Net Interest Income

Throughout this discussion, reference is made to People’s net interest income, interest rate spread and net interest margin (on an FTE basis) in terms of the "owned portfolio" and the "managed portfolio." The owned portfolio encompasses on-balance-sheet earning assets and funding liabilities. These amounts are combined with off-balance-sheet securitized credit card receivables and the related securities issued to determine "managed portfolio" performance.

Net interest income and margin are affected by many factors, including changes in average balances; sales of securitized credit card receivables; sales of other loans and securities; interest rate fluctuations; product pricing; the relative mix and maturity of earning assets and interest-bearing liabilities; non-interest-bearing sources of funds; and asset quality.

Managed Portfolio

Net interest income for the managed portfolio increased $45.4 million, or 13.8%, to $373.2 million in 1997 compared to $327.8 million in 1996. This increase reflects an increase of $1.0 billion, or 13.3%, in average managed earning assets and an increase of $221.2 million, or 16.4%, in non-interest-bearing sources of funds (stockholders’ equity and non-interest-bearing deposits). The $23.6 million increase in net interest income in 1996 compared to 1995 reflects an increase of $686.6 million, or 9.6%, in average earning assets and an increase of $187.8 million, or 16.1%, in non-interest-bearing sources of funds. The increases in earning assets reflect growth in People’s average managed credit card portfolio (year- over-year growth of $793.6 million in 1997 and $553.2 million in 1996) and growth in People’s other loan portfolios (year- over-year growth of $196.3 million in 1997 and $61.6 million in 1996). Growth in average non-interest-bearing deposits was $137.6 million in 1997 and $115.9 million in 1996.

People’s maintained relatively stable net interest margins over the past three years (4.20% in 1997, 4.18% in 1996 and 4.25% in 1995), while the one-year T-bill yield fluctuated 160 basis points from 5.1% to 6.7% as shown above. During 1997, the quarterly managed margin varied from a low of 4.11% in the second quarter to a high of 4.32% in the fourth quarter. The higher margin later in the year reflects increased yields on the managed credit card portfolio, as introductory rates on new accounts contractually repriced upward and an additional $600 million in credit card receivables were repriced during the third quarter.

For 1997 compared to 1996, interest income on the managed portfolio increased by $103.5 million due to an increase in average earning assets and decreased by $5.4 million due to a decrease in rates earned. For 1996 compared to 1995, interest income on the managed portfolio increased by $69.5 million due to an increase in average earning assets and decreased by $15.7 million due to a decrease in rates earned.

Average funding liabilities for the managed portfolio increased $989.1 million in 1997 compared to 1996, following an increase of $685.4 million in 1996 compared to 1995. Interest expense on the managed portfolio in 1997 reflects increases of $49.1 million due to an increase in average interest-bearing liabilities and $3.6 million due to an increase in rates paid. During 1997, average deposits increased $533.1 million, reflecting positive results generated by the Super Stop & Shop and municipal banking initiatives, as well as continued success in growing the commercial customer base; average borrowings increased $80.9 million; and average off-balance-sheet funding sources increased $375.1 million due to continued sales of securitized credit card receivables.

For 1996 compared to 1995, interest expense on the managed portfolio increased by $31.5 million due to an increase in average interest-bearing liabilities and decreased by $1.3 million due to a decrease in rates paid. During 1996, average deposits increased $308.8 million, average borrowings increased $187.3 million and average off-balance-sheet funding sources increased $189.3 million.

Owned Portfolio

For the owned portfolio, net interest income increased $21.8 million, or 9.0%, to $263.9 million in 1997 compared to $242.1 million in 1996, after increasing $5.2 million in 1996 compared to 1995. Net interest margins were 3.66% in 1997, 3.70% in 1996 and 3.92% in 1995. The slight decline in the net interest margin for the owned portfolio in 1997 primarily reflects an increase in earning assets funded by a slightly higher cost of funds. The decline in net interest margin in 1996 compared to 1995 reflects the securitization and sale of seasoned accounts with fully indexed interest rates and growth in on-balance-sheet credit card receivables earning introductory rates.

Owned portfolio average earning assets increased $667.7 million in 1997 compared to 1996, following an increase of $497.3 million in 1996 compared to 1995. The increases in 1997 and 1996 reflect increases of $418.5 million and $363.9 million, respectively, in average on-balance-sheet credit card receivables. Average loans for the periods presented reflect loan originations, partially offset by sales of securitized credit card receivables, sales of residential mortgage loans, continued principal repayments and charge-offs.

Average Treasury Yield Curve
As of December 31 (percent)


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Average Balance, Interest and Yield/Rate Analysis

The table that follows presents average balance sheets, FTE-basis interest income and interest expense, and the corresponding average yields earned and rates paid. The average balances are principally daily averages and, for loans, include both performing and non-performing balances. Interest income on loans includes the effect of deferred loan fees and costs accounted for as yield adjustments, but does not include interest on loans for which People’s has ceased to accrue interest. This table also shows the interest earned on off-balance-sheet credit card receivables, as well as the interest paid on the related off-balance-sheet securities.

¹ The FTE adjustment for 1997, 1996 and 1995 was $10.9 million, $7.6 million and $5.3 million, respectively.
² Interest rate spread, excluding non-interest-bearing deposits, equaled 2.99%, 3.11% and 3.37% for 1997, 1996 and 1995, respectively.
³ Net interest income associated with the off-balance-sheet portfolio is included in "credit card securitization income" in the consolidated statements of income.
⁴ Interest rate spread, excluding non-interest-bearing deposits, equaled 3.61%, 3.65% and 3.75% for 1997, 1996 and 1995, respectively.

Volume and Rate Analysis

The following table sets forth the extent to which changes in interest rates and changes in the volume of average earning assets and average interest-bearing liabilities have affected People’s FTE-basis interest and dividend income and interest expense. For each category of earning assets and interest-bearing liabilities, information is provided relating to changes attributable to changes in volume (changes in average balances multiplied by the prior year’s average interest rate); changes in rates (changes in average interest rates multiplied by the prior year’s average balance); and the total change. Changes attributable to both volume and rate have been allocated proportionately.