the effect of reducing the number of outstanding shares of the Common Stock, unless the failure so to increase such annual rate is approved by a majority of the Disinterested Directors then in office; and
8
(iii) such Interested Shareholder shall not have become the beneficial owner of any additional shares of Voting Stock except (A) as part of the transaction that results in such Interested Shareholder becoming an Interested Shareholder, (B) as the result of a stock dividend paid by the Corporation or (C) upon the exercise or conversion of securities of the Corporation issued pro rata to all holders of Common Stock which are exercisable for or convertible into shares of Voting Stock.
(f) After the Determination Date, the Interested Shareholder shall not have received the benefit, directly or indirectly (except proportionately as a shareholder), of any loans, advances, guarantees, pledges or other financial assistance or any tax credits or other tax advantages provided by or through the Corporation or an Affiliate of the Corporation, whether in anticipation of or in connection with such Business Combination or otherwise.
(g) A proxy or information statement describing the proposed Business Combination in accordance with the requirements of the Securities Exchange Act of 1934, as amended (the Exchange Act), whether or not the Corporation is then subject to such requirements, and the rules and regulations thereunder (or any subsequent provisions replacing such Exchange Act, rules or regulations) shall be mailed to shareholders of the Corporation at least thirty (30) days prior to the consummation of such Business Combination (whether or not such proxy or information statement is required to be mailed pursuant to such Exchange Act or subsequent provisions). The first page of such proxy or information statement shall prominently display the recommendation, if any, that a majority of the Disinterested Directors then in office may choose to make to the holders of Voting Stock regarding the proposed Business Combination. Such proxy or information statement shall also contain, if a majority of the Disinterested Directors then in office so requests, an opinion of a reputable investment banking firm (which firm shall be engaged solely on behalf of the shareholders of the Corporation other than the Interested Shareholder and shall be selected by a majority of the Disinterested Directors then in office, furnished with all information it reasonably requests and paid a reasonable fee for its services by the Corporation upon the Corporations receipt of such Opinion) as to the fairness (or lack of fairness) of the terms of the proposed Business Combination from the point of view of the holders of Voting Stock other than the Interested Shareholder.
SECTION 7.03 - DEFINITIONS. For purposes of this Article VII, the following terms shall have the following meanings:
(a) Affiliate and Associate shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Exchange Act, as in effect on the date of filing by the Secretary of State of the State of Delaware of this Certificate of Incorporation, whether or not the Corporation was then subject to such rule.
(b) Announcement Date shall mean the date of the first public announcement of the proposal of the Business Combination.
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(c) A Person shall be deemed the beneficial owner, or to have beneficial ownership, of any shares of Voting Stock that:
(i) such Person or any of its Affiliates or Associates beneficially owns, directly or indirectly; or
(ii) such Person or any or its Affiliates or Associates, directly or indirectly, has (A) the right to acquire (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement or understanding (but a Person shall not be deemed to be the beneficial owner of any Voting Stock solely by reason of an agreement, arrangement or understanding with the Corporation to effect a Business Combination) or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise, or (B) the right to vote, or to direct the vote of, pursuant to any agreement, arrangement or understanding (but neither such Person nor any Affiliate or Associate shall be deemed to be the beneficial owner of any shares of Voting Stock solely by reason of a revocable proxy granted for a particular meeting of shareholders, pursuant to a public solicitation of proxies for such meeting, and with respect to which shares neither such Person nor any Affiliate or Associate is otherwise deemed the beneficial owner); or
(iii) is beneficially owned, directly or indirectly, by any other Person with which such first mentioned Person or any of its Affiliates or Associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting (except to the extent contemplated by the parenthetical clause of Section 3(c)(ii)(B)) or disposing of any shares of Voting Stock; provided, however, that no director or officer of the Corporation (nor any Affiliate or Associate of any such director or officer) (A) shall, solely by reason of any or all of such directors or officers acting in their capacities as such, be deemed, for any purposes hereof, to beneficially own any Voting Stock of the Corporation beneficially owned by any other such director or officer (or any Affiliate or Associate thereof) or (B) shall be deemed to beneficially own any Voting Stock of the Corporation owned by any pension, profit-sharing, stock bonus or other compensation plan maintained by the Corporation or by a member of a controlled group of corporations or trades or businesses of which the Corporation is a member for the benefit of employees of the Corporation and/or any Subsidiary, or any trust or custodial arrangement established in connection with any such plan, not specifically allocated to such Persons personal account.
(d) The term Business Combination shall mean any transaction that is referred to in any one or more of the following paragraphs (i) through (vi):
(i) any merger or consolidation of the Corporation or any Subsidiary (other than a merger pursuant to Section 253 of the GCL) with (A) any Interested Shareholder or (B) any other entity (whether or not such other entity is itself an Interested Shareholder) which is, or after such merger or consolidation would be, an Affiliate or Associate of any Interested Shareholder; or
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(ii) any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions) to or with any Interested Shareholder or any Affiliate or Associate of any Interested Shareholder of any assets of the Corporation or any Subsidiary having an aggregate Fair Market Value equal to ten percent (10%) or more of the total assets of the Corporation or the Subsidiary in question, as of the end of its most recent fiscal year ending prior to the time the determination is being made; or
(iii) the issuance or transfer by the Corporation or any Subsidiary (in one transaction or a series of transactions) of any securities of the Corporation or any Subsidiary to any Interested Shareholder or any Affiliate or Associate of any Interested Shareholder other than (A) on a pro rata basis to all holders of Voting Stock, (B) in connection with the exercise or conversion of securities issued pro rata that are exercisable for, or convertible into, securities of the Corporation or any Subsidiary or (C) the issuance or transfer of such securities having an aggregate Fair Market Value equal to less than one percent (1%) of the aggregate Fair Market Value of all of the outstanding Capital Stock; or
(iv) the adoption of any plan or proposal for the liquidation or dissolution of the Corporation proposed by or on behalf of any Interested Shareholder or any Affiliate or Associate of any Interested Shareholder; or
(v) any reclassification of securities (including any reverse stock split), or recapitalization of the Corporation, or any merger or consolidation of the Corporation with any of its Subsidiaries or any other transaction (whether or not with or into or otherwise involving an Interested Shareholder) which has the effect, directly or indirectly, of increasing the proportionate share of the outstanding shares of any class or series of equity or convertible securities of the Corporation or any Subsidiary that is directly or indirectly owned by any Interested Shareholder or any Affiliate or Associate of any Interested Shareholder, except as a result of immaterial changes due to fractional share adjustments, which changes do not exceed, in the aggregate, 1% of the issued and outstanding shares of such class or series of equity or convertible securities; or
(vi) the acquisition by the Corporation or a Subsidiary of any securities of an Interested Shareholder or its Affiliates or Associates.
(e) Consummation Date shall mean the date of the consummation of the Business Combination.
(f) Determination Date shall mean the date on which the Interested Shareholder became an Interested Shareholder.
(g) Disinterested Director shall mean any member of the Board of Directors of the Corporation who is not an Affiliate or Associate of, or otherwise affiliated with, the Interested Shareholder and who either was a member of the Board of Directors prior to the Determination Date, or was recommended for election by a majority of the Disinterested Directors in office at the time such director was nominated for election. If
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there is no Interested Shareholder, each member of the Board of Directors shall be a Disinterested Director.
(h) Fair Market Value shall mean:
(i) in the case of stock, the highest closing price during the 30-day period immediately preceding the date in question of a share of such stock on the Composite Tape for New York Stock Exchange listed stocks or, if such stock is not quoted on such Composite Tape, or if such stock is not listed on such Exchange, then on the principal United States securities exchange registered under the Exchange Act, on which such stock is listed, or, if such stock is not listed on any such exchange, then the highest closing bid quotation with respect to a share of such stock during the 30-day period preceding the date in question on the NASDAQ Stock Market or any system then in use, or, if no such quotation is available, then the fair market value on the date in question of a share of such stock as determined in good faith by a majority of the Disinterested Directors then in office, in each case with respect to any class of stock, appropriately adjusted for any dividend or distribution in shares of such stock or any stock split or reclassification of outstanding shares of such stock into a greater number of shares of such stock or any combination or reclassification of outstanding shares of such stock into a smaller number of shares of such stock; and
(ii) in the case of property other than cash or stock, the fair market value of such property on the date in question as determined in good faith by a majority of the Disinterested Directors then in office .
(i) References to highest per share price shall in each case with respect to any class of stock reflect an appropriate adjustment for any dividend or distribution in shares of such stock or any stock split or reclassification of outstanding shares of such stock into a greater number of shares of such stock or any combination or reclassification of outstanding shares of such stock into a smaller number of shares of such stock.
(j) Interested Shareholder shall mean any Person (other than the Corporation, any Subsidiary or any pension, profit-sharing, stock bonus or other compensation or employee benefit plan maintained by the Corporation or by a member of a controlled group of corporations or trades or businesses of which the Corporation is a member for the benefit of employees of the Corporation and/or any Subsidiary, or any trust or custodial arrangement established in connection with any such plan or holding Voting Stock for the purpose of funding any such plan or funding employee lending for employees of the Corporation or any Subsidiary) who or which:
(i) is the beneficial owner of fifteen percent (15%) or more of the Voting Stock; or
(ii) is an Affiliate or Associate of the Corporation and at any time within the two-year period immediately prior to the date in question was the beneficial owner of fifteen percent (15%) or more of the then outstanding shares of Voting Stock; or
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(iii) is an assignee of or has otherwise succeeded to any shares of Voting Stock that were at any time within the two-year period immediately prior to the date in question beneficially owned by any other Interested Shareholder, if such assignment or succession shall have occurred in the course of a transaction or series of transactions not involving a public offering within the meaning of the Securities Act of 1933, as amended, and not executed on any exchange or in the over-the-counter market through a registered broker or dealer.
In determining whether a Person is an Interested Shareholder pursuant to this subsection (j), the number of shares of Voting Stock deemed to be outstanding shall include shares deemed owned through application of subsection (c) of this Section 3 but shall not include any other shares of Voting Stock that may be issuable pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants or options, or otherwise.
(k) Person shall mean any corporation, partnership, trust, unincorporated organization or association, syndicate, any other entity or a natural person, together with any Affiliate or Associate of such Person or any other Person acting in concert with such Person.
(l) Subsidiary shall mean any corporation or entity of which a majority of any class or series of equity securities is owned, directly or indirectly, by the Corporation; provided, however, that for the purposes of the definition of Interested Shareholder set forth in subsection (j) of this Section 3, the term Subsidiary shall mean only a corporation or entity of which a majority of each class or series of outstanding voting securities is owned, directly or indirectly, by the Corporation.
(m) Voting Stock shall mean all of the outstanding shares of Capital Stock entitled to vote generally in the election of directors.
SECTION 7.04 - POWERS OF THE DISINTERESTED DIRECTORS. When it appears that a particular Person may be an Interested Shareholder and that the provisions of this Article VII need to be applied or interpreted, then a majority of the directors of the Corporation who would qualify as Disinterested Directors shall have the power and duty to interpret all of the terms and provisions of this Article VII, and to determine on the basis of information known to them after reasonable inquiry of all facts necessary to ascertain compliance with this Article VII, including, without limitation, (a) whether a Person is an Interested Shareholder; (b) the number of shares of Voting Stock beneficially owned by any Person; (c) whether a Person is an Affiliate or Associate of another; (d) the Fair Market Value of: (i) the assets that are the subject of any Business Combination, (ii) the securities to be issued or transferred by the Corporation or any Subsidiary in any Business Combination, (iii) the consideration other than cash to be received by holders of shares of any class or series of Common Stock or Voting Stock other than Common Stock in any Business Combination, (iv) the outstanding Capital
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Stock or (v) any other item the Fair Market Value of which requires determination pursuant to this Article VII; and (e) whether all of the applicable conditions set forth in Section 2 of this Article VII have been met with respect to any Business Combination.
Any construction, application or determination made by the Board of Directors or the Disinterested Directors pursuant to this Article VII, in good faith and on the basis of such information and assistance as was then reasonably available for such purpose, shall be conclusive and binding upon the Corporation and its shareholders, and neither the Corporation nor any of its shareholders shall have the right to challenge any such construction, application or determination.
SECTION 7.05 - EFFECT ON FIDUCIARY OBLIGATIONS OF INTERESTED SHAREHOLDERS. Nothing contained in this Article VII shall be construed to relieve any Interested Shareholder from any fiduciary obligations imposed by law.
SECTION 7.06 - AMENDMENT, REPEAL, ETC. Notwithstanding any other provisions of this Certificate of Incorporation or the Bylaws (and notwithstanding the fact that a lesser percentage may be specified by law, this Certificate of Incorporation or the Bylaws of the Corporation), in addition to any affirmative vote required by applicable law and any voting rights granted to or held by holders of Preferred Stock, any amendment, alteration, repeal or rescission of any provision of this Article VII must also be approved by either (a) a majority of the Disinterested Directors or (b) the affirmative vote of not less than two thirds (66.67%) of the total number of votes eligible to be cast by the holders of all outstanding shares of the Voting Stock, voting together as a single class, together with the affirmative vote of not less than fifty percent (50%) of the total number of votes eligible to be cast by the holders of all outstanding shares of the Voting Stock not beneficially owned by any Interested Shareholder or Affiliate or Associate thereof, voting together as a single class.
ARTICLE VIII.
LIMITATION OF DIRECTOR LIABILITY
A director of the Corporation shall not be personally liable to the Corporation or its shareholders for monetary damages for breach of fiduciary duty as a director, except to the extent such exemption from liability or limitation thereof is expressly prohibited by the GCL as the same exists or may hereafter be amended.
ARTICLE IX.
INDEMNIFICATION
SECTION 9.01 ACTIONS, SUITS OR PROCEEDINGS OTHER THAN BY OR IN THE RIGHT OF THE CORPORATION . To the fullest extent permitted by the
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GCL, the Corporation shall indemnify any person who is or was or has agreed to become a director or officer of the Corporation who was or is made a party to or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that he or she is or was or has agreed to become a director or officer of the Corporation, or is or was serving or has agreed to serve at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, or by reason of any action alleged to have been taken or omitted in such capacity, and the Corporation may indemnify any other person who is or was or has agreed to become an employee or agent of the Corporation who was or is made a party to or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that he or she is or was or has agreed to become an employee or agent of the Corporation, or is or was serving or has agreed to serve at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, or by reason of any action alleged to have been taken or omitted in such capacity, against costs, charges, expenses (including attorneys fees and expenses), judgments, fines and amounts paid in settlement actually and reasonably incurred by him or her or on his or her behalf in connection with such action, suit or proceeding and any appeal therefrom, if he or she acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, the best interests of the Corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he or she reasonably believed to be in, or not opposed to, the best interests of the Corporation and, with respect to any criminal action or proceeding, had reasonable cause to believe that his or her conduct was unlawful. Notwithstanding anything contained in this Article IX, but subject to Section 7 hereof, the Corporation shall not be obligated to indemnify any director or officer in connection with an action, suit or proceeding, or part thereof, initiated by such person against the Corporation unless such action, suit or proceeding, or part thereof, was authorized or consented to by the Board of Directors.
SECTION 9.02 - ACTIONS OR SUITS BY OR IN THE RIGHT OF THE CORPORATION. To the fullest extent permitted by the GCL, the Corporation shall indemnify any person who is or was or has agreed to become a director or officer of the Corporation who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he or she is or was or has agreed to become a director or officer of the Corporation, or is or was serving or has agreed to serve at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, or by reason of any action alleged to have been taken or omitted in such capacity, and the Corporation may indemnify any other person who is or was or has agreed to become an employee or agent
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of the Corporation who was or is made a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he or she is or was or has agreed to become an employee or agent of the Corporation, or is or was serving or has agreed to serve at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, or by reason of any action alleged to have been taken or omitted in such capacity, against costs, charges and expenses (including attorneys fees and expenses) actually and reasonably incurred by him or her or on his or her behalf in connection with the defense or settlement of such action or suit and any appeal therefrom, if he or she acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, the best interests of the Corporation, except no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Court of Chancery of Delaware or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of such liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such costs, charges and expenses which the Court of Chancery or such other court shall deem proper. Notwithstanding anything contained in this Article IX, but subject to Section 7 hereof, the Corporation shall not be obligated to indemnify any director or officer in connection with an action or suit, or part thereof, initiated by such person against the Corporation unless such action or suit or part thereof, was authorized or consented to by the Board of Directors.
SECTION 9.03 INDEMNIFICATION FOR COSTS, CHARGES AND EXPENSES OF A SUCCESSFUL PARTY. To the extent that a present or former director or officer of the Corporation has been successful, on the merits or otherwise (including, without limitation, the dismissal of an action without prejudice), in defense of any action, suit or proceeding referred to in Section 1 or 2 of this Article IX, or in defense of any claim, issue or matter therein, such person shall be indemnified against all costs, charges and expenses (including attorneys fees and expenses) actually and reasonably incurred by such person or on such persons behalf in connection therewith.
SECTION 9.04 - INDEMNIFICATION FOR EXPENSES OF A WITNESS. To the extent that any person who is or was or has agreed to become a director or officer of the Corporation is made a witness to any action, suit or proceeding to which he or she is not a party by reason of the fact that he or she was, is or has agreed to become a director or officer of the Corporation, or is or was serving or has agreed to serve as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, at the request of the Corporation, such person shall be indemnified against all costs, charges and expenses actually and reasonably incurred by such person or on such persons behalf in connection therewith.
To the extent that any person who is or was or has agreed to become an employee or agent of the Corporation is made a witness to any action, suit or proceeding to which he or she is not a party by reason of the fact that he or she was, is or has agreed to become
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an employee or agent of the Corporation, or is or was serving or has agreed to serve as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, at the request of the Corporation, such person may be indemnified against all costs, charges and expenses actually and reasonably incurred by such person or on such persons behalf in connection therewith.
SECTION 9.05 - DETERMINATION OF RIGHT TO INDEMNIFICATIO N. Any indemnification under Section 1 or 2 of this Article IX (unless ordered by a court) shall be made, if at all, by the Corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper under the circumstances because he or she has met the applicable standard of conduct set forth in Section 1 or 2 of this Article IX. Any indemnification under Section 4 of this Article IX (unless ordered by a court) shall be made, if at all, by the Corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper under the circumstances. Such determinations shall be made with respect to a person who is a director or officer at the time of such determination (a) by a majority vote of directors who were not parties to such action, suit or proceeding even though less than a quorum of the Board of Directors, (b) by a committee of such directors designated by majority vote of such directors, even though less than a quorum, (c) if there are no such directors, or if such directors so direct, by independent counsel in a written opinion or (d) by the shareholders of the Corporation. To obtain indemnification under this Article IX, any person referred to in Section 1, 2, 3 or 4 of this Article IX shall submit to the Corporation a written request, including therewith such documents as are reasonably available to such person and are reasonably necessary to determine whether and to what extent such person is entitled to indemnification.
SECTION 9.06 - ADVANCEMENT OF COSTS, CHARGES AND EXPENSES. Costs, charges and expenses (including attorneys fees and expenses) incurred by or on behalf of a director or officer in defending a civil or criminal action, suit or proceeding referred to in Section 1 or 2 of this Article IX shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding; provided, however, that the payment of such costs, charges and expenses incurred by or on behalf of a director or officer in advance of the final disposition of such action, suit or proceeding shall be made only upon receipt of a written undertaking by or on behalf of the director or officer to repay all amounts so advanced in the event that it shall ultimately be determined that such director or officer is not entitled to be indemnified by the Corporation as authorized in this Article IX or by law. No security shall be required for such undertaking and such undertaking shall be accepted without reference to the recipients financial ability to make repayment. The majority of the directors who were not parties to such action, suit or proceeding may, upon approval of such director or officer of the Corporation, authorize the Corporations counsel to represent such person, in any action, suit or proceeding, whether or not the Corporation is a party to such action, suit or proceeding.
SECTION 9.07 - PROCEDURE FOR INDEMNIFICATION. Any indemnification under Section 1, 2, 3 or 4 of this Article IX or advancement of costs, charges and expenses
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under Section 6 of this Article IX shall be made promptly, and in any event within sixty (60) days (except indemnification to be determined by shareholders which will be determined at the next annual or special meeting of shareholders), upon the written request of the director or officer. The right to indemnification or advancement of expenses as granted by this Article IX shall be enforceable by the director, officer, employee or agent in any court of competent jurisdiction in the event the Corporation denies such request, in whole or in part, or if no disposition of such request is made within sixty (60) days of the request. Such persons costs, charges and expenses incurred in connection with successfully establishing his or her right to indemnification or advancement, to the extent successful, in any such action shall also be indemnified by the Corporation. It shall be a defense to any such action (other than an action brought to enforce a claim for the advancement of costs, charges and expenses under Section 6 of this Article IX where the required undertaking, if any, has been received by the Corporation) that the claimant has not met the standard of conduct set forth in Section 1 or 2 of this Article IX, but the burden of proving such defense shall be on the Corporation. Neither the failure of the Corporation (including its directors, its independent counsel and its shareholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in Section 1 or 2 of this Article IX, nor the fact that there has been an actual determination by the Corporation (including its directors, its independent counsel and its shareholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct.
SECTION 9.08 SETTLEMENT. The Corporation shall not be obligated to reimburse the costs, charges and expenses of any settlement to which it has not agreed. If, in any action, suit or proceeding (including any appeal) within the scope of Section 1 or 2 of this Article IX, the person to be indemnified shall have unreasonably failed to enter into a settlement thereof offered or assented to by the opposing party or parties in such action, suit or proceeding, then, notwithstanding any other provision of this Article IX, the indemnification obligation of the Corporation to such person in connection with such action, suit or proceeding shall not exceed the total of the amount at which settlement could have been made and the expenses incurred by or on behalf of such person prior to the time such settlement could reasonably have been effected.
SECTION 9.09 - OTHER RIGHTS; CONTINUATION OF RIGHT TO INDEMNIFICATION; INDIVIDUAL CONTRACTS. The indemnification and advancement of costs, charges and expenses provided by or granted pursuant to this Article IX shall not be deemed exclusive of any other rights to which any person seeking indemnification or advancement of costs, charges and expenses may be entitled under law (common or statutory) or any Bylaw, agreement, policy of indemnification insurance or vote of shareholders or directors or otherwise, both as to action in his or her official capacity and as to action in any other capacity while holding office, and shall continue as to any person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the legatees, heirs, distributees, executors and administrators of any such person. Nothing contained in this Article IX shall be deemed to prohibit the Corporation
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from entering into, and the Corporation is specifically authorized to enter into, agreements with directors, officers, employees and agents providing indemnification rights and procedures different from those set forth herein. All rights to indemnification under this Article IX shall be deemed to be a contract between the Corporation and each director, officer, employee or agent of the Corporation who serves or served in such capacity (or is or was serving or has agreed to serve at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise) at any time while this Article IX is in effect.
SECTION 9.10 - SAVINGS CLAUS E. If this Article IX or any portion shall be invalidated on any ground by any court of competent jurisdiction, the Corporation shall nevertheless indemnify each director or officer, and may indemnify each employee or agent, of the Corporation as to any costs, charges, expenses (including attorneys fees and expenses), judgments, fines and amounts paid in settlement with respect to any action, suit or proceeding, whether civil, criminal, administrative or investigative (including any action by or in the right of the Corporation), to the full extent permitted by any applicable portion of this Article IX that shall not have been invalidated and to the fullest extent permitted by applicable law.
SECTION 9.11 - INSURANCE . The Corporation may purchase and maintain insurance, at its expense, to protect itself and any person who is or was a director, officer, employee or agent of the Corporation or is or was serving or has agreed to serve at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any costs, charges or expenses, liability or loss incurred by such person in any such capacity, or arising out of such persons status as such, whether or not the Corporation would have the power to indemnify such person against such costs, charges or expenses, liability or loss under the Certificate of Incorporation or applicable law; provided, however, that such insurance is available on acceptable terms as determined by a vote of the Board of Directors. To the extent that any director, officer, employee or agent is reimbursed by an insurance company under an indemnification insurance policy for any costs, charges, expenses (including attorneys fees and expenses), judgments, fines and amounts paid in settlement to the fullest extent permitted by any applicable portion of this Article IX, the Bylaws, any agreement, the policy of indemnification insurance or otherwise, the Corporation shall not be obligated to reimburse the person to be indemnified in connection with such proceeding.
SECTION 9.12 - DEFINITIONS . For purposes of this Article IX, the following terms shall have the following meanings:
(a) The Corporation shall include, in addition to the resulting corporation, any constituent corporation or entity (including any constituent of a constituent) absorbed by way of an acquisition, consolidation, merger or otherwise, which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, employees or agents so that any person who is or was a director, officer, employee or agent of such constituent corporation or entity, or is or was serving at the written request
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of such constituent corporation or entity as a director or officer of another corporation, entity, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this Article IX with respect to the resulting or surviving corporation or entity as such person would have with respect to such constituent corporation or entity if its separate existence had continued;
(b) Other enterprises shall include employee benefit plans, including, but not limited to, any employee benefit plan of the Corporation;
(c) Director or officer of the Corporation shall include any director or officer of the Corporation who is or was or has agreed to serve at the request of the Corporation as a director, officer, partner or trustee of another corporation, partnership, joint venture, trust or other enterprise;
(d) Serving at the request of the Corporation shall include any service that imposes duties on, or involves services by a director, officer, employee or agent of the Corporation with respect to an employee benefit plan, its participants or beneficiaries, including acting as a fiduciary thereof;
(e) Fines shall include any penalties and any excise or similar taxes assessed on a person with respect to an employee benefit plan;
(f) To the fullest extent permitted by law, a person shall be deemed to have acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, the best interests of the Corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful, if his or her action is based on the records or books of account of the Corporation or another enterprise, or on information supplied to him or her by the officers of the Corporation or another enterprise in the course of their duties, or on the advice of legal counsel for the Corporation or another enterprise or on information or records given or reports made to the Corporation or another enterprise by an independent certified public accountant or by an appraiser or other expert selected with reasonable care by the Corporation or another enterprise; and
(g) A person shall be deemed to have acted in a manner not opposed to the best interests of the Corporation, as referred to in Sections 1 and 2 of this Article IX if such person acted in good faith and in a manner he or she reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan.
SECTION 9.13 - SUBSEQUENT AMENDMENT AND SUBSEQUENT LEGISLATION. Neither the amendment, termination nor repeal of this Article IX or of relevant provisions of the GCL or any other applicable laws, nor the adoption of any provision of this Certificate of Incorporation or the Bylaws of the Corporation or of any statute inconsistent with this Article IX shall eliminate, affect or diminish in any way the rights of any director, officer, employee or agent of the Corporation to indemnification under the provisions of this Article IX with respect to any action, suit or proceeding
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arising out of, or relating to, any actions, transactions or facts occurring prior to the final adoption of any such amendment, termination, repeal, provision or statute.
If the GCL is amended to expand further the indemnification permitted to directors and officers of the Corporation, then the Corporation shall indemnify such persons to the fullest extent permitted by the GCL, as so amended.
ARTICLE X.
AMENDMENTS
SECTION 10.01 AMENDMENTS OF CERTIFICATE OF INCORPORATION. In addition to any affirmative vote required by applicable law and any voting rights granted to or held by holders of shares of any series of Preferred Stock, any alteration, amendment, repeal or rescission (collectively, any Change) of any provision of this Certificate of Incorporation must be approved by the Board of Directors and by the affirmative vote of the holders of a majority (or such greater proportion as may otherwise be required pursuant to any specific provision of this Certificate of Incorporation) of the total votes eligible to be cast by the holders of all outstanding shares of Capital Stock entitled to vote thereon; provided, however, that if any such Change relates to Section 13 of Article IX or Articles V, VI or X of this Certificate of Incorporation, such Change must also be approved either by (a) not less than a majority of the authorized number of directors and, if one or more Interested Shareholders (as defined in Article VII hereof) exists, by not less than a majority of the Disinterested Directors (as defined in Article VII hereof), or (b) the affirmative vote of the holders of not less than two-thirds of the total votes eligible to be cast by the holders of all outstanding shares of Capital Stock entitled to vote thereon and, if the Change is proposed by or on behalf of an Interested Shareholder or a director who is an Affiliate or Associate (as such terms are defined in Article VII hereof) of an Interested Shareholder, by the affirmative vote of the holders of not less than a majority of the total votes eligible to be cast by holders of all outstanding shares of Capital Stock entitled to vote thereon not beneficially owned by an Interested Shareholder or an Affiliate or Associate thereof. Subject to the foregoing, the Corporation reserves the right to amend this Certificate of Incorporation from time to time in any and as many respects as may be desired and as may be lawfully contained in an original certificate of incorporation filed at the time of making such amendment.
Except as may otherwise be provided in this Certificate of Incorporation, the Corporation reserves the right at any time, and from time to time, to amend, alter, change or repeal any provision contained in this Certificate of Incorporation and to add or insert herein any other provisions authorized by the laws of the State of Delaware at the time in force, in the manner now or hereafter prescribed by law, and all rights, preferences and privileges of any nature conferred upon shareholders, directors or any other persons whomsoever by and pursuant to this Certificate of Incorporation in its present form or as hereafter amended are granted subject to the rights reserved in this Section 1.
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SECTION 10.02 - AMENDMENTS OF BYLAWS . In furtherance and not in limitation of the powers conferred by statute, the Board of Directors of the Corporation, upon the vote of two-thirds of the members of the entire Board, is expressly authorized to make, alter, amend, rescind or repeal from time to time any of the Bylaws of the Corporation in accordance with the terms thereof; provided, however, that any Bylaw made by the Board of Directors may be altered, amended, rescinded or repealed in accordance with the terms thereof by the holders of two-thirds of the shares of Capital Stock entitled to vote thereon at any annual meeting or at any special meeting called for that purpose. Notwithstanding the foregoing, any provision of the Bylaws that contains a supermajority voting requirement shall only be altered, amended, rescinded or repealed by a vote of the Board of Directors or holders of shares of Capital Stock entitled to vote thereon that is not less than the supermajority specified in such provision.
ARTICLE XI.
NOTICES
The name and mailing address of the sole incorporator of this Corporation is:
Susan D. Stanley
Peoples Bank
850 Main Street
Bridgeport, CT 06604
[Signature Page Follows]
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I, the undersigned, being the Corporate Secretary, do make, file and record this Amended and Restated Certificate of Incorporation and do certify that the Amended and Restated Certificate of Incorporation was approved by the Board of Directors of Peoples United Financial, Inc. on February 1, 2007 and by a majority of the shares of outstanding common stock of Peoples United Financial, Inc. entitled to vote thereon on February 1, 2007 in accordance with the laws of the State of Delaware and that the facts herein stated are true, and accordingly, have hereto set my hand this 12 th day of February, 2007.
/s/ Susan D. Stanley |
Susan D. Stanley |
Corporate Secretary |
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Exhibit 3.2
SECOND AMENDED AND RESTATED BYLAWS
OF
PEOPLES UNITED FINANCIAL, INC.
ARTICLE I
OFFICES
SECTION 1. REGISTERED OFFICE. The registered office of PEOPLES UNITED FINANCIAL, Inc. (the Corporation) in the State of Delaware shall be in the City of Dover, County of Kent.
SECTION 2. PRINCIPAL PLACE OF BUSINESS. The principal place of business of the Corporation shall be located in Bridgeport, Connecticut.
SECTION 3. ADDITIONAL OFFICES. The Corporation may also have offices and places of business at such other places as the Board of Directors (the Board) may from time to time designate or the business of the Corporation may require.
ARTICLE II
SHAREHOLDERS
SECTION 1. PLACE OF MEETINGS. Meetings of shareholders of the Corporation shall be held at such place as may be fixed by the Board and designated in the notice of meeting. If no place is so fixed, such meetings shall be held at the principal place of business of the Corporation.
SECTION 2. ANNUAL MEETINGS. The annual meeting of shareholders of the Corporation for the election of directors and the transaction of any other business which may properly come before such meeting shall be held each year on a date and at a time to be designated by the Board.
SECTION 3. SPECIAL MEETINGS. Special meetings of shareholders, for any purpose or purposes, may be called at any time only by the Chief Executive Officer or the President or by resolution of at least three-fourths of the directors then in office. Special meetings shall be held on the date and at the time and place as may be designated by the Board. At a special meeting, no business shall be transacted and no corporate action shall be taken other than that stated in the notice of meeting.
SECTION 4. NOTICE OF MEETINGS. Except as otherwise required by law, written notice stating the place, date and hour of any meeting of shareholders and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered to each shareholder of record entitled to vote at such meeting, either personally or by mail, not less than ten (10) nor more than sixty (60) days before the date of such meeting. If mailed, such notice shall be deemed to be delivered when deposited in the U.S. mail, with postage thereon prepaid, addressed to the shareholder at his or her
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address as it appears on the stock transfer books or records of the Corporation as of the record date prescribed in Section 6 of this Article II, or at such other address as the shareholder shall have furnished in writing to the Secretary. Notice of any special meeting shall indicate that the notice is being issued by or at the direction of the person or persons calling such meeting. When any meeting of shareholders, either annual or special, is adjourned to another time or place, no notice of the adjourned meeting need be given, other than an announcement at the meeting at which such adjournment is taken giving the time and place to which the meeting is adjourned; PROVIDED, HOWEVER, that if the adjournment is for more than thirty (30) days, or, if after adjournment, the Board fixes a new record date for the adjourned meeting, notice of the adjourned meeting shall be given to each shareholder of record entitled to vote at the meeting.
SECTION 5. WAIVER OF NOTICE. Notice of any annual or special meeting need not be given to any shareholder who submits a signed waiver of notice of any meeting, in person or by proxy or by his or her duly authorized attorney-in-fact, whether before or after the meeting. The attendance of any shareholder at a meeting, in person or by proxy, shall constitute a waiver of notice by such shareholder, except where a shareholder attends a meeting for the express purpose of objecting at the beginning of the meeting to the transaction of any business because the meeting is not lawfully called or convened.
SECTION 6. FIXING OF RECORD DATE. For the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or shareholders entitled to receive payment of any dividend or other distribution or the allotment of any rights, or in order to make a determination of shareholders for any other proper purpose, the Board shall fix a date as the record date for any such determination of shareholders, which date shall not precede the date upon which the resolution fixing the record date is adopted by the Board. Such date in any case shall be not more than sixty (60) days and, in the case of a meeting of shareholders, not less than ten (10) days prior to the date on which the particular action requiring such determination of shareholders is to be taken. When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided in this Section 6, such determination shall, unless otherwise provided by the Board, also apply to any adjournment thereof. If no record date is fixed, (a) the record date for determining shareholders entitled to notice of or vote at a meeting of shareholders shall be at the close of business on the day next preceding the day on which the notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held, and (b) the record date for determining shareholders for any other purpose shall be at the close of business on the day on which the Board adopts the resolution relating thereto.
SECTION 7. QUORUM. The holders of record of a majority of the total number of votes eligible to be cast in the election of directors, represented in person or by proxy, shall constitute a quorum for the transaction of business at a meeting of shareholders, except as otherwise provided by law, these Bylaws or the Certificate of Incorporation. If less than a majority of such total number of votes is represented at a meeting, a majority of the number of votes so represented may adjourn the meeting from time to time without
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further notice, PROVIDED, that if such adjournment is for more than thirty (30) days, a notice of the adjourned meeting shall be given to each shareholder of record entitled to vote at the meeting. At such adjourned meeting at which a quorum is present, any business may be transacted that might have been transacted at the meeting as originally called. When a quorum is once present to organize a meeting of shareholders, such quorum is not broken by the subsequent withdrawal of any shareholders.
SECTION 8. CONDUCT OF MEETINGS. The Chairman shall serve as chairman at all meetings of the shareholders or, if the Chairman is absent or otherwise unable to so serve, the President shall serve as chairman. If the President is absent or otherwise unable to so serve, such other person as shall be appointed by a majority of the entire Board shall serve as chairman at any meeting of shareholders. The Secretary or, in his or her absence, such other person as the chairman of the meeting shall appoint, shall serve as secretary of the meeting. The chairman of the meeting shall conduct all meetings of the shareholders in accordance with the best interests of the Corporation and shall have the authority and discretion to establish reasonable procedural rules for the conduct of such meetings, including such regulation of the manner of voting and the conduct of discussion as he or she shall deem appropriate. The chairman of the meeting shall also have the authority to adjourn the meeting from time to time and from place to place as he or she may deem necessary and in the best interests of the Corporation.
SECTION 9. VOTING; VOTING OF SHARES IN THE NAME OF TWO OR MORE PERSONS. Except for the election of directors or as otherwise provided by applicable law or regulation, the Certificate of Incorporation or these Bylaws, at all meetings of shareholders, all matters shall be determined by a vote of the holders of a majority of the number of votes eligible to be cast by the holders of the outstanding shares of capital stock of the Corporation present and entitled to vote thereat. Directors shall, except as otherwise required by law, these Bylaws or the Certificate of Incorporation, be elected by a plurality of the votes cast by each class of shares entitled to vote at a meeting of shareholders, present and entitled to vote in the election.
If ownership of a share of voting stock of the Corporation stands in the name of two or more persons, in the absence of written directions to the Corporation to the contrary, any one or more of such shareholders may cast, in person or by proxy, all votes to which such ownership is entitled. If an attempt is made to cast conflicting votes by the several persons in whose names shares of stock stand, the vote or votes to which those persons are entitled shall be cast as directed by a majority of those holding such stock and present, in person or by proxy, at such meeting. If such conflicting votes are evenly split on any particular matter, each faction may vote the securities in question proportionally, or any person voting the shares, or a beneficiary, if any, may apply to the Court of Chancery of Delaware or such other court as may have jurisdiction to appoint an additional person to act with the persons so voting the shares, which shall then be voted as determined by a majority of such persons and the person appointed by the Court.
SECTION 10. PROXIES. Each shareholder entitled to vote at any meeting may vote either in person or by proxy. Unless otherwise specified in the Certificate of Incorporation or in a resolution, or resolutions, of the Board providing for the issuance of
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preferred stock, each shareholder entitled to vote shall be entitled to one vote for each share of capital stock registered in his or her name on the transfer books or records of the Corporation. Each shareholder entitled to vote may authorize another person or persons to act for him or her by proxy. All proxies shall by written instrument, signed by the shareholder or by his or her attorney-in-fact, or by electronic transmission as permitted by law; PROVIDED, that such electronic transmission either sets forth or is submitted with information from which it can be determined that such electronic transmission was authorized by such shareholder. All proxies shall be filed with the Secretary before being voted. No proxy shall be valid after three (3) years from the date of its execution unless otherwise provided in the proxy. The attendance at any meeting by a shareholder who shall have previously given a proxy applicable thereto shall not, as such, have the effect of revoking the proxy. The Corporation may treat any duly executed proxy as not revoked and in full force and effect until it receives a duly executed instrument revoking it, or a duly executed proxy bearing a later date.
SECTION 11. INSPECTORS OF ELECTION. In advance of any meeting of shareholders, the Board shall, to the extent required by applicable law, appoint one or more persons, other than officers, directors or nominees for office, as inspectors of election to act at such meeting or any adjournment thereof. Such appointment shall not be altered at the meeting. If inspectors of election are not so appointed, the chairman of the meeting shall make such appointment at the meeting. If any person appointed as inspector fails to appear or fails or refuses to act at the meeting, the vacancy so created may be filled by appointment by the Board in advance of the meeting or at the meeting by the Chairman of the meeting. The duties of the inspectors of election shall include determining the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, the validity and effect of proxies, receiving votes, ballots or consents, hearing and deciding all challenges and questions arising in connection with the right to vote, counting and tabulating all votes, ballots or consents, determining the results and doing such acts as are proper to the conduct of the election or the vote with fairness to all shareholders. Any report or certificate made by them shall be PRIMA FACIE evidence of the facts stated and of the vote as certified by them. Each inspector shall be entitled to a reasonable compensation for his or her services, to be paid by the Corporation.
SECTION 12. PROCEDURE FOR NOMINATIONS. Only persons who are nominated in accordance with the procedures set forth in Section 5.06 of the Certificate of Incorporation shall be eligible as Directors. Subject to the provisions hereof, the Compensation and Nominating Committee shall select, and recommend to the Board for its approval, nominees for election as directors. Except in the case of a nominee substituted as a result of the death, incapacity, withdrawal or other inability to serve of a nominee, the Compensation and Nominating Committee shall, upon the approval of the Board, deliver written nominations to the Secretary at least 120 days prior to the date of the annual meeting. Provided the Compensation and Nominating Committee makes such nominations, no nominations for directors except those made by the Compensation and Nominating Committee and approved by the Board shall be voted upon at the annual meeting of shareholders, unless other nominations by shareholders are made in accordance with the provisions of Section 5.06 of the Certificate of Incorporation.
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SECTION 13. SUBSTITUTION OF NOMINEES. In the event that a person is validly designated as a nominee in accordance with Section 6.08 of the Certificate of Incorporation shall thereafter become unwilling or unable to stand for election to the Board, the Board , upon recommendation by the Compensation and Nominating Committee, may designate a substitute nominee upon delivery, not fewer than five (5) days prior to the date of the meeting for the election of such nominee, of a written notice to the Secretary. Such notice shall include a signed consent to serve as a director of the Corporation, if elected, of each such substituted nominee.
SECTION 14. NEW BUSINESS. Any new business to be taken up at the annual meeting at the request of the Chief Executive Officer or by resolution of at least three-fourths of the directors then in office shall be stated in writing and filed with the Secretary at least fifteen (15) days before the date of the annual meeting, and all business so stated, proposed and filed shall be considered at the annual meeting, but, except as provided in this Section 14, no other proposal shall be acted upon at the annual meeting. Any proposal offered by any shareholder may be made at the annual meeting and the same may be discussed and considered, but unless properly brought before the meeting such proposal shall not be acted upon at the meeting. For a proposal to be properly brought before an annual meeting by a shareholder, the shareholder must be a shareholder of record and have given timely notice thereof in writing to the Secretary. To be timely, a shareholders notice must be delivered to or received by the Secretary not later than the following dates: (i) with respect to an annual meeting of shareholders, ninety (90) days in advance of the anniversary of the previous years annual meeting if current years meeting is to be held within 30 days prior to, on the anniversary date of, or after the anniversary of the previous years annual meeting; and (ii) with respect to an annual meeting of shareholders held at a time other than within the time periods set forth in the immediately preceding clause (i), the close of business on the tenth (10th) day following the date on which notice of such meeting is first given to shareholders. For purposes of this Section 14, notice shall be deemed to first be given to shareholders when disclosure of such date of the meeting of shareholders is first made in a press release reported to Dow Jones News Services, Associated Press or comparable national news service, or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Securities Exchange Act of 1934, as amended. A shareholders notice to the Secretary shall set forth as to the matter the shareholder proposes to bring before the annual meeting (a) a brief description of the proposal desired to be brought before the annual meeting, the reasons for conducting such business at the
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meeting and any material interest in such business of such shareholder and the beneficial owner, if any, on whose behalf the proposal is made; (b) the name and address of the shareholder proposing such business; (c) the class and number of shares of the Corporation which are owned of record by the shareholder and the dates upon which he or she acquired such shares; (d) the identification of any person employed, retained, or to be compensated by the shareholder submitting the proposal, or any person acting on his or her behalf, to make solicitations or recommendations to shareholders for the purpose of assisting in the passage of such proposal, and a brief description of the terms of such employment, retainer or arrangement for compensation; (e) a representation that the shareholder is a holder of record of stock of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to propose such new business; (f) a representation whether the shareholder intends or is part of a group which intends to (1) deliver a proxy statement and/or form of proxy to holders of at least the percentage of the Corporations outstanding capital stock required to approve or adopt the proposal and/or (2) otherwise solicit proxies from shareholders in support of such proposal; and (g) all such other information regarding such proposal as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission or required to be delivered to the Corporation pursuant to the proxy rules of the Securities and Exchange Commission (whether or not the Corporation is then subject to such rules). This provision shall not prevent the consideration and approval or disapproval at an annual meeting of reports of officers, directors and committees of the Board or the management of the Corporation, but in connection with such reports, no new business shall be acted upon at such annual meeting unless stated and filed as herein provided. This provision shall not constitute a waiver of any right of the Corporation under the proxy rules of the Securities and Exchange Commission or any other rule or regulation to omit a shareholders proposal from the Corporations proxy materials. The chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that any new business was not properly brought before the meeting in accordance with the provisions hereof, and, if the chairman should so determine, the chairman shall declare to the meeting that such new business was not properly brought before the meeting and shall not be considered.
ARTICLE III
SHARES AND THEIR TRANSFER
SECTION 1. CERTIFICATES OF STOCK. Shares of the Corporation may but need not be represented by certificates. Upon request every holder of uncertificated shares shall be entitled to have a certificate. When shares are represented by certificates, the Corporation shall issue such certificates in such form as shall be required by the General Corporation Law of the State of Delaware (the GCL) and as determined by the Board to every shareholder for the fully paid shares owned by such shareholder. Each certificate shall state the registered holders name and the number and class of shares and shall be signed by the Chairman or the President and the Secretary or any Assistant Secretary, and may, but need not, bear the seal of the Corporation or a facsimile thereof. Any or all of the signatures on the certificates may be facsimiles. In case any officer or officers who shall have signed any such certificate shall cease to be such officer or
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officers of the Corporation, whether because of death, resignation or otherwise, before such certificate shall have been delivered by the Corporation, such certificate may nevertheless be adopted by the Corporation and be issued and delivered as though the person or persons who signed such certificate or certificates had not ceased to be such officer or officers of the Corporation.
SECTION 2. BOOK ENTRY SHARES. The Corporation may by resolution provide for the issuance of shares of its capital stock in book-entry (uncertificated) form. In such event, all references in these Bylaws to the delivery of stock certificates shall be inapplicable. The Corporations Transfer Agent shall keep appropriate records indicating the number of shares of capital stock owned by each person to whom shares are issued, any restrictions applicable to such shares of capital stock and the duration thereof, and other relevant information. Upon expiration of any applicable restrictions for any reason, the Transfer Agent shall effect delivery of such shares of capital stock by adjusting its records to reflect the expiration of such restrictions, and by notifying the person in whose name such shares were issued that such restrictions have lapsed.
SECTION 3. TRANSFER AGENT AND REGISTRAR. The Board shall have the power to appoint one or more Transfer Agents and Registrars for the transfer and registration of certificates of stock of any class and may require that stock certificates be countersigned and registered by one or more of such Transfer Agents and Registrars.
SECTION 4. REGISTRATION AND TRANSFER OF SHARES. Subject to the provisions of the Certificate of Incorporation of the Corporation, the name of each person owning a share of the capital stock of the Corporation shall be entered on the books of the Corporation together with the number of shares held by him or her, and for shares held in certificated form, the numbers of the certificates covering such shares and the dates of issue of such certificates. Subject to the provisions of the Certificate of Incorporation of the Corporation, the shares of stock of the Corporation shall be transferable on the books of the Corporation by the holders thereof in person, or by their duly authorized attorneys or legal representatives, on surrender and cancellation of certificates for a like number of shares, accompanied by an assignment or power of transfer endorsed thereon or attached thereto, duly executed, with such guarantee or proof of the authenticity of the signature as the Corporation or its agents may reasonably require and with proper evidence of payment of any applicable transfer taxes. Subject to the provisions of the Certificate of Incorporation of the Corporation, a record shall be made of each transfer.
SECTION 5. LOST, DESTROYED AND MUTILATED CERTIFICATES. The holder of any shares of stock of the Corporation held in certificated form shall immediately notify the Corporation of any loss, theft, destruction or mutilation of the certificates therefor. The Corporation may issue, or cause to be issued, a new certificate of stock in the place of any certificate theretofore issued by it alleged to have been lost, stolen or destroyed upon evidence satisfactory to the Corporation of the loss, theft or destruction of the certificate and, in the case of mutilation, the surrender of the mutilated certificate. The Corporation may, in its discretion, require the owner of the lost, stolen or destroyed certificate, or his or her legal representatives, to give the Corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the
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alleged loss, theft, destruction or mutilation of any such certificate and the issuance of such new certificate, or may refer such owner to such remedy or remedies as he or she may have under the laws of the State of Delaware.
SECTION 6. HOLDER OF RECORD. Subject to the provisions of the Certificate of Incorporation of the Corporation, the Corporation shall be entitled to treat the holder of record of any share or shares of stock as the holder thereof in fact and shall not be bound to recognize any equitable or other claim to or interest in such shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise expressly provided by law.
ARTICLE IV
BOARD OF DIRECTORS
SECTION 1. RESPONSIBILITIES; NUMBER OF DIRECTORS. The business and affairs of the Corporation shall be under the direction of the Board. The Board shall consist of not less than five (5) nor more than twenty-one (21) directors (other than directors elected by the holders of shares of any series of preferred stock). Within the foregoing limits, the number of directors shall be determined only by resolution of the Board.
SECTION 2. QUALIFICATIONS. Each director shall be at least eighteen (18) years of age. No director shall serve on the board of directors of an Insured Depository Institution, bank holding company, financial holding company or thrift holding company, other than the Corporation, its affiliated entities or the Federal Home Loan Bank of Boston, while a member of the Board.
SECTION 3. VICE CHAIRMAN. The Board may appoint from among its members a Vice Chairman, who shall perform such duties as may be assigned to him or her from time to time by the Board. The Vice Chairman shall serve for a one year term or until his or her successor shall be elected and qualified.
SECTION 4. LEAD DIRECTOR. The Board shall at each annual meeting appoint from among its members a Lead Director, who shall be an independent director and who shall perform such duties as may be assigned to him or her from time to time by the Board . The Lead Director shall serve for a one year term or until his or her successor shall be elected and qualified.
SECTION 5. AGE LIMITATION OF DIRECTORS. With the exception of the Vice Chairman of the Board, a director shall retire from service as a director of the Corporation at the expiration of the term of office during which such Director has reached the age of seventy-two. The Vice Chairman of the Board shall retire from service as a director of the Corporation at the expiration of the term of office during which such Director reaches the age of seventy-five.
SECTION 6. REGULAR AND ANNUAL MEETINGS. An annual meeting of the Board for the election of officers shall be held, without notice other than these
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Bylaws, immediately after, and at the same place as, the annual meeting of the shareholders, or at such other time or place as the Board may fix by resolution. The Board may provide, by resolution, the time and place for the holding of regular meetings of the Board without notice other than such resolution.
SECTION 7. SPECIAL MEETINGS. Special meetings of the Board may be called for any purpose at any time by or at the request of the Chairman or the President. Special meetings of the Board shall also be called by the Secretary upon the written request, stating the purpose or purposes of the meeting, of at least sixty percent (60%) of the directors then in office, but in any event not less than five (5) directors. The persons authorized to call special meetings of the Board shall give notice of such meetings in the manner prescribed by these Bylaws and may fix any place, within or without the Corporations regular business area, as the place for holding any special meeting of the Board called by such persons. No business shall be conducted at a special meeting other than that specified in the notice of meeting.
SECTION 8. NOTICE OF MEETINGS; WAIVER OF NOTICE. Except as otherwise provided in Section 6 of this Article IV, notice of each meeting shall be mailed or otherwise given to each director at least two (2) business days before the day of the meeting to his or her address shown in the records of the Corporation, except in the case of an emergency, in the discretion of the Chairman or the President, shorter oral notice may be given. The purpose of any special meeting shall be stated in the notice. Such notice shall be deemed given when sent or given to any mail or courier service or company providing electronic transmission service. Any director may waive notice of any meeting by submitting a signed waiver of notice with the Secretary, whether before or after the meeting. The attendance of a director at a meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting for the express purpose of objecting at the beginning of the meeting to the transaction of any business because the meeting is not lawfully called or convened.
SECTION 9. CONDUCT OF MEETINGS. Meetings of the Board shall be presided over by the Chairman or such other director or officer as the Chairman shall designate. If the Chairman is absent or otherwise unable to preside over the meeting, the presiding officer shall be the President. If the President is absent or otherwise unable to preside over the meeting, the presiding officer shall be such other person as shall be appointed by a majority of the Board. The Secretary or, in his absence, a person appointed by the Chairman (or other presiding person), shall act as secretary of the meeting. The Chairman (or other person presiding) shall conduct all meetings of the Board in accordance with the best interests of the Corporation and shall have the authority and discretion to establish reasonable procedural rules for the conduct of Board meetings.
SECTION 10. QUORUM AND VOTING REQUIREMENTS. A quorum at any meeting of the Board shall consist of not less than a majority of the directors then in office or such greater number as shall be required by law, these Bylaws or the Certificate of Incorporation, but not less than one-third (1/3) of the total number of directors fixed by the Board. If less than a required quorum is present, the majority of those directors
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present shall adjourn the meeting to another time and place without further notice. At such adjourned meeting at which a quorum shall be represented, any business may be transacted that might have been transacted at the meeting as originally noticed. Except as otherwise provided by law, the Certificate of Incorporation or these Bylaws, a majority vote of the directors present at a meeting, if a quorum is present, shall constitute an act of the Board.
SECTION 11. ACTION WITHOUT MEETING. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board, or of any committee thereof, may be taken without a meeting if all members of the Board or such committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or such committee.
SECTION 12. PARTICIPATION OTHER THAN IN PERSON. Members of the Board or any committee thereof may participate in a Board or committee meeting by means of conference telephone or other communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this subsection shall constitute presence in person at the meeting.
SECTION 13. VACANCIES. To the extent not inconsistent with the Certificate of Incorporation and subject to the limitations prescribed by law and the rights of holders of Preferred Stock, vacancies in the office of director, including vacancies created by newly created directorships resulting from an increase in the number of directors, shall be filled only by a vote of a majority of the directors then holding office, whether or not a quorum, at any regular or special meeting of the Board called for that purpose. Subject to the rights of holders of Preferred Stock, no person shall be so elected a director unless nominated by the Compensation and Nominating Committee. Subject to the rights of holders of Preferred Stock, any director so elected shall serve for the remainder of the full term of the class of directors in which the new directorship was created or the vacancy occurred and until his or her successor shall be elected and qualified.
SECTION 14. COMPENSATION. The Board may provide for the compensation of directors for their services in such one or more forms as the Board may determine.
SECTION 15. AMENDMENTS CONCERNING THE BOARD. The number and other restrictions and qualifications for directors of the Corporation as set forth in these Bylaws may be altered only by a vote, in addition to any vote required by law, of two-thirds of the entire Board or by the affirmative vote of the holders of record of not less than eighty percent (80%) of the total votes eligible to be cast by holders of all outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors at a meeting of the shareholders called for that purpose.
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ARTICLE V
COMMITTEES
SECTION 1. EXECUTIVE COMMITTEE. There shall be an Executive Committee of the Board, as shall be appointed by Board resolution or these Bylaws. The Executive Committee shall, to the extent not inconsistent with law, these Bylaws, the Certificate of Incorporation or resolutions adopted by the Board, exercise all the powers and authority of the Board in the management of the business and affairs of the Corporation in the intervals between the meetings of the Board. The Executive Committee shall operate pursuant to a Charter approved by the Committee and the entire Board of Directors.
SECTION 2. OTHER COMMITTEES. The Board may by resolution create or eliminate such other committees, including, but not limited to, an Audit Committee and a Compensation and Nominating Committee, as from time to time it may deem necessary or appropriate for the conduct of the business of the Corporation. Each such committee shall exercise such powers as may be assigned by the Board to the extent not inconsistent with law, these Bylaws, the Certificate of Incorporation or resolutions adopted by the Board. Each committee established by the Board pursuant to this Article V, Section 2 shall operate pursuant to a committee charter which shall be annually approved and adopted by the committee and the Board.
ARTICLE VI
OFFICERS
SECTION 1. DESIGNATION OF OFFICERS. The Board shall, at each annual meeting, elect a Chairman, Chief Executive Officer, President, Treasurer and a Secretary, and may elect such other officers as the Board from time to time may deem necessary or the business of the Corporation may require. The other officers shall consist of the Controller, one or more Executive Vice Presidents, one or more Senior Vice Presidents, one or more First Vice Presidents, one or more Vice Presidents, one or more Assistant Vice Presidents, one or more Assistant Secretaries, and such other officers, assistant officers and agents as may be deemed necessary and appointed by the Board of Directors, the President, or the Chief Executive Officer or as may be chosen in such other manner as may be prescribed or permitted by these Bylaws, as amended from time to time. Any number of offices may be held by the same person except the office of President and Secretary.
The election of the officers shall be made only by a vote of a majority of the entire Board. If such election is not held at the meeting held annually for the election of officers, such officers may be so elected at any subsequent regular meeting or at a special meeting called for that purpose, in the same manner above provided. Each person elected shall have such authority, bear such title and perform such duties as provided in these Bylaws and as the Board may prescribe from time to time. Whenever a vacancy occurs among the officers, it may be filled at any regular or special meeting called for that purpose, in the same manner as above provided. All officers elected or appointed by the Board shall assume their duties immediately upon their election and shall hold office at the pleasure of the Board.
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SECTION 2. TERM OF OFFICE AND REMOVAL. Each officer shall serve until his or her successor is elected and duly qualified, the office is abolished or he or she is removed. Any officer may be removed at any regular or special meeting of the Board called for that purpose, with or without cause, by an affirmative vote of a majority of the entire Board.
SECTION 3. CHAIRMAN OF THE BOARD. The Chairman of the Board shall perform such duties as the Board may from time to time assign to him or her, including, but not limited to, presiding at all meetings of the shareholders, the Board and the Executive Committee. The Chairman of the Board also shall have such powers and duties as are generally incident to the position of Chairman.
SECTION 4. CHIEF EXECUTIVE OFFICER. The Chief Executive Officer shall be so designated by the Board and may also hold the title of Chairman of the Board, and/or President. The Chief Executive Officer of the Corporation, subject to the direction of the Board, shall be responsible for assuring that the policy decisions of the Board are implemented as formulated. The Chief Executive Officer shall have such powers as may be assigned to such officer by the Board or its committees .
SECTION 5. PRESIDENT. The President shall be the Chief Executive Officer of the Corporation and shall be subject to the direction of the Board. The President shall perform such duties as from time to time may be assigned to him by these Bylaws, the Board or the Chairman. In the absence of or disability of the Chairman, or if the office of the Chairman is vacant by reason of death, resignation, failure of the Board to elect a Chairman or otherwise, the President or such other person who the Board shall designate, shall exercise the powers and perform the duties which otherwise would fall upon the Chairman.
SECTION 6. VICE PRESIDENTS. Executive Vice Presidents, Senior Vice Presidents, First Vice Presidents and Vice Presidents may be appointed by the Board to perform such duties as may be prescribed by these Bylaws, the Board or the Chief Executive Officer as permitted by the Board.
SECTION 7. SECRETARY. The Secretary shall record, or cause to be recorded, all votes and minutes of all proceedings of the Board and of the shareholders in a book or books to be kept for that purpose. The Secretary shall have such other powers and duties as are generally incident to the office of Secretary and as may be assigned to him or her by the Board, any committee of the Board, the Chairman, and the Chief Executive Officer.
SECTION 8. TREASURER. The Treasurer shall perform all acts and duties as are generally incident to the office of the Treasurer.
SECTION 9. CONTROLLER. The Controller shall be the chief accounting officer and shall be responsible for the maintenance of adequate internal systems and records. The Controller shall maintain the general books of the Corporation relating to all assets, liabilities, receipts, disbursements and other financial transactions, and shall see that all
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expenditures are made in accordance with procedures duly established from time to time. The Controller shall prepare or cause to be prepared all reports pertinent to his office as may be required by the Board or regulatory authorities.
SECTION 10. OTHER OFFICERS. Other officers appointed by the Board shall have such authority and shall perform such duties as may be assigned to them, from time to time, by the Board or the Chief Executive Officer.
SECTION 11. COMPENSATION OF OFFICERS. The compensation of all officers may be fixed from time to time by the Board, upon the recommendation of the Compensation and Nominating Committee. The compensation of the Chief Executive Officer, President and the Executive Vice Presidents may be fixed, from time to time, by the Board of Directors. The salaries of the other officers may be fixed, from time to time, by a committee of the Board of Directors or by the Chief Executive Officer of the Corporation. No officer shall be prevented from receiving compensation by reason of the fact that he or she is also a Director of the Corporation.
ARTICLE VII
DIVIDENDS
The Board shall have the power, subject to the provisions of law and the requirements of the Certificate of Incorporation, to declare and pay dividends out of surplus (or, if no surplus exists, out of net profits of the Corporation, for the fiscal year in which the dividend is declared and/or the preceding fiscal year, except where there is an impairment of capital stock), to pay such dividends to the shareholders in cash, in property or in shares of the capital stock of the Corporation and to fix the date or dates for the payment of such dividends.
ARTICLE VIII
AMENDMENTS
These Bylaws, except as provided by applicable law or the Certificate of Incorporation, or as otherwise set forth in these Bylaws, may be amended or repealed at any regular or special meeting of the entire Board by the vote of two-thirds of the members of the entire Board; PROVIDED, HOWEVER, that (a) a notice specifying the change or amendment shall have been given at a previous regular meeting and entered in the minutes of the Board; (b) a written statement describing the change or amendment shall be made in the notice delivered to the directors of the meeting at which the change or amendment shall be acted upon; and (c) any Bylaw made by the Board may be altered, amended, rescinded or repealed by the holders of shares of capital stock entitled to vote thereon at any annual meeting or at any special meeting called for that purpose in accordance with the percentage requirements set forth in the Certificate of Incorporation and/or these Bylaws. Notwithstanding the foregoing, any provision of these Bylaws that contains a supermajority voting requirement shall only be altered, amended, rescinded or repealed by a vote of the Board or holders of capital stock entitled to vote thereon that is not less than the supermajority specified in such provision.
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Exhibit 4.1
No. Sample | Zero Shares |
CUSIP
Peoples United Financial, Inc.
I NCORPORATED UNDER THE L AWS OF THE S TATE OF D ELAWARE
This Certifies that is the owner of
fully paid and non-assessable Shares, par value $0.01 per share, of the COMMON STOCK of
Peoples United Financial, Inc.
(the Corporation), a corporation organized under the laws of the State of Delaware. The shares represented by this Certificate are transferable only on the stock transfer books of the Corporation by the holder hereof in person or by his or her duly authorized attorney or legal representative upon surrender of this Certificate properly endorsed.
The shares represented by this Certificate are not deposits or savings accounts and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.
I N W ITNESS W HEREOF , the Corporation has caused this Certificate to be executed by the signature of its duly authorized officers and has caused its corporate seal to be hereunto affixed.
[SEAL] | ||||
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Secretary | Chairman, Chief Executive Officer, and President |
Dated:
P EOPLE S U NITED F INANCIAL , I NC .
The shares represented by this Certificate are issued subject to all the provisions of the Certificate of Incorporation and By-Laws of P EOPLE S U NITED F INANCIAL , I NC . (the Corporation) as from time to time amended (copies of which are on file at the principal office of the Corporation), to all of which the holder by acceptance hereof assents. The following description constitutes a summary of certain provisions of, and is qualified in its entirety by reference to, the Certificate of Incorporation.
The Certificate of Incorporation of the Corporation contains provisions providing that the affirmative vote of the holders of at least 66.67% of the Voting Stock of the Corporation may be required to approve certain business combinations and other transactions with persons who directly or indirectly acquire or hold the beneficial ownership of in excess of 15% of the Voting Stock of the Corporation.
The Corporation will furnish to any shareholder upon written request and without charge, a statement of the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Such request may be made to the Corporation or to its transfer agent and registrar.
The following abbreviations when used in the inscription on the face of this Certificate shall be construed as though they were written out in full according to applicable laws or regulations:
TEN COM TEN ENT JT TEN |
- - - |
as tenants in common as tenants by the entireties as joint tenants with right of survivorship and not as tenants in common |
UNIF TRANSFERS TO MIN ACT . . . . . . . . . Custodian (Cust) (Minor) (State) |
Additional abbreviations may also be used though not in the above list
For value received, hereby sell(s), assign(s) and transfer(s) unto
shares of Common Stock evidenced by this Certificate, and do(es) hereby irrevocably constitute(s) and appoint(s) as Attorney, to transfer the said shares on the books of the herein named Corporation, with full power of substitution.
Date:
Signature |
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Signature |
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NOTICE: The signature to this assignment must correspond with the name as written upon the face of the Certificate, in every particular, without alteration or enlargement, or any change whatsoever.
Exhibit 8.1
February 12, 2007
Peoples Mutual Holdings
850 Main Street
Bridgeport, Connecticut 06604
Peoples Bank
850 Main Street
Bridgeport, Connecticut 06604
Peoples United Financial, Inc.
c/o Peoples Bank
850 Main Street
Bridgeport, Connecticut 06604
Dear Sirs:
You have requested our opinion regarding certain U.S. federal income tax consequences of the proposed conversion of Peoples Mutual Holdings (MHC) from a federally chartered mutual holding company to a Delaware chartered and federally registered stock holding company (the Conversion), pursuant to the Amended and Restated Agreement and Plan of Conversion and Reorganization of Peoples Mutual Holdings and Peoples Bank dated as of October 26, 2006 (the Plan). The Conversion and its component and related transactions described below are described in the Plan and in the prospectus included in the Companys Registration Statement filed on Form S-1 with the Securities and Exchange Commission in connection with the Conversion (the Prospectus). We are rendering this opinion pursuant to Section 6.07 of the Plan. All capitalized terms used but not defined in this letter shall have the meanings set forth in the Plan or the Prospectus.
Pursuant to the Plan, (a) MHC will convert to a stock form interim federal savings bank (Interim A); (b) Peoples Bank (the Bank) will organize Peoples United Financial, Inc., a Delaware corporation (the Company), as a wholly-owned subsidiary of the Bank which, upon consummation of the Plan, will become the new holding company of the Bank, and (c) the Company will organize Federal Interim Savings Bank (Interim B), a federally-chartered stock savings bank, as a wholly-owned subsidiary of the Company. The Conversion will be effected by the following transactions:
New York, NY | Washington, DC | White Plains, | Summit, NJ | Mexico City, Mexico |
Peoples Mutual Holdings Peoples Bank Peoples United Financial, Inc. February 12, 2007 |
Page 2 |
(1) the conversion of MHC from mutual form to federal interim stock savings bank form and the simultaneous merger of Interim A into the Bank, with the Bank being the surviving corporation (Merger 1); and
(2) the merger of Interim B into the Bank, with the Bank being the surviving corporation (Merger 2).
Pursuant to Merger 1, the Bank Common Stock previously held by MHC will be cancelled, and Eligible Account Holders and Supplemental Eligible Account Holders will be granted interests in a liquidation account to be established by the Bank in an amount determined in accordance with the Plan.
Pursuant to Merger 2, (a) the Bank will recontribute its shares of the Company to the Company, which will then cancel those shares; (b) the Companys shares of Interim B will be converted, on a one-to-one basis, into shares of Bank Common Stock; (c) all of the shares of Bank Common Stock held by the public shareholders of the Bank will automatically be converted into shares of common stock of the Company Common Stock at an exchange ratio determined in accordance with the Plan; and (d) the Bank will become a wholly-owned subsidiary of the Company.
Simultaneously with the Conversion, the Company will sell additional shares of Company Stock pursuant to the Offerings, with priority subscription rights granted to persons who are depositors of the Bank dates specified in the Plan and Tax-Qualified Employee Stock Benefit Plans.
In connection with the opinions expressed below, we have examined and relied upon originals, or copies certified or otherwise identified to our satisfaction, of the Plan and the Prospectus and of such corporate records of the parties to the Conversion as we have deemed appropriate. We have also relied, without independent verification, upon the February 12, 2007 letter of MHC and the Bank to Thacher Proffitt and Wood LLP containing certain tax representations. We have assumed that such representations are true and that the parties to the Conversion will act in accordance with the Plan. In addition, we have made such investigations of law as we have deemed appropriate to form a basis for the opinions expressed below.
Based on and subject to the foregoing, it is our opinion that for federal income tax purposes, under current law:
1. The conversion of MHC from mutual form to federal interim stock savings bank form will qualify as a reorganization under Section 368(a)(1)(F) of the Internal Revenue Code of 1986 (the Code), and no gain or loss will be recognized by MHC by reason of such conversion.
2. The merger of Interim A with and into the Bank will qualify as a reorganization within the meaning of Section 368(a)(1)(A) of the Code, and no gain or loss will be recognized by Interim A or by the Bank by reason of such merger.
Peoples Mutual Holdings Peoples Bank Peoples United Financial, Inc. February 12, 2007 |
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3. The merger of Interim B with and into the Bank pursuant to which shares of Bank Common Stock will be converted into shares of Company Common Stock will constitute a reorganization under Section 368(a)(2)(E) or Section 351 of the Code, and no gain or loss will be recognized by Interim B, the Bank or the Company by reason of such Merger.
4. No gain or loss will be recognized by the current stockholders of the Bank upon the receipt of shares of Company Common Stock pursuant to the stock exchange, except to the extent of any cash received in lieu of a fractional share interest in the Company.
5. The aggregate tax basis of the shares of Company Common Stock held by the current stockholders of the Bank upon the receipt of shares of Company Common Stock will be equal to the aggregate tax basis of the shares of Bank Common Stock held immediately before the stock exchange, reduced by the basis allocable to a fractional share interest in the Company for which cash is received.
6. The holding period of the shares of Company Common Stock received by the current stockholders of the Bank in the stock exchange will include the holding period of the shares of Bank Common Stock held immediately before the stock exchange, provided that such shares of Bank Common Stock were held as a capital asset on the date of the exchange.
7. A holder of shares of Company Common Stock who receives cash in lieu of a fractional share of Company Common Stock in the share exchange will recognize gain or loss equal to the difference between the amount of cash received and the portion of such holders tax basis of the shares of Bank Common Stock allocable to the fractional share; such gain or loss will be capital gain or loss if such shares were held as a capital asset as of the date of the share exchange, and will be long-term capital gain or loss if such holders holding period in the shares of Bank Common Stock is more than one year on the date of the share exchange.
8. No gain or loss will be recognized by the Company upon the sale of shares of Company Common Stock in the offering.
9. No gain or loss will be recognized by depositors of the Bank upon the issuance to them of interests in the liquidation account in the Bank pursuant to Merger 1.
10. It is more likely than not that the fair market value of the nontransferable subscription rights to purchase shares of Company Common Stock to be issued to eligible account holders, supplemental eligible account holders and other depositors is zero and accordingly, that no income will be recognized by eligible account holders, supplemental eligible account holders and other depositors upon the issuance to them of subscription rights or upon the exercise of the subscription rights.
11. It is more likely than not that the tax basis to the holders of shares of Company Common Stock purchased in the offering pursuant to the exercise of subscription rights will be the amount paid therefor, and that the holding period for such shares of Company Common Stock will begin on the date of the completion of the offerings.
Peoples Mutual Holdings Peoples Bank Peoples United Financial, Inc. February 12, 2007 |
Page 4 |
12. The holding period for shares of Company Common Stock purchased in the syndicated offering will begin on the day after the date of purchase.
The opinions set forth in (10) and (11), above, are based on the position that the subscription rights do not have any market value at the time of distribution or at the time they are exercised. Although the Internal Revenue Service (IRS) will not issue rulings on whether subscription rights have a market value, we are unaware of any instance in which the IRS has taken the position that nontransferable subscription rights issued by a converting financial institution have a market value. We understand that the subscription rights will be granted at no cost to the recipients, will be nontransferable and of short duration and will afford the recipients the right only to purchase Company Common Stock at a price equal to its estimated fair market value, which will be the same price as the purchase price for the unsubscribed shares of Company Common Stock. Based on the foregoing, we believe that it is more likely than not (i.e., there is a more than a 50% likelihood) that the subscription rights have no market value for U.S. federal income tax purposes.
Except as set forth above, we express no opinion to any party as to the tax consequences, whether federal, state, local or foreign, of the Conversion or of any transaction related thereto or contemplated by the Plan. We are furnishing this opinion solely in connection with the filing of the Registration Statement and this opinion is not to be relied upon for any other purpose. We consent (1) to the filing of this opinion as an exhibit to the Companys Registration Statement on Form S-1, (2) to the filing of this opinion as an exhibit to MHCs and the Banks Application for Conversion on Form AC and (3) to the reliance on this opinion by PricewaterhouseCoopers LLP in rendering their opinion as to the Connecticut income and franchise tax consequences of the Conversion to the extent such Connecticut tax consequences are affected by the U.S. federal income tax consequences discussed herein.
Very truly yours,
/s/ Thacher Proffitt & Wood LLP
Exhibit 8.2
February 12, 2007
Mr. Philip R. Sherringham
EVP and Chief Financial Officer
Peoples Bank
850 Main Street
Bridgeport, CT 06604
Dear Mr. Sherringham:
You have requested that PricewaterhouseCoopers LLP (PwC) provide you with our opinion addressing certain Connecticut state income tax consequences of the proposed conversion of Peoples Mutual Holdings (MHC) from a federally chartered mutual holding company to a Delaware chartered and federally registered stock holding company and its component and related transactions (the Conversion), pursuant to the Amended and Restated Agreement and Plan of Conversion and Reorganization of Peoples Mutual Holdings and Peoples Bank dated as of October 26, 2006 (the Plan). The Conversion is described in the Plan and in the prospectus included in People United Financials (Peoples United) registration statement filed on Form S-1 with the Securities and Exchange Commission (the Prospectus).
Background
MHC operates as a federally chartered mutual savings and loan holding company. MHC is the majority stockholder of Peoples Bank (Bank) and, as such, has voting power to elect the Board of Directors of Bank. Although MHCs primary purpose is to own the common stock of Bank, it may make other investments and undertake other banking related activities at its discretion. As of July 21, 2006, MHC owned 57.7% of Banks outstanding stock. MHC conducts its business activities primarily in the state of Connecticut and files stand-alone tax returns for both federal and Connecticut income tax purposes.
Bank is a federal savings bank and is the parent of an affiliated group of corporations that files a consolidated federal income tax return. It conducts banking business, including the acceptance of deposits and making of loans and, through its subsidiaries, conducts a variety of other businesses including real estate, investment management, leasing, insurance and discount brokerage. Bank conducts certain business activities in the state of Connecticut and files a combined return with its subsidiaries in the state of Connecticut. As of December 31, 2005, the combined group has net operating loss carryforwards of $693 million for Connecticut state income tax purposes.
In August 2006, Bank converted from a Connecticut-chartered savings bank to a federally chartered savings bank. Simultaneously, MHC converted from a Connecticut-chartered mutual holding company to a federally chartered savings and loan holding company. PwC rendered an opinion to MHC and Bank in June 2006 that provided, in part, that the conversion of Bank to a federal savings bank pursuant to an F reorganization would not extinguish or limit Banks ability to utilize Banks pre-reorganization Connecticut net operating loss carryforwards. You have represented to us that this transaction is separate and distinct from the Conversion described in the Plan and the Prospectus.
At the time the transaction is consummated MHC, Bank, and Peoples United will obtain an opinion from Thacher Proffitt & Wood LLP addressing the federal income tax consequences of the transaction. You have provided us with a copy of their draft opinion in which they conclude that the transactions described therein will be treated as tax-free reorganizations or, in one instance, a capital contribution and that no tax will be incurred at the shareholder level except for gains recognized with respect to cash received in lieu of fractional shares. Their opinion also indicates that shareholders holding period will carry over. Their opinion reaches a more likely than not conclusion with respect to the value of subscription rights issued to depositors and that no income will be recognized as a result by eligible accountholders and others and with respect to the computation of basis of the Company Common Stock purchased. We are relying upon this opinion to form the basis of our opinion regarding the Connecticut state income consequences.
Proposed Transaction
The proposed Conversion will be conducted pursuant to and is governed by the Plan, and includes the following:
Step 1 : MHC will convert to a federally chartered interim stock savings bank, to be known as Interim A. This entity will simultaneously merge with and into Bank, with Bank surviving such merger.
Step 2 : The common stock of Bank that is held by MHC will be cancelled and a liquidation account will be established for the benefit of the Depositors as of specified dates.
Step 3 : Peoples United Financial Inc., a newly formed state-chartered stock corporation and a wholly owned subsidiary of Bank (the Company or Peoples United), will form a federally chartered interim stock savings bank to be known as Peoples Federal Interim Savings Bank (Interim B).
Step 4 : Interim B will merge with and into Bank, with Bank surviving such merger.
Step 5 : Bank will recontribute its shares of the Company to the Company, which will then cancel these shares.
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Step 6 : The Companys shares of Interim B will be converted, on a one-to-one basis, into shares of Bank Common Stock. The public stockholders will exchange their shares of Bank Common Stock for shares of Company Common Stock, based upon the exchange ratio. Upon consummation of the conversion, all of the Bank Common Stock will be owned by the Company and the public stockholders will own the same percentage ownership of the Company Common Stock (approximately 42.3%) as the percentage of Bank Common Stock owned by them prior to the Conversion, before giving effect to cash paid in lieu of any fractional shares, and before giving effect to any shares of Company Common Stock purchased by the Public Stockholders in the conversion.
Step 7 : The rest of the Company shares will be sold pursuant to the Agreement and Plan of Conversion and Reorganization (the Plan). The sale of the remaining shares will be at the discretion of the MHC Board of Trustees and the Bank Board of Directors.
The consummation of the above steps will result in public ownership of 100% of Companys stock. Company will, in turn, own 100% of the stock of Bank.
We understand that the Bank will continue to have substantial NOL carryovers for Connecticut state corporate income tax purposes as of the date of the Conversion.
Relevant Authority
IRC Section 361(b) provides that no gain or loss shall be recognized to a corporation if such corporation is a party to a reorganization and exchanges property, in pursuance of the plan of reorganization, solely for stock or securities in another corporation a party to the reorganization.
IRC Section 354 provides that no gain or loss shall be recognized by shareholders if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization.
IRC Section 368(a)(1)(F) defines one type of a reorganization as a mere change in identity, form, or place of organization of one corporation, however, effected.
IRC Section 368(a)(1)(A) defines another type of reorganization as a statutory merger or consolidation.
IRC Section 368(a)(2)(E) defines another type of reorganization as a statutory merger or consolidation wherein stock of a corporation (referred to as the controlling corporation), which before the merger was in control of the merged corporation, is used in the transaction if after the transaction, the corporation surviving the merger holds substantially all of its
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properties and of the properties of the merged corporation (other than stock of the controlling corporation distributed in the transaction); and in the transaction, former shareholders of the surviving corporation exchanged, for an amount of voting stock of the controlling corporation, an amount of stock in the surviving corporation which constitutes control of such corporation.
IRC Section 351 generally provides that no gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in such corporation and immediately after the exchange such person or persons are in control (as defined in IRC Section 368(c)) of the corporation.
Section 12-214(a)(1) of the Connecticut General Statute (CGS) generally provides that every company carrying on, or having the right to carry on, business in the state of Connecticut shall pay tax measured by entire net income. Entire net income includes gross income, which in accordance with CGS Section 12-213 generally means gross income as defined in the Internal Revenue Code (IRC).
CGS Section 12-213(a)(23) provides that Internal Revenue Code means the Internal Revenue Code of 1986, or any subsequent internal revenue code of the United States, as from time to time amended, effective and in force on the last day of the income year. By adopting the federal Internal Revenue Code, Connecticut has conformed its treatment of corporate reorganizations to the federal treatment. However, Connecticut does not incorporate several of the corporate carryover sections, i.e., sections 381 through 385. Rather, Connecticut law with respect to corporate attributes and net operating loss carryovers has developed through case law and administrative rulings.
In general, Connecticut provides for the deduction of a Connecticut net operating loss (NOL) in income years subsequent to the year such NOL is generated. CGS Sec. 12-217. Connecticuts NOL provision (CGS Sec. 12-217(4)) does not specifically address whether net operating losses of a merging entity survive in a corporate reorganization. The Connecticut statute grants the Commissioner the authority to promulgate regulations relating to mergers or consolidations of corporations providing for the deduction, by the surviving corporation in the planned merger, of operating losses that were incurred by a merging corporation. CGS Sec. 12-217(d). To date, such regulations have not been promulgated.
Connecticut courts have addressed the matter of a carryover of a merging entitys net operating loss (i.e., an entity that does not survive the merger) in a number of cases, and generally have applied a continuity of business enterprise test, which was originally established by the U.S. Supreme Courts decision in Libson Shops, Inc. v. Koehler , 353 U.S. 382 (1957) and followed by several Connecticut court cases. 1
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Thermatool Corporation v. Department of Rev. Serv. , 43 Conn. Supp. 260 (Conn. Superior Ct., 1994); Cunningham Group, Inc. v. Commissioner of Rev. Serv. , 45 Conn. Supp. 202 (Conn. Superior Ct. 1997); Grade A Market, Inc. v. Commissioner of Rev. Serv. , 44 Conn. Supp. 377 (Conn. Superior Ct. 1996). |
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Among the rulings Connecticut has issued, two rulings (Letter Ruling 93-23 and 97-3) address the treatment of net operating losses when corporations that have net operating loss carryovers are parties to a reorganization or merger. In Letter Ruling 93-23, Connecticut ruled that since the corporation with a net operating loss carryover was the surviving entity in a merger, it was entitled to use its pre-merger net operating loss carryover to offset post-merger income. In this Ruling, Connecticut acknowledged that nothing in CGS Section 12-217 prohibits surviving corporations from deducting pre-merger NOLs generated by such taxpayers from future income of the merged corporation.
Letter Ruling 97-3 took a more expansive view permitting the net operating loss carryover of a corporation that did not survive the merger to be used to offset post-merger income applying a continuity of business enterprise analysis.
Conversion of MHC
The conversion of MHC from a federally chartered mutual holding company to a federally chartered interim stock savings bank (Interim A) contemplates that the legal existence of MHC will not terminate and Interim A will be a continuation of MHC. Since this transaction will involve the change in form of organization and involves only one corporation, it will meet the definition of a type F reorganization.
Merger of Interim A into Bank
The merger of Interim A with and into Bank will be accomplished through a statutory merger with Bank as the surviving entity. Since this transaction will involve the statutory merger of two corporations, it will meet the definition of a type A reorganization.
Merger of Interim B into Bank
The merger of Interim B with and into Bank will be accomplished through a statutory merger with Bank as the surviving entity. As part of this transaction, shares of Bank common stock will be converted into shares of Company common stock as described in the Plan. Since this transaction will involve the statutory merger of two corporations wherein stock of the controlling corporation (Bank) is used in the transaction and after the transaction the surviving corporation (Bank) will hold all of its properties and all of the properties of the merger corporation (Interim B) and the former shareholders of surviving corporation (Bank) will exchange an amount of stock in the surviving corporation (Bank), which constitutes control, for an amount of voting stock of the controlling corporation (Bank), it will meet the definition of a type A reorganization.
Alternatively, this transaction could be viewed as a contribution of the Bank common stock to the Company in exchange for Company common stock, after which Company will control Bank, which will meet the general requirements of IRC Section 351.
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Effect on MHC, Bank and the shareholders of Bank
Since Connecticut follows the federal treatment of the transactions described, MHC, Bank and the shareholders of the Bank will not recognize gain or loss on the transactions. In addition, since the Bank will maintain its legal entity status throughout the Conversion (i.e., it is the surviving entity in the transactions described), following Ruling 93-23 its NOLs should survive without limitation.
Effect on the mutual interest holders of MHC
Since Connecticut follows the federal treatment, it is more likely than not that that the fair market value of the nontransferable subscription rights to purchase shares of Company Common Stock to be issued to eligible account holders, supplemental eligible account holders and other depositors is zero and accordingly, that no income will be recognized by eligible account holders, supplemental eligible account holders and other depositors upon the issuance to them of subscription rights or upon the exercise of the subscription rights.
Conclusions
Based on our review of the facts as represented to us and relevant statutory, judicial, and administrative authority and relying on the federal tax opinion issued by Thacher, Proffitt & Wood LLP, subject to caveats and limitations expressed in this letter, it is our opinion that in accordance with Connecticuts income tax provisions:
1. | The conversion of MHC from mutual form to federal interim stock savings bank form will constitute a reorganization for federal income tax purposes under Section 368(a)(1)(F) of the IRC, and, therefore, will be treated as a tax-free reorganization for Connecticut income tax purposes; |
2. | The merger of Interim A with and into Bank will constitute a reorganization under IRC Section 368(a)(1)(A) and, therefore, will be treated as a tax-free reorganization for Connecticut income tax purposes; |
3. | The merger of Interim B with and into Bank, pursuant to which shares of Bank common stock will be converted into shares of Company common stock, will constitute a reorganization under IRC Section 368(a)(2)(E) or a contribution under IRC Section 351 and, therefore, will be treated as a tax-free reorganization or tax-free contribution for Connecticut income tax purposes; |
4. | No gain or loss will be recognized by the current stockholders of the Bank upon receipt of shares of Company common stock pursuant to the exchange of Bank common stock for Company common stock, except to the extent of any cash received in lieu of fractional share interests in the Company, for Connecticut income tax purposes; |
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5. | The aggregate tax basis of the shares of Company Common Stock held by the current stockholders of the Bank upon the receipt of shares of Company Common Stock will be equal to the aggregate tax basis of the shares of Bank Common Stock held immediately before the stock exchange, reduced by the basis allocable to a fractional share interest in the Company for which cash is received, for Connecticut income tax purposes; |
6. | The holding period of the shares of Company Common Stock received by the current stockholders of the Bank in the stock exchange will include the holding period of the shares of Bank Common Stock held immediately before the stock exchange; |
7. | A holder of shares of Company Common Stock who receives cash in lieu of a fractional share of Company Common Stock in the share exchange will recognize gain or loss equal to the difference between the amount of cash received and the portion of such holders tax basis of the shares of Bank Common Stock allocable to the fractional share; |
8. | No gain or loss will be recognized by the Company upon the sale of shares of Company Common Stock in the offering for Connecticut income tax purposes; |
9. | No gain or loss will be recognized by depositors of the Bank upon the issuance to them of interests in the liquidation account in the Bank pursuant to conversion and merger described in conclusions 1 and 2 above for Connecticut income tax purposes; |
10. | It is more likely than not that the fair market value of the nontransferable subscription rights to purchase shares of Company Common Stock to be issued to eligible account holders, supplemental eligible account holders and other depositors is zero and accordingly, that no income will be recognized by eligible account holders, supplemental eligible account holders and other depositors upon the issuance to them of subscription rights or upon the exercise of the subscription rights for Connecticut income tax purposes; |
11. | It is more likely than not that the tax basis to the holders of shares of Company Common Stock purchased in the offering pursuant to the exercise of subscription rights will be the amount paid therefore, and that the holding period for such shares of Company Common Stock will begin on the date of the completion of the offerings; |
12. | The holding period for shares of Company common stock purchased will begin on the day after the date of purchase for Connecticut income tax purposes; and |
13. | The Connecticut net operating loss carryovers of the Bank will survive the Conversion without limitation for Connecticut income tax purposes. |
Caveats and Limitations
Our reference to the federal tax treatment of the transactions detailed above is solely for the purpose of reaching a conclusion on the Connecticut treatment of the transactions. We are
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aware that you have obtained an opinion of Thacher, Proffitt & Wood LLP as to the federal tax treatment of the transactions and we have not been engaged for the purpose of rendering an opinion on the federal tax consequences of the transactions.
We have assumed that the representations made by the Bank, MHC, and Peoples United in their letter to us dated January xx, 2007 are true and will continue to be true at Closing, and that each of Bank, MHC, and Peoples United will act in accordance with the Amended and Restated Agreement and Plan of Conversion and Reorganization of Peoples Mutual Holdings and Peoples Bank dated as of October 26, 2006.
The conclusions reached in this opinion represent and are based upon our best judgment regarding the application of federal and Connecticut income tax laws arising under the Internal Revenue Code and the Connecticut general statutes, respectively, judicial decisions, administrative regulations, published rulings, and other tax authorities existing as of the date of this opinion. This opinion is not binding upon the Internal Revenue Service, the Connecticut Department of Revenue Services, or any relevant courts, and there is no guarantee that the Internal Revenue Service or the Connecticut Department of Revenue Services will not successfully assert a contrary position. Furthermore, no assurance can be given that future legislative or administrative changes, on either a prospective or retroactive basis, would not adversely affect the accuracy of the conclusions stated herein. PricewaterhouseCoopers LLP undertakes no responsibility to advise any party or shareholder of any new developments in the application or interpretation of the federal and Connecticut income tax laws.
This opinion does not address any federal or state tax consequences of the transactions set forth herein, or transactions related or proximate to such transactions, except as specifically set forth herein. This opinion does not address any local, foreign, or other tax consequences that may result from any of the transactions set forth herein, or transactions related to such transactions.
This opinion is based upon the representations, documents, facts, and assumptions that have been included or referenced herein and the assumption that such information is accurate, true, and authentic. This opinion does not address any transactions other than those described herein. This opinion does not address any transactions whatsoever if all the transactions described herein are [were] not consummated as described herein without waiver or breach of any material provision thereof or if the assumptions set forth herein are not true and accurate at all relevant times. In the event any one of the facts or assumptions is incorrect, in whole or in part, the conclusions reached in this opinion might be adversely affected.
This document was not intended or written to be used, and it cannot be used, for the purpose of avoiding U.S. federal, state or local tax penalties.
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Consent to filing
We consent (1) to the filing of this opinion as an exhibit to the Companys Registration Statement on Form S-1 and (2) to the filing of this opinion as an exhibit to MHCs and the Banks Application for Conversions on Form AC.
Very truly yours,
/s/ PricewaterhouseCoopers LLP
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Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
The Board of Directors
Peoples Bank:
We consent to the use of our report dated March 3, 2006, except for Note 20, which is dated October 30, 2006, with respect to the consolidated statements of condition of Peoples Bank and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of income, changes in stockholders equity, and cash flows for each of the years in the three-year period ended December 31, 2005, and of our report dated March 3, 2006 with respect to managements assessment of the effectiveness of internal control over financial reporting as of December 31, 2005 and the effectiveness of internal control over financing reporting as of December 31, 2005, which reports are included in the Pre-Effective Amendment No. 4 to the Registration Statement on Form S-1, and to the reference to our firm under the heading Experts in the Registration Statement.
Stamford, Connecticut |
February 12, 2007 |