People. s conducts its lending activities through the following segments: Consumer Financial Services, Commercial Banking and Credit Card Services.

People. s lending activities consist of originating loans secured by residential and commercial properties, and extending secured and unsecured loans to consumers and businesses. A significant focus each year on community development lending has earned People. s an . outstanding. Community Reinvestment Act rating.

Total Managed Loans
As of December 31 (dollars in billions)


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Non-Performing Assets

The level of non-performing loans reflects strong economic conditions in Connecticut and the rest of the United States along with management. s proactive resolution of problem loans. Although asset quality is considered strong, the low level of non-performing loans reported in recent years may not be sustainable and is expected to fluctuate from year to year in response to changing economic and market conditions.

Loans are classified as non-accrual when they become 90 days past due as to interest or principal payments. 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. People. s 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, People. s will complete foreclosure procedures, if applicable. Restructured commercial and commercial real estate finance loans are those for which concessions, including reduction of interest rates to below-market levels or deferral of interest or principal payments, have been granted due to the borrowers. financial condition.  

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Consumer Financial Services

Residential Mortgage Lending
People. s 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, as well as Federal Housing Authority insured, Veteran. s Administration guaranteed and Connecticut Housing Finance Authority loans. At December 31, 1999, 97% of the residential mortgage portfolio was secured by properties located in Connecticut.

Included in residential mortgage loans were construction loans totaling $118 million and $95 million at December 31, 1999 and 1998, respectively.

The mix and volume of residential mortgage loan originations varies in response to changes in market interest rates and customer preferences. The increase in refinancing and purchase activity that began in 1997, due to the lower interest rate environment, continued into early 1999.

As rates increased in the second half of 1999, refinancing activity slowed while purchase mortgage activity remained high. The demand for adjustable rate mortgage (. ARM. ) loans, including loans with a fixed rate for three or five years that convert into one-year adjustable rate loans, increased in 1999 as fixed rate mortgage originations declined. ARM loans accounted for 64% of total residential mortgage originations in 1999, 45% in 1998 and 65% in 1997.

According to the Commercial Record Monthly Mortgage Report for the last seven years, People. s has maintained the leading market share for Connecticut residential mortgage loan originations as measured by both number and dollar volume. In 1999, People. s originated $1.2 billion in residential mortgage loans compared to $1.9 billion in 1998, reflecting the market conditions described previously. These originations represent approximately 5.7% of the Connecticut market for 1999 compared to People. s closest competitor. s market share of 3.5%.

Residential Mortgage
Originations
Years ended December 31
(dollars in millions)


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People. s current strategy is to sell substantially all newly-originated fixed rate residential mortgage loans and to retain most residential ARM loans for its own portfolio. People. s does sell residential ARM loans in the secondary market from time to time as conditions warrant. In conjunction with the HomeSide strategic alliance, 1999 residential mortgage sales were executed with servicing rights released and a majority of these sales were to HomeSide. Prior to 1999, residential mortgage loans were sold with servicing rights retained by People. s.

Although substantially all People. s residential mortgage loans are serviced by HomeSide, this alliance has not changed People. s origination process (i.e., setting interest rates, receiving and processing applications, underwriting, approving and closing loans). People. s also retains the exclusive right to market banking, investment and life insurance products to all of the customers whose loans it originates.

1999 Residential Mortgage
Originations by Product
Years ended December 31

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Other Consumer Lending

People. s is an active participant in the consumer credit market in Connecticut, offering a full range of competitive products such as home equity lines of credit, second mortgage loans, TaxSaver loans, automobile loans and other forms of installment and revolving credit loans. People. s continues to focus on growing the consumer loan portfolio while maintaining strong credit quality standards. Consumer loans are originated through traditional means in branches, by telephone and interactive video, as well as targeted direct mail.

During 1999, People. s piloted a program to market consumer loan products through its national and international credit card operations. The results of this program were encouraging and accounted for 72% of the $62 million growth in other consumer loans. The success of these early marketing efforts has led People. s to re-align its consumer lending business under Credit Card Services as of January 2000. The goal of this re-alignment is to leverage the database mining and marketing expertise developed in the credit card operation in order to expand the consumer lending business nationally and in the United Kingdom. In addition, the integration of these two units will allow People. s to more effectively target customers and provide tailored products to meet their needs.

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Commercial Banking

Commercial Real Estate Finance

People. s manages the commercial real estate finance portfolio to limit the concentration in any type, term, industry, or to any individual borrower. People. s primary strategy is to focus on lending in the state of Connecticut. However, People. s will generally originate loans outside Connecticut when requested by an existing customer. People. s also participates to a limited extent in loan syndications with financial institutions having comparable asset quality standards.

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, Connecticut. s economy.

In 1999, Connecticut. s economy remained strong and provided People. s with an opportunity to continue solid internal growth in the commercial real estate finance portfolio, while focusing on maintaining strong asset quality.

At December 31, 1999, approximately 89% of People. s commercial real estate finance portfolio was secured by properties located in Connecticut compared to 91% at December 31, 1998. Included in this portfolio were construction loans totaling $144 million and $124 million at December 31, 1999 and 1998, respectively.

Commercial Real Estate Finance Portfolio As of December 31(dollars in millions) Click above for full chart

Commercial Real Estate Finance Diversification As of December 31, 1998 Click above for full chart

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Commercial Lending

People. s provides diversified products and services to its commercial customers, including correspondent banking, short-term working capital credit facilities, term financing, asset-based loans, letters of credit, Internet-based cash management services, and equipment leasing and financing through PCLC.

PCLC provides equipment financing for customers in over 30 states, specializing in printing, packaging, transportation and manufacturing industries. PCLC had $128.4 million in loans and leases at December 31, 1999 compared to $54.5 million at December 31, 1998.

Commercial Lending
Portfolio
As of December 31 (dollars in millions)

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Products are packaged together to create a financing solution specifically tailored to the needs of the customer. Taking a consultative approach with commercial customers to meet their financing needs has resulted in the generation of substantial commercial non-interest-bearing deposits, which have funded a significant portion of the loan growth. For an additional discussion of commercial deposits, see . Deposits. on page 39.

Commercial Lending
Diversification
As of December 31, 1998

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Unlike other types of lending, the borrower. s ability to repay a commercial loan is closely tied to the ongoing profitability and cash flow of the borrower. s business. Consequently, a commercial loan tends to be more directly impacted by changes in economic cycles that affect businesses generally and the borrower. s 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.

At December 31, 1999, approximately 72% of the commercial loan portfolio consisted of loans to Connecticut-based businesses compared to 82% at December 31, 1998. Geographic diversification throughout the state and within neighboring states remains a focus, as well as maintaining strong asset quality.

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People. s strategy is to segment the credit card market by risk classification and offer a low fixed interest rate credit card to highly creditworthy individuals who carry balances. Each offer is based on a segment. s potential risk/reward relationship and is priced accordingly. As of December 31, 1999, according to the Nilson Report, People. s was ranked the 17th largest Visa and MasterCard credit card issuer in the United States based on outstanding balances.

In general, People. s identifies and solicits prospects using various modeling techniques, with a significant portion of all credit card applications fully underwritten by an analyst upon receipt. People. s has invested in sophisticated information-based technologies for originating and managing credit card accounts. These technologies are used to develop credit risk models that management believes increase the credit quality of new solicitations and facilitate active risk management of the overall portfolio.

Managed Credit Card Portfolio
As of December 31 (dollars in millions)

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In 1999, the managed credit card portfolio increased $281 million, or 7%. In the first three quarters of 1999, managed credit card receivables experienced virtually no growth due to accelerated repayments related to continued residential mortgage refinance activity and competitive pricing pressures. In the fourth quarter of 1999, managed receivables grew $363 million reflecting a strong holiday shopping season.

Irrational pricing by certain competitors in the credit card market continues to challenge People. s ability to grow the portfolio. People. s continues to use direct mail to actively solicit new customers while focusing on enhancing profitability and maintaining strong asset quality. Future growth of People. s managed credit card portfolio is highly dependent upon economic conditions, competitors. strategies, the success of marketing programs and information-based strategies and the United Kingdom operation.

People. s limited branch in the United Kingdom, established in 1996, has generated credit card receivables totaling $355 million as of December 31, 1999, representing a 43% increase from $249 million as of December 31, 1998. In 1999, People. s expanded the United Kingdom credit card operation through the formation of a relationship call center that in-sourced collection and telemarketing capabilities and enhanced customer service.

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Managed Credit Card Portfolio Net Charge-Offs

At December 31, 1999, approximately 6% of managed credit card loan balances were to individuals and businesses located in Connecticut. In general, the concentration of People. s national credit card loan balances mirrors the population distribution of the United States.

Managed credit card net charge-offs increased to 4.1% of average managed credit card receivables for 1999 from 3.9% in 1998 (excluding the one-time credit card adjustment described on page 25). In 1999, the number of personal bankruptcy filings increased 8%, and the average balance per bankruptcy rose 11% compared to 1998. These statistics have a substantial impact on the level of credit card charge-offs realized in a given period. When the current economic expansion ends, bankruptcy filings and related charge-offs may increase further. People. s commitment to maintaining strong asset quality through its underwriting practices is designed to mitigate the effects of such an environmental change.

In 1998, People. s sold $107 million in credit card receivables associated with an expired affinity relationship. This sale resulted in a $5.8 million gain and was initiated to capture the premium associated with these accounts, which was expected to diminish rapidly over the remainder of 1998.

Over the last six years, People. s has periodically securitized credit card receivables and sold asset-backed certificates (representing undivided interests in assets transferred to the Trust) in the capital market. Management expects to continue to do so as conditions warrant.

As a result of securitization activities, People. s managed credit card portfolio includes an on-balance-sheet portfolio (unsecuritized receivables and People. s retained interest in the Trust) and off-balance-sheet securitized receivables that have been sold.

For securitized and sold receivables, amounts that would have been previously reported as net interest income, credit card fees and provisions for loan losses (if such receivables had remained on-balance-sheet) are instead combined and reported as credit card securitization income. People. s credit card securitization income will vary over the term of the transactions depending upon the level of interest and fees charged on credit card accounts, the interest rate environment and the credit performance of the receivables. However, People. s exposure to losses on the off-balance-sheet receivables is contractually limited to future excess spread revenue and to collateral accounts established for the benefit of investors. Collateral accounts totaled $93 million at December 31, 1999 and $85 million at December 31, 1998.

The following table illustrates People. s operating results, capital ratios and certain other financial information on a managed basis. Managed basis information is pro forma information that would have been reported if the securitized receivables had not been sold.