Form 10-Q/A
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q/A

 

 

 

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2009.

or

 

¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number: 001-31486

 

 

LOGO

WEBSTER FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   06-1187536

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

Webster Plaza, Waterbury, Connecticut   06702
(Address of principal executive offices)   (Zip Code)

(203) 465-4364

(Registrant’s telephone number, including area code)

 

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes    ¨  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    ¨  Yes    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of shares of common stock, par value $.01 per share, outstanding as of July 29, 2009 was 68,124,642.

 

 

 


Table of Contents

Explanatory Note

Webster is filing this amended Form 10-Q for the sole and express purpose of correcting an error in the footnote setting forth the cumulative amount of other-than-temporary impairments at June 30, 2009 with respect to the available for sale equity securities portfolio. This amount is set forth in footnote (b) to the first table appearing in Note 4 to the condensed consolidated financial statements included herein.

In addition, as required by Rule 12b-15 under the Securities Exchange Act of 1934, as amended, new certifications by Webster’s principal executive officer and principal financial officer are filed as exhibits to this Form 10-Q/A under Item 6 hereof. No other new exhibits are being filed herewith.

No other changes have been made to the Form 10-Q. This form 10-Q/A speaks as of the original filing date of the Form 10-Q, does not reflect events that may have occurred subsequent to the original filing date, and does not modify or update in any way disclosures made in the Form 10-Q.

INDEX

 

         Page No.

PART I – FINANCIAL INFORMATION

  

Item 1.

  Condensed Consolidated Financial Statements (Unaudited)   
  Condensed Consolidated Balance Sheets    3
  Condensed Consolidated Statements of Operations    4
  Condensed Consolidated Statements of Changes in Equity    6
  Condensed Consolidated Statements of Cash Flows    7
  Notes to Condensed Consolidated Financial Statements    9

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations    36

Item 3.

  Quantitative and Qualitative Disclosures about Market Risk    59

Item 4.

  Controls and Procedures    59

PART II - OTHER INFORMATION

  

Item 1.

  Legal Proceedings    60

Item 1A.

  Risk Factors    60

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds    60

Item 3.

  Defaults upon Senior Securities    60

Item 4.

  Submission of Matters to a Vote of Security Holders    60

Item 5.

  Other Information    61

Item 6.

  Exhibits    62
SIGNATURES    63
EXHIBIT INDEX    64

 

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PART I. – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS (Unaudited)

WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

(Dollars in thousands, except share and per share amounts)

   June 30,
2009
    December 31,
2008
 
     (unaudited)        

Assets:

    

Cash and due from depository institutions

   $ 254,638      $ 259,208   

Short-term investments

     8,216        22,154   

Investment securities:

    

Trading, at fair value

     —          77   

Available for sale, at fair value

     1,405,872        1,188,705   

Held-to-maturity, at amortized cost (fair value of $2,800,705 and $2,559,745, respectively)

     2,767,965        2,522,511   
                

Total investment securities

     4,173,837        3,711,293   

Loans held for sale

     113,936        24,524   

Loans, net

     11,304,703        11,952,262   

Federal Home Loan Bank and Federal Reserve Bank stock

     137,874        134,874   

Goodwill

     529,887        529,887   

Cash surrender value of life insurance

     285,064        279,807   

Premises and equipment, net

     179,625        185,928   

Other intangible assets, net

     31,126        34,039   

Deferred tax asset, net

     153,745        189,337   

Accrued interest receivable and other assets

     279,925        260,224   
                

Total assets

   $ 17,452,576      $ 17,583,537   
                

Liabilities:

    

Deposits

   $ 13,174,582      $ 11,884,890   

Federal Home Loan Bank advances

     663,123        1,335,996   

Securities sold under agreements to repurchase and other short-term debt

     1,015,099        1,570,971   

Long-term debt

     590,520        687,797   

Accrued expenses and other liabilities

     158,102        220,145   
                

Total liabilities

     15,601,426        15,699,799   
                

Equity:

    

Shareholders’ equity:

    

Preferred stock, $0.01 par value; Authorized - 3,000,000 shares;

    

Series A issued and outstanding - 56,400 and 224,900 shares

     56,400        224,900   

Series B issued and outstanding - 400,000 shares (net of discount; $7,702 and $8,574)

     392,298        391,426   

Common stock, $0.01 par value; authorized - 200,000,000 shares;

    

Issued - 67,899,440 and 56,607,177 shares

     679        566   

Paid in capital:

    

Warrant for common stock

     8,719        8,719   

Additional paid in capital

     815,893        722,962   

Retained earnings

     786,949        781,106   

Accumulated other comprehensive loss, net of taxes

     (66,872     (105,910

Less: Treasury stock, at cost; 3,801,628 and 3,723,527 shares

     (152,548     (149,650
                

Total Webster Financial Corporation shareholders’ equity

     1,841,518        1,874,119   

Noncontrolling interests

     9,632        9,619   
                

Total equity

     1,851,150        1,883,738   
                

Total liabilities and equity

   $ 17,452,576      $ 17,583,537   
                

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

     Three months ended June 30,     Six months ended June 30,  

(In thousands, except per share amounts)

   2009     2008     2009     2008  

Interest Income:

        

Loans including fees

   $ 137,533      $ 175,786      $ 278,300      $ 367,058   

Investments securities

     48,799        38,115        99,626        77,447   

Loans held for sale

     833        92        997        1,492   
                                

Total interest income

     187,165        213,993        378,923        445,997   
                                

Interest Expense:

        

Deposits

     49,982        60,055        102,890        135,297   

Borrowings

     17,895        28,252        38,548        60,158   
                                

Total interest expense

     67,877        88,307        141,438        195,455   
                                

Net interest income

     119,288        125,686        237,485        250,542   

Provision for credit losses

     85,000        25,000        151,000        40,800   
                                

Net interest income after provision for credit losses

     34,288        100,686        86,485        209,742   
                                

Non-interest Income:

        

Deposit service fees

     29,984        29,943        57,943        58,376   

Loan related fees

     6,350        7,891        12,832        14,749   

Wealth and investment services

     6,081        7,634        11,831        14,590   

Mortgage banking activities

     3,433        104        4,039        844   

Increase in cash surrender value of life insurance

     2,665        2,623        5,257        5,204   

Impairment losses on investment securities

     (27,110     (54,924     (27,110     (56,177

Net (loss) gain on the sale of investment securities

     (13,593     126        (9,135     249   

Gain on the exchange of trust preferred securities for common stock

     24,336        —          24,336        —     

Gain on early extinguishment of subordinated notes

     —          —          5,993        —     

Gain on Visa share redemption

     1,907        —          1,907        1,625   

Other income

     1,325        854        1,600        2,638   
                                

Total non-interest income

     35,378        (5,749     89,493        42,098   
                                

Non-interest Expenses:

        

Compensation and benefits

     59,189        62,866        115,658        126,309   

Occupancy

     13,594        13,128        27,889        26,810   

Furniture and equipment

     15,288        15,634        30,428        30,794   

Intangible assets amortization

     1,450        1,464        2,913        3,012   

Marketing

     3,196        4,940        6,302        8,583   

Outside services

     3,394        3,706        7,178        7,859   

FDIC deposit insurance assessment

     5,959        344        10,549        698   

FDIC special deposit insurance assessment

     8,000        —          8,000        —     

Goodwill impairment

     —          8,500        —          8,500   

Severance and other costs

     1,313        9,368        1,553        8,718   

Foreclosed and repossessed asset write-downs

     2,829        484        6,279        717   

Foreclosed and repossessed asset expenses

     1,799        1,068        2,978        1,348   

Other expenses

     14,066        16,005        28,366        30,063   
                                

Total non-interest expenses

     130,077        137,507        248,093        253,411   
                                

Loss from continuing operations before income tax (benefit) expense

     (60,411     (42,570     (72,115     (1,571

Income tax (benefit) expense

     (28,536     (14,285     (29,129     18   
                                

Loss from continuing operations

     (31,875     (28,285     (42,986     (1,589

Income (loss) from discontinued operations, net of tax

     313        (439     313        (2,563
                                

Consolidated net loss

     (31,562     (28,724     (42,673     (4,152

Less: Net income (loss) attributable to noncontrolling interests

     —          1        13        (8
                                

Net loss attributable to Webster Financial Corporation

     (31,562     (28,725     (42,686     (4,144

Preferred stock dividends and accretion of preferred stock discount and gain on extinguishment

     48,361        (215     37,932        (431
                                

Net income (loss) applicable to common shareholders

   $ 16,799      $ (28,940   $ (4,754   $ (4,575
                                

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS, continued

 

     Three months ended June 30,     Six months ended June 30,  
(In thousands, except per share amounts)    2009    2008     2009     2008  

Basic:

         

Income (loss) from continuing operations, per common share

   $ 0.30    $ (0.55   $ (0.10   $ (0.04

Income (loss) from discontinued operations, net of tax per common share

     0.01      (0.01     0.01        (0.05
                               

Net income (loss) attributable to Webster Financial Corporation, per common share

   $ 0.31    $ (0.56   $ (0.09   $ (0.09

Diluted:

         

Income (loss) from continuing operations, per common share

   $ 0.30    $ (0.55   $ (0.10   $ (0.04

Income (loss) from discontinued operations, net of tax per common share

     0.01      (0.01     0.01        (0.05
                               

Net income (loss) attributable to Webster Financial Corporation, per common share

   $ 0.31    $ (0.56   $ (0.09   $ (0.09

Dividends per common share

   $ 0.01    $ 0.30      $ 0.02      $ 0.60   

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

 

     Six months ended June 30, 2009  

(In thousands, except share and per
share data)

   Preferred
Stock
    Common
Stock
   Paid-in
Capital
    Retained
Earnings
    Treasury
Stock
    Accumulated
Other
Comprehensive
Loss
    Non controlling
interests
   Total  

Balance, December 31, 2008

   $ 616,326      $ 566    $ 731,681      $ 781,106      $ (149,650   $ (105,910   $ 9,619    $ 1,883,738   

Cumulative effect of change in accounting principle

     —          —        —          11,431        —          (11,431     —        —     

Comprehensive income (loss):

                  

Net loss

     —          —        —          (42,686     —          —          13      (42,673

Other comprehensive loss, net of taxes

     —          —        —          —          —          50,469        —        50,469   
                                                              

Comprehensive loss

                     7,796   

Dividends paid on common stock of $.01 per share

     —          —        —          (1,055     —          —          —        (1,055

Dividends paid on Series A preferred stock $21.25 per share

     —          —        —          (9,558     —          —          —        (9,558

Dividends incurred on Series B preferred stock $12.50 per share

     —          —        —          (10,000     —          —          —        (10,000

Subsidiary preferred stock dividends

     —          —        —          (431     —          —          —        (431

Repurchase of 6,123 common shares

     —          —        —          —          (51     —          —        (51

Accretion of preferred stock discount

     872        —        —          (872     —          —          —        —     

Stock-based compensation expense

     —          —        1,246        —            —          —        1,246   

Restricted stock grants and expense

     —          —        5,860        222        (2,847     —          —        3,235   

Conversion of Series A preferred stock

     (168,500     60      49,069        58,792        —          —          —        (60,579

Extinguishment of Trust Preferred Securities

     —          53      36,780        —          —          —          —        36,833   

Additional issuance costs associated with the issuance of the Series B preferred stock and warrant

     —          —        (24     —          —          —          —        (24
                                                              

Balance, June 30, 2009

   $ 448,698      $ 679    $ 824,612      $ 786,949      $ (152,548   $ (66,872   $ 9,632    $ 1,851,150   
                                                              

 

     Six months ended June 30, 2008  

(In thousands, except share and
per share data)

   Preferred
Stock
   Common
Stock
   Paid-in
Capital
    Retained
Earnings
    Treasury
Stock
    Accumulated
Other
Comprehensive
Loss
    Non controlling
interests
    Total  

Balance, December 31, 2007

   $ —      $ 566    $ 734,604      $ 1,183,621      $ (166,263   $ (15,896   $ 9,615      $ 1,746,247   

Comprehensive income:

                  

Net income (loss)

     —        —        —          (4,144     —          —          (8     (4,152

Other comprehensive loss, net of taxes

     —        —        —          —          —          (30,244     —          (30,244
                                                              

Comprehensive income

                     (34,396

Dividends paid on common stock of $.60 per share

     —        —        —          (31,495     —          —          —          (31,495

Dividends paid on consolidated affiliate preferred stock

     —        —        —          (431     —          —          —          (431

Exercise of stock options, including excess tax benefits

     —        —        (73     —          513        —          —          440   

Repurchase of 11,447 common shares

     —        —        —          —          (349     —          —          (349

Stock-based compensation expense

     —        —        1,327        —          —          —          —          1,327   

Restricted stock grants and expense

     —        —        532        —          2,660        —          —          3,192   

Issuance of Series A preferred stock

     225,000      —        (7,300     —          —          —          —          217,700   

EITF 06-4 Adoption

     —        —        —          (923     —          —          —          (923
                                                              

Balance, June 30, 2008

   $ 225,000    $ 566    $ 729,090      $ 1,146,628      $ (163,439   $ (46,140   $ 9,607      $ 1,901,312   
                                                              

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     Six months ended June 30,  

(In thousands)

   2009     2008  

Operating Activities:

    

Net loss

   $ (42,673   $ (4,152

Income (loss) from discontinued operations, net of tax

     313        (2,563
                

Loss from continuing operations

     (42,986     (1,589

Adjustments to reconcile loss from continuing operations to net cash (used for) provided by operating activities:

    

Provision for credit losses

     151,000        40,800   

Depreciation and amortization

     29,742        29,039   

Gain on early extinguishment of subordinated notes

     (4,504     —     

Gain on exchange of trust preferred securities for common stock

     (24,336     —     

Stock-based compensation

     4,481        4,519   

Foreclosed and repossessed asset write-downs

     6,279        925   

Write-down of fixed assets

     1,150        —     

Goodwill impairment

     —          8,500   

Impairment losses on investment securities

     27,110        56,177   

Net loss (gain) on the sale of investment securities

     9,135        (316

Decrease in trading securities

     76        60   

Increase in cash surrender value of life insurance

     (5,257     (5,204

Net (increase) decrease in loans held for sale

     (89,412     217,596   

Net increase in prepaid expenses and other assets

     (45,074     (9,691

Net decrease in accrued expenses and other liabilities

     (41,434     (18,500
                

Net cash (used for) provided by operating activities

     (24,030     322,316   
                

Investing Activities:

    

Net decrease in short-term investments

     13,938        2,116   

Purchases of securities, available for sale

     (688,091     (339,438

Proceeds from maturities and principal payments of securities, available for sale

     99,085        21,083   

Proceeds from sales of securities, available for sale

     410,336        6,277   

Purchases of held-to-maturity securities

     (286,084     (75,163

Proceeds from maturities and principal payments of held-to-maturity securities

     242,530        116,252   

Purchases of FHLB and FRB stock

     (3,000     (21,248

Net decrease (increase) in loans

     264,214        (341,820

Proceeds from sale of foreclosed properties

     11,789        5,855   

Net purchases of premises and equipment, net of sales proceeds

     (13,283     (15,730
                

Net cash provided by (used for) investing activities

     51,434        (641,816
                

Financing Activities:

    

Net increase (decrease) in deposits

     1,289,693        (277,591

Proceeds from FHLB advances

     9,420,286        28,275,925   

Repayments of FHLB advances

     (10,091,665     (27,906,974

Net (decrease) increase in securities sold under agreements to repurchase and other short-term borrowings

     (554,912     37,322   

Repayment of long-term debt

     (15,928     —     

Issuance costs for Series B Preferred Stock

     (24     —     

Issuance of Series A Preferred Stock, net

     —          217,700   

Conversion of Series A Preferred Stock

     (58,975     —     

Cash dividends to common shareholders

     (1,055     (31,495

Cash dividends to preferred shareholders of consolidated affiliate

     (431     (431

Cash dividends paid to preferred shareholders

     (19,225     —     

Exercise of stock options

     —          440   

Common stock repurchased

     (51     (349
                

Net cash (used for) provided by financing activities

     (32,287     314,547   
                

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, continued

 

     Six months ended June 30,  

(In thousands)

   2009     2008  

Cash Flows from Discontinued Operations:

    

Operating activities

   $ 313      $ (2,141

Proceeds from sale of discontinued operations

     —          23,920   
                

Net cash provided by discontinued operations

     313        21,779   
                

Net change in cash and cash equivalents

     (4,570     16,826   

Cash and cash equivalents at beginning of period

     259,208        306,654   
                

Cash and cash equivalents at end of period

   $ 254,638      $ 323,480   
                

Supplemental disclosure of cash flow information:

    

Interest paid

   $ 147,672      $ 199,203   

Income taxes paid

     1,847        24,190   

Noncash investing and financing activities:

    

Mortgage loans securitized and transferred to mortgage-backed securities - GSE held-to-maturity

   $ 203,030      $ —     

Transfer of loans and leases, net to foreclosed properties

     21,253        15,478   

Issuance of loan to finance sale of subsidiary

     —          18,000   

Gain on early extinguishment of fair value hedge of subordinated debt

     1,489        —     

Transfer of property from premises and equipment to assets held-for-disposition

     1,632        900   

Extinguishment of junior subordinated notes through issuance of common stock

    

Carrying value of junior subordinated notes extinguished

     (63,773     —     

Fair value of common stock issued

     39,307        —     

Recognition of deferred gain on cash flow hedge

     (674     —     

Conversion of Series A Preferred Stock:

    

Carrying value of Series A Preferred Stock converted, net of cash paid upon conversion

     (103,979     —     

Fair value of common stock issued

     45,187        —     

Sale transactions:

    

Fair value of noncash assets sold

   $ —        $ 40,833   

Fair value of liabilities extinguished

     —          7,117   

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

NOTE 1: Summary of Significant Accounting Policies

Nature of Operations. Webster Financial Corporation (“Webster” or the “Company”) is a financial holding company and a bank holding company headquartered in Waterbury, Connecticut that delivers, through its subsidiaries, financial services to individuals, families and businesses throughout southern New England and into eastern New York State. Webster also offers equipment financing, asset-based lending, health savings accounts and insurance premium financing on a national basis and commercial real estate lending on a regional basis.

Basis of Presentation. The condensed consolidated financial statements in this Quarterly Report on Form 10-Q include the accounts of Webster and all other entities in which Webster has a controlling financial interest (collectively referred to as “Webster” or the “Company”). All significant intercompany balances and transactions have been eliminated in consolidation. The accounting and financial reporting policies Webster follows conform, in all material respects, to accounting principles generally accepted in the United States and to general practices within the financial services industry.

The condensed consolidated financial statements in this Quarterly Report on Form 10-Q have not been audited by an independent registered public accounting firm, but in the opinion of management, reflect all adjustments necessary for a fair presentation of the Company’s financial position and results of operations. All such adjustments were of a normal and recurring nature. The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q adopted by the Securities and Exchange Commission (“SEC”). Accordingly, the condensed consolidated financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements and should be read in conjunction with the Company’s consolidated financial statements, and notes thereto, for the year ended December 31, 2008, included in Webster’s Annual Report on Form 10-K filed with the SEC on March 2, 2009 (the “2008 Form 10-K”). Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period. Webster has evaluated subsequent events for potential recognition and/or disclosure through August 5, 2009, the date the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q were filed with the SEC.

Use of Estimates. The preparation of the condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements. Actual results could differ from those estimates. The allowance for credit losses, the fair values of financial instruments, the deferred tax asset valuation allowance and the status of goodwill evaluation are particularly subject to change.

Comprehensive Income. Comprehensive income includes all changes in equity during a period, except those resulting from transactions with shareholders. Besides net income, other components of Webster’s comprehensive income include the after tax effect of changes in the net unrealized gain/loss on securities available for sale, changes in the net actuarial gain/loss on defined benefit post-retirement benefit plans and changes in the accumulated gain/loss on effective cash flow hedging instruments. Comprehensive income for the six months ended June 30, 2009 and 2008 is reported in the accompanying condensed consolidated statements of changes in equity.

Earnings Per Share. Effective January 1, 2009, Webster adopted Financial Accounting Standards Board (“FASB”) Staff Position (“FSP”) No. Emerging Issues Task Force Issued No. (“ETIF”) 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP EITF 03-6-1”). FSP EITF 03-6-1 provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. Accordingly, effective January 1, 2009, earnings per common share is computed using the two-class method prescribed by the Statement of Financial Accounting Standards (“SFAS”) No. (128), “Earnings Per Share.” (“SFAS No. 128”) All previously reported earnings or losses per common share information has been retrospectively adjusted to conform to the new computation method.

Reclassifications. Certain items previously reported have been reclassified to conform to the current period’s condensed consolidated financial statement presentation.

NOTE 2: New Accounting Standards

Recently Issued Accounting Standards

SFAS No. 166, “Accounting for Transfers of Financial Assets, an Amendment of FASB Statement No. 140” (“SFAS 166”). SFAS 166 amends SFAS 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” to enhance reporting about transfers of financial assets, including securitizations, and where companies have continuing exposure to the risks

 

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related to transferred financial assets. SFAS 166 eliminates the concept of a “qualifying special-purpose entity” and changes the requirements for derecognizing financial assets. SFAS 166 also requires additional disclosures about all continuing involvements with transferred financial assets including information about gains and losses resulting from transfers during the period. SFAS 166 will be effective January 1, 2010 and is not expected to have a significant impact on the Company’s condensed consolidated financial statements.

SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (“SFAS 167”). SFAS 167 amends FASB Interpretation (“FIN”) No. 46 (“FIN 46”) FIN 46 (Revised December 2003), “Consolidation of Variable Interest Entities,” to change how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. SFAS 167 requires additional disclosures about the reporting entity’s involvement with variable interest entities and any significant changes in risk exposure due to that involvement as well as its affect on the entity’s financial statements. SFAS 167 will be effective January 1, 2010 and is not expected to have a significant impact on the Company’s condensed consolidated financial statements.

SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a Replacement of FASB Statement No. 162”(“SFAS 168”). SFAS 168 replaces SFAS 162, “The Hierarchy of Generally Accepted Accounting Principles” and establishes the FASB Accounting Standards Codification (the “Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by non-governmental entities in the preparation of financial statements in conformity with generally accepted accounting principles. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative guidance for SEC registrants. All guidance contained in the Codification carries an equal level of authority. All non-grandfathered, non-SEC accounting literature not included in the Codification is superseded and deemed non-authoritative. SFAS 168 will be effective for the Company’s condensed consolidated financial statements for periods ending after September 15, 2009. SFAS 168 is not expected to have a significant impact on the Company’s condensed consolidated financial statements.

Recently Adopted Accounting Standards

SFAS No. 160, “Noncontrolling Interest in Consolidated Financial Statements, an amendment of ARB Statement No. 51” (“SFAS 160”). SFAS 160 amends Accounting Research Bulletin (“ARB”) No. 51, “Consolidated Financial Statements,” to establish accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 clarifies that a non-controlling interest in a subsidiary, which is sometimes referred to as minority interest, is an ownership interest in the consolidated entity that should be reported as a component of equity in the condensed consolidated financial statements. Among other requirements, SFAS 160 requires condensed consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the non-controlling interest. It also requires disclosure, on the face of the condensed consolidated income statement, of the amounts of condensed consolidated net income attributable to the parent and to the non-controlling interest. SFAS 160 became effective for the Company on January 1, 2009 and did not have a significant impact on the Company’s condensed consolidated financial statements.

SFAS No. 161, “Disclosures About Derivative Instruments and Hedging Activities, an Amendment of FASB Statement No. 133” (“SFAS 161”). SFAS 161 amends SFAS 133, “Accounting for Derivative Instruments and Hedging Activities,” (“SFAS 133”) to amend and expand the disclosure requirements of SFAS 133 to provide greater transparency about (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedge items are accounted for under SFAS 133 and its related interpretations, and (iii) how derivative instruments and related hedged items affect an entity’s financial position, results of operations and cash flows. To meet those objectives, SFAS 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments and disclosures about credit-risk-related contingent features in derivative agreements. SFAS 161 became effective for the Company on January 1, 2009 and the required disclosures are reported in Note 17 - Derivative Financial Instruments.

SFAS No. 165, “Subsequent Events” (“SFAS 165”). SFAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued. SFAS 165 defines (i) the period after the balance sheet date during which a reporting entity’s management should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements (ii) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and (iii) the disclosures an entity should make about events or transactions that occurred after the balance sheet date. SFAS 165 became effective for the Company for periods ending after June 15, 2009. SFAS 165 did not have a significant impact on the Company’s condensed consolidated financial statements.

 

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Financial Accounting Standards Board Staff Positions and Interpretations

FSP SFAS 132R-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets” (“FSP SFAS 132R-1”). FSP SFAS 132R-1 provides guidance related to an employer’s disclosures about plan assets of defined benefit pension or other post-retirement benefit plans. Under FSP SFAS 132R-1, disclosures should provide users of financial statements with an understanding of how investment allocation decisions are made, the factors that are pertinent to an understanding of investment policies and strategies, the major categories of plan assets, the inputs and valuation techniques used to measure the fair value of plan assets, the effect of fair value measurements using significant unobservable inputs on changes in plan assets for the period and significant concentrations of risk within plan assets. The disclosures required by FSP SFAS 132R-1 will be included in the Company’s consolidated financial statements beginning with the financial statements for the year-ended December 31, 2009.

FSP SFAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP SFAS 157-4”). FSP SFAS 157-4 affirms that the objective of fair value when the market for an asset is not active is the price that would be received to sell the asset in an orderly transaction, and clarifies and includes additional factors for determining whether there has been a significant decrease in market activity for an asset when the market for that asset is not active. FSP SFAS 157-4 requires an entity to base its conclusion about whether a transaction was not orderly on the weight of the evidence. FSP SFAS 157-4 also amended SFAS 157, “Fair Value Measurements,” to expand certain disclosure requirements. The Company adopted the provisions of FSP SFAS 157-4 during the second quarter of 2009. Adoption of FSP SFAS 157-4 did not significantly impact the Company’s condensed consolidated financial statements.

FSP SFAS 115-2 and SFAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP SFAS 115-2 and SFAS 124-2”). FSP SFAS 115-2 and SFAS 124-2 (i) changes existing guidance for determining whether an impairment is other-than-temporary to debt securities and (ii) replaces the existing requirement that the entity’s management assert it has both the intent and ability to hold an impaired security until recovery with a requirement that management assert: (a) it does not have the intent to sell the security; and (b) it is more likely than not it will not have to sell the security before recovery of its cost basis. Under FSP SFAS 115-2 and SFAS 124-2, declines in the fair value of held-to-maturity and available for sale securities below their cost that are deemed to be other-than-temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of the impairment related to other factors is recognized in other comprehensive income. The Company adopted the provisions of FSP SFAS 115-2 and SFAS 124-2 during the second quarter of 2009. Adoption of FSP SFAS 115-2 and SFAS 124-2 resulted in the reclassification of $17.6 million ($11.4 million, net of tax) of non-credit related OTTI to OCI which had previously been recognized in earnings and is disclosed in Note 4 - Investment Securities.

FSP SFAS 107-1 and Accounting Principles Board Opinion No. (“APB 28-1”), “Interim Disclosures about Fair Value of Financial Instruments.” (“FSP SFAS 107-1 and APB 28-1”) FSP SFAS 107-1 and APB 28-1 amends SFAS 107, “Disclosures about Fair Value of Financial Instruments,” (“SFAS 107”) to require an entity to provide disclosures about the fair value of financial instruments in interim financial information and amends APB 28, “Interim Financial Reporting,” to require those disclosures in summarized financial information at interim reporting periods. The new interim disclosures required by FSP SFAS 107-1 and APB 28-1 are included in Note 12 - Fair Value Measurements.

FSP SFAS 141R-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies.” (“FSP SFAS 141R-1”). FSP SFAS 141R-1 amends the guidance in SFAS 141R to require that assets acquired and liabilities assumed in a business combination that arise from contingencies be recognized at fair value if fair value can be reasonably estimated. If fair value of such an asset or liability cannot be reasonably estimated, the asset or liability would generally be recognized in accordance with SFAS 5, “Accounting for Contingencies,” and FIN No. 14, “Reasonable Estimation of the Amount of a Loss.” FSP SFAS 141R-1 removes subsequent accounting guidance for assets and liabilities arising from contingencies from SFAS 141R and requires entities to develop a systematic and rational basis for subsequently measuring and accounting for assets and liabilities arising from contingencies. FSP SFAS 141R-1 eliminates the requirement to disclose an estimate of the range of outcomes of recognized contingencies at the acquisition date. For unrecognized contingencies, entities are required to include only the disclosures required by SFAS 5. FSP SFAS 141R-1 also requires that contingent consideration arrangements of an acquiree assumed by the acquirer in a business combination be treated as contingent consideration of the acquirer and should be initially and subsequently measured at fair value in accordance with SFAS 141R. FSP SFAS 141R-1 is effective for assets or liabilities arising from contingencies the Company acquires in business combinations occurring after January 1, 2009.

NOTE 3: Subsequent Events

Capital Transaction

On July 27, 2009, Webster announced that Warburg Pincus (“Warburg”), the global private equity firm agreed to invest $115 million in Webster through a direct purchase of newly issued shares of common stock, junior non-voting preferred stock, and warrants. Warburg is acquiring 11.5 million shares of common stock from Webster, upon receipt of all necessary approvals. Warburg initially funded approximately $40.2 million of its investment and received approximately 4 million shares of common stock and 3 million warrants. Upon initial funding, Warburg will have a 5.9 percent ownership of Webster’s common stock outstanding prior to bank regulatory and shareholder approvals. Warburg will fund the remaining $74.8 million and be issued the remaining common stock, junior non-voting preferred stock, and warrants, following receipt of necessary antitrust and federal bank regulatory approvals.

 

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Following the funding of the remaining portion, Warburg will have a 15.2 percent ownership of Webster’s common stock outstanding. A portion of Warburg’s investment that is funded following the receipt of regulatory approvals will initially be held in the form of junior non-voting preferred stock which will automatically convert into Webster common stock upon receiving the requisite approval of Webster’s shareholders. The preferred stock initially will have a dividend that mirrors any dividend payable on the common stock. If the requisite shareholder approval is not received, and the preferred shares are therefore still outstanding after February 28, 2010, the preferred stock’s annual non-cumulative dividend will increase to 8 percent per annum. The preferred stock is expected to qualify for Tier I capital treatment.

As part of the transaction, Warburg will receive 8.6 million seven-year Class A Warrants. The Class A Warrants will initially have a strike price of $10.00 per share, with the strike price increasing to $11.50 per share twenty four months after this transaction and to $13.00 per share forty eight months after this transaction. Warburg also will receive 5.5 million seven-year Class B Warrants with a strike price of $2.50 per share which will only become exercisable and transferable if, following the receipt of necessary regulatory approvals, shareholder approval is not received by February 28, 2010. The Class B Warrants will expire immediately upon receiving shareholder approval.

The investment held by Warburg including the exercise of the Class A and Class B warrants is subject to Warburg not owning more than 23.9% of Webster’s voting securities as calculated under applicable regulations of the Board of Governors of the Federal Reserve System.

Other

Subsequent events have been evaluated through August 5, 2009, the date financial statements are filed with the SEC. Through that date, except for the transaction previously discussed, there were no additional events requiring disclosure.

NOTE 4: Investment Securities

The following table presents a summary of the cost and fair value of Webster’s investment securities. For securities classified as available for sale, the following table shows the unrealized gains and losses (pre-tax) in accumulated other comprehensive income, by security type.

 

     As of June 30, 2009    As of December 31, 2008

(In thousands)

   Par Value    Amortized
Cost (a)(b)
   Unrealized     Estimated
Fair
Value
   Par Value    Amortized
Cost (a)(b)
   Unrealized     Estimated
Fair
Value
         Gains    Losses              Gains    Losses    

Trading:

                           

Municipal bonds and notes

              $ —                 $ 77
                                                                       

Available for Sale:

                           

Government Treasury Bills

   $ 500    $ 500    $ —      $ —        $ 500    $ 2,000    $ 1,998    $ 2    $ —        $ 2,000

Corporate bonds and notes (a)

     256,295      139,417      9,490      (34,154     114,753      359,996      159,610      —        (66,092     93,518

Equity securities (b)

     N/A      15,373      627      (1,341     14,659      N/A      30,925      2,024.00      (2,174     30,775

Mortgage-backed securities - GSE

     1,150,334      1,169,901      27,540      (2,093     1,195,348      970,905      972,323      16,592      (152     988,763

Mortgage-backed securities - other

     135,000      133,862      —        (53,250     80,612      135,000      133,814      —        (60,165     73,649
                                                                       

Total available for sale

   $ 1,542,129    $ 1,459,053    $ 37,657    $ (90,838   $ 1,405,872    $ 1,467,901    $ 1,298,670    $ 18,618    $ (128,583   $ 1,188,705
                                                                       

Held-to-maturity:

                           

Municipal bonds and notes

   $ 694,984    $ 691,240    $ 8,576    $ (17,000   $ 682,816    $ 703,944    $ 700,365    $ 9,627    $ (14,481   $ 695,511

Mortgage-backed securities - GSE

     2,003,026      2,015,508      47,904      (5,632     2,057,780      1,749,399      1,751,679      43,912      —          1,795,591

Mortgage-backed securities - other

     61,217      61,217      —        (1,108     60,109      70,493      70,467      —        (1,824     68,643
                                                                       

Total held-to-maturity

   $ 2,759,227    $ 2,767,965    $ 56,480    $ (23,740   $ 2,800,705    $ 2,523,836    $ 2,522,511    $ 53,539    $ (16,305   $ 2,559,745
                                                                       

Total Investment Securities

   $ 4,301,356    $ 4,227,018    $ 94,137    $ (114,578   $ 4,206,577    $ 3,991,737    $ 3,821,181    $ 72,157    $ (144,888   $ 3,748,527
                                                                       

 

(a) Amortized cost is net of $105.9 million of credit related other-than-temporary impairments at June 30, 2009.
(b) Amortized cost is net of $34.9 million of other-than-temporary impairments at June 30, 2009.

 

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Management evaluates all investment securities with an unrealized loss in value, whether caused by adverse interest rates, credit movements or some other factor to determine if the loss is other-than-temporary. The following table provides information on the gross unrealized losses and fair value of Webster’s investment securities with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment security category and length of time that individual investment securities have been in a continuous unrealized loss position at June 30, 2009.

 

     As of June 30, 2009  
     Less Than Twelve Months     Twelve Months or Longer     Total  

(In thousands)

   Fair Value    Unrealized
Losses
    Fair Value    Unrealized
Losses
    Fair Value    Unrealized
Losses
 

Available for Sale:

               

Corporate bonds and notes

   $ 22,745    $ (6,267   $ 71,411    $ (27,887   $ 94,156    $ (34,154

Equity securities

     7,274      (1,274     886      (67     8,160      (1,341

Mortgage-backed securities-GSE

     292,043      (2,093     —        —          292,043      (2,093

Mortgage-backed securities-other

     —        —          80,612      (53,250     80,612      (53,250
                                             

Total available for sale

   $ 322,062    $ (9,634   $ 152,909    $ (81,204   $ 474,971    $ (90,838
                                             

Held-to-maturity:

               

Municipal bonds and notes

   $ 140,110    $ (2,670   $ 223,407    $ (14,330   $ 363,517    $ (17,000

Mortgage-backed securities-GSE

     414,826      (5,632     —        —          414,826      (5,632

Mortgage-backed securities-other

     —        —          60,109      (1,108     60,109      (1,108
                                             

Total held-to-maturity

   $ 554,936    $ (8,302   $ 283,516    $ (15,438   $ 838,452    $ (23,740
                                             

Total investment securities

   $ 876,998    $ (17,936   $ 436,425    $ (96,642   $ 1,313,423    $ (114,578
                                             

The following table provides information on the gross unrealized losses and fair value of Webster’s investment securities with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment security category and length of time that individual investment securities have been in a continuous unrealized loss position at December 31, 2008.

 

     As of December 31, 2008  
     Less Than Twelve Months     Twelve Months or Longer     Total  

(In thousands)

   Fair Value    Unrealized
Losses
    Fair Value    Unrealized
Losses
    Fair Value    Unrealized
Losses
 

Available for Sale:

               

Corporate bonds and notes

   $ 5,116    $ (8,734   $ 49,651    $ (57,358   $ 54,767    $ (66,092

Equity securities

     9,028      (2,171     15      (3     9,043      (2,174

Mortgage-backed securities-GSE

     17,843      (8     45,942      (144     63,785      (152

Mortgage-backed securities-other

     50,319      (24,399     23,330      (35,766     73,649      (60,165
                                             

Total available for sale

   $ 82,306    $ (35,312   $ 118,938    $ (93,271   $ 201,244    $ (128,583
                                             

Held-to-maturity:

               

Municipal bonds and notes

   $ 273,335    $ (10,617   $ 56,820    $ (3,864   $ 330,155    $ (14,481

Mortgage-backed securities- other

     —        —          68,643      (1,824     68,643      (1,824
                                             

Total held-to-maturity

   $ 273,335    $ (10,617   $ 125,463    $ (5,688   $ 398,798    $ (16,305
                                             

Total investment securities

   $ 355,641    $ (45,929   $ 244,401    $ (98,959   $ 600,042    $ (144,888
                                             

Management conducts a formal review of investment securities on a quarterly basis for the presence of other-than-temporary impairment (“OTTI”). For the second quarter of 2009, Webster adopted FSP SFAS 115-2 and SFAS 124-2, issued by the FASB on April 9, 2009. Management assesses whether OTTI is present when the fair value of a debt security is less than its amortized cost basis at the balance sheet date. Under these circumstances as required by the new FSP, OTTI is considered to have occurred (1) if Webster intends to sell the security; (2) if it is “more likely than not” that Webster will be required to sell the security before recovery of its amortized cost basis; or (3) the present value of expected cash flows is not sufficient to recover the entire amortized cost basis. The “more likely than not” criteria is a lower threshold than the “probable” criteria used under previous guidance.

 

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The FSP requires that credit-related OTTI is recognized in earnings while non-credit related OTTI on securities not expected to be sold is recognized in other comprehensive income (“OCI”). Non-credit related OTTI is caused by other factors, including illiquidity. For securities classified as held-to-maturity (“HTM”), the amount of OTTI recognized in OCI is accreted to the credit-adjusted expected cash flow amounts of the securities over future periods. Non-credit related OTTI recognized in earnings previous to April 1, 2009 is reclassified from retained earnings to accumulated OCI as a cumulative effect adjustment. The Company adopted this FSP effective April 1, 2009. The adoption of this FSP resulted in the reclassification of $17.6 million, ($11.4 million, net of tax) of non-credit related OTTI to OCI which had previously been recognized in earnings.

As stated in Webster’s 2008 Annual Report on Form 10-K, management’s OTTI evaluation process also follows the guidance of SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities”, EITF 99-20, Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets”, and FSP No. EITF 99-20-1, Amendments to the Impairment and Interest Income Measurement Guidance of EITF Issue No. 99-20” (“FSP EITF 99-20-1”). This guidance requires the Company to take into consideration current market conditions, fair value in relationship to cost, extent and nature of change in fair value, issuer rating changes and trends, volatility of earnings, current analysts’ evaluations, all available information relevant to the collectability of debt securities, Webster’s ability and intent to hold investments until a recovery of fair value, which may be maturity, and other factors when evaluating for the existence of OTTI in its securities portfolio. FSP EITF 99-20-1 was issued on January 12, 2009 and is effective for reporting periods ending after December 15, 2008. This FSP amends EITF 99-20 by eliminating the requirement that a holder’s best estimate of cash flows be based upon those that a market participant would use. Instead, the FSP requires that OTTI be recognized as a realized loss through earnings when there has been an adverse change in the holder’s expected cash flows such that it is “probable” that the full amount will not be received. This requirement is consistent with the impairment model in SFAS 115.

In addition, the disclosure and related discussion of unrealized losses is presented pursuant to FSP FAS 115-1 and FAS 124-1, (“EITF 03-1”) and EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (“ETIF 03-1”). FSP FAS 115-1 and FAS 124-1 replaces certain impairment evaluation guidance of EITF 03-1; however, the disclosure requirements of EITF 03-1 remain in effect. This FSP addresses the determination of when an investment is considered impaired, whether the impairment is considered to be other-than-temporary, and the measurement of an impairment loss. The FSP also supersedes EITF Topic No. D-44, “Recognition of Other-Than-Temporary Impairment upon the Planned Sale of a Security Whose Cost Exceeds Fair Value”, and clarifies that an impairment loss should be recognized no later than when the impairment is deemed other-than-temporary, even if a decision to sell an impaired security has not been made.

For the three and six months ended June 30, 2009, Webster recognized OTTI of $27.1 million. The OTTI charge was comprised of a credit related OTTI charge of $23.6 million for certain pooled trust preferred securities and a $3.5 million OTTI charge on an equity security. OTTI charges were recognized in earnings for these securities as management concluded that it is more likely than not that the security will be sold before recovery of the cost basis in the security.

For all security types discussed below where no OTTI is considered necessary at June 30, 2009, management applied the criteria of FSP FAS 115-2 and FAS 124-1 to each investment individually. That is, for each security evaluated, management concluded that it does not intend to sell the security and it is not more likely than not that management will be required to sell the security before recovery of its amortized cost basis and as such OTTI was not recognized in earnings.

The following summarizes, by investment security type, the basis for the conclusion that the applicable investment securities within the Company’s available for sale portfolio were not other-than-temporarily impaired at June 30, 2009:

Corporate bonds and notes

The unrealized losses on the Company’s investment in corporate bonds and notes decreased to $34.2 million at June 30, 2009 from $66.1 million at December 31, 2008. This portfolio consists of various trust preferred securities, both pooled and single issuers, that are investment grade, below investment grade and unrated.

Single Issuer—The single issuer trust preferred portfolio totals $31.7 million in total fair value and accounts for $23.9 million of the total unrealized losses at June 30, 2009. The single issuer portfolio consists mainly of three large cap, money center financial institutions and one mid-size regional financial institution. During the quarter, two of the issuers were downgraded. However impairment was not warranted due to the issuers’ continued ability to service their debt and indications of stabilization in their capital structures, as evidenced by the U.S. Treasury’s purchase of CPP preferred stock in each institution. Unrealized losses for these institutions was $9.8 million at June 30, 2009

 

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Pooled Trust Preferred Securities—The pooled trust preferred portfolio totals $83.0 million in total fair value and accounts for $10.3 million of the total unrealized losses at June 30, 2009. The pooled trust preferred portfolio consists of various classes in fifteen CDO’s containing predominantly bank and insurance collateral. The unrealized loss is attributable primarily to changes in interest rates, including a liquidity spread premium to reflect the inactive and illiquid nature of the trust preferred securities market at this time. To determine expected credit losses, management compared amortized cost to the present value of cash flows adjusted for deferrals and defaults using the purchased discount margin. Other factors considered include an analysis of excess subordination and temporary interest shortfall coverage. Based on the valuation analysis as of June 30, 2009 management expects to fully recover amortized cost. However, additional interest deferrals and /or defaults could result in future other than temporary impairment charges. See Note 12 – Fair Value Measurements for additional information on pooled trust preferred securities.

The Company does not consider these investments to be other-than-temporarily impaired at June 30, 2009.

Equity securities

The unrealized losses on the Company’s investment in equity securities decreased to $1.3 million at June 30, 2009 from $2.2 million at December 31, 2008 after the other-than-temporary impairment charge of $3.5 million for the three and six months ended June 30, 2009. This portfolio consists primarily of investments in the common stock of small capitalization financial institutions based in New England ($12.1 million of the total fair value and $1.3 million of the total unrealized losses at June 30, 2009), auction rate preferred securities ($2.0 million of the total fair value at June 30, 2009), perpetual preferred stock of government sponsored enterprises (“GSE”) ($0.5 million of the total fair value at June 30, 2009), and perpetual preferred stock of a non-public financial institution (which during the quarter was deemed other-than-temporary impaired and has no fair value at June 30, 2009). When estimating the recovery period for equity securities in an unrealized loss position, management utilizes analyst forecasts, earnings assumptions and other company specific financial performance metrics. In addition, this assessment incorporates general market data, industry and sector cycles and related trends to determine a reasonable recovery period. The Company evaluated the near-term prospects of the issuers in relation to the severity and duration of the impairment. Based on that evaluation, management does not have the intent to sell the security and it is more likely than not it will not have to sell the security before recovery of its cost basis. The Company does not consider these investments to be other-than-temporarily impaired at June 30, 2009. For its investments in perpetual preferred stock, Webster evaluates these securities for other-than-temporary impairment using an impairment analysis that is applied to debt securities, which is consistent with SEC guidance.

Mortgage-backed securities (GSE) – The unrealized losses on the Company’s investment in residential mortgage-backed securities issued by the GSEs increased to $2.1 million at June 30, 2009 from $0.2 million at December 31, 2008. The contractual cash flows for these investments are performing as expected. As the decline in market value is attributable to changes in interest rates and not due to underlying credit deterioration, and because management does not have the intent to sell the security, and it is more likely than not it will not have to sell the security before recovery of its cost basis, the Company does not consider these investments to be other-than-temporarily impaired at June 30, 2009.

Mortgage-backed securities (other) – The unrealized losses on the Company’s investment in commercial mortgage-backed securities issued by entities other than GSEs decreased to $53.3 million at June 30, 2009 from $60.2 million at December 31, 2008. The contractual cash flows for these investments are performing as expected. As the decline in market value is attributable to changes in interest rates and not due to underlying credit deterioration, and because management does not have the intent to sell the security, and it is more likely than not it will not have to sell the security before recovery of its cost basis, the Company does not consider these investments to be other-than-temporarily impaired at June 30, 2009.

The following summarizes by investment security type the basis for the conclusion that the applicable investment securities within the Company’s held-to-maturity portfolio were not other-than-temporarily impaired at June 30, 2009:

Municipal bonds and notes – The unrealized losses on the Company’s investment in municipal bonds and notes increased to $17.0 million at June 30, 2009 from $14.5 million at December 31, 2008. Approximately $14.3 million of the $17.0 million unrealized losses at June 30, 2009 had been in an unrealized loss position for twelve consecutive months or longer as compared to $3.9 million of the $14.5 million at December 31, 2008. These securities are primarily insured AA and A rated general obligation bonds with stable ratings. The $14.3 million unrealized loss was concentrated in 221 municipal bonds and notes with a fair value of $223.4 million. Management does not have the intent to sell the security, and it is more likely than not it will not have to sell the security before recovery of its cost basis. The Company does not consider these investments to be other-than-temporarily impaired at June 30, 2009.

Mortgage-backed securities-(GSE) – The unrealized losses on the Company’s investment in residential mortgage-backed securities issued by the GSEs increased $5.6 million at June 30, 2009. The contractual cash flows for these investments are performing as expected. As the decline in market value is attributable to changes in interest rates and not due to underlying credit deterioration, and because management does not have the intent to sell the security and it is more likely than not it will not have to sell the security before recovery of its cost basis, the Company does not consider these investments to be other-than-temporarily impaired at June 30, 2009.

 

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Mortgage-backed securities-(other) – The unrealized losses on the Company’s investment in residential mortgage-backed securities issued by entities other than GSEs decreased to $1.1 million at June 30, 2009 from $1.8 million at December 31, 2008. Approximately $1.1 million at June 30, 2009 had been in an unrealized loss position for twelve consecutive months or longer as compared to $1.8 million at December 31, 2008. These securities carry AAA ratings and are currently performing as expected. The $1.1 million unrealized loss was concentrated in three securities with a total fair value of $60.1 million. Management does not have the intent to sell the security, and it is more likely than not it will not have to sell the security before recovery of its cost basis. The Company does not consider these investments to be other-than-temporarily impaired at June 30, 2009.

There were no significant credit downgrades on these held-to-maturity securities during the second quarter of 2009, and they are currently performing as anticipated. Management does not consider these investments to be other-than-temporarily impaired and management does not have the intent to sell the security, and it is more likely than not it will not have to sell the security before recovery of its cost basis. Management expects that recovery of these temporarily impaired securities will occur over the weighted-average estimated remaining life of these securities.

The amortized cost and fair value of securities at June 30, 2009, by contractual maturity, are set forth below. Actual maturities may differ from contractual maturities because certain borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

 

     Available for Sale    Held-to-Maturity

(Dollars in thousands)

   Amortized
Cost
   Fair
Value
   Amortized
Cost
   Fair
Value

Securities Available for Sale

           

Due in one year or less

   $ 500    $ 500    $ 7,154    $ 7,161

Due after one year through five years

     —        —        3,674      3,706

Due after five through ten years

     24,023      7,665      468,231      481,029

Due after ten years

     1,419,157      1,383,048      2,288,906      2,308,809
                           

Totals

   $ 1,443,680    $ 1,391,213    $ 2,767,965    $ 2,800,705
                           

For the three and six months ended June 30, 2009 and 2008, proceeds from the sale of available for sale securities were $8.0 million and $410.3 million and $4.8 million and $6.3 million, respectively. The following tables summarize the impact of the recognition of other-than-temporary impairments and net realized gains and losses on sales of securities for the three and six months ended June 30, 2009.

 

     Three Months ended June 30,  
     2009     2008  

(In thousands)

   Gains    Losses(a)(b)     Net     Gains    Losses (a)(b)(c)     Net  

Trading securities:

              

Municipal bonds and notes

   $ —      $ —        $ —        $ 145    $ (108   $ 37   

Other

     —        —          —          —        —          —     
                                              

Total trading

     —        —          —          145      (108     37   
                                              

Available for sale:

              

U.S. Government agency notes

     —        —          —          23      —          23   

Municipal bonds and notes

     —        —          —          —        —          —     

Corporate bonds and notes

     —        (35,522     (35,522     —        (41,620     (41,620

Equity securities

     97      (5,278     (5,181     80      (12,160     (12,080

Mortgage-backed securities

     —        —          —          —        —          —     
                                              

Total available for sale

     97      (40,800     (40,703     103      (53,780     (53,677
                                              

Total

   $ 97    $ (40,800   $ (40,703   $ 248    $ (53,888   $ (53,640
                                              

 

(a) Other-than-temporary impairment charges for equity securities were $3.5 million and $12.1 million for the three months ended June 30, 2009 and 2008, respectively.
(b) Other-than-temporary impairment charges for corporate bonds and notes were $23.6 million and $41.6 million for the three months ended June 30, 2009 and 2008, respectively.
(c) Losses for the three months ended June 30, 2008 excluded other-than-temporary impairments of direct investments of $1.3 million. Direct investments are included in other assets in the accompanying condensed consolidated balance sheets. There were no other-than-temporary impairments of direct investments for the three months ended June 30, 2009.

 

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     Six Months ended June 30,  
     2009     2008  

(In thousands)

   Gains    Losses(a)(b)     Net     Gains    Losses (a)(b)(c)     Net  

Trading securities:

              

Municipal bonds and notes

   $ —      $ (1   $ (1   $ 372    $ (457   $ (85

Other

     —        —          —          18      —          18   
                                              

Total trading

     —        (1     (1     390      (457     (67
                                              

Available for sale:

              

U.S. Government agency notes

     —        —          —          23      —          23   

Municipal bonds and notes

     —        —          —          —        —          —     

Corporate bonds and notes

     —        (35,522     (35,522     286      (41,678     (41,392

Equity securities

     303      (6,721     (6,418     80      (12,705     (12,625

Mortgage-backed securities

     5,696      —          5,696        —        —          —     
                                              

Total available for sale

     5,999      (42,243     (36,244     389      (54,383     (53,994
                                              

Total

   $ 5,999    $ (42,244   $ (36,245   $ 779    $ (54,840   $ (54,061
                                              

 

(a) Other-than-temporary impairment charges for equity securities were $3.5 million and $12.6 million for the six months ended June 30, 2009 and 2008, respectively.
(b) Other-than-temporary impairment charges for corporate bonds and notes were $23.6 million and $41.6 million for the six months ended June 30, 2009 and 2008, respectively.
(c) Losses for the six months ended June 30, 2008 excluded other-than-temporary impairments of direct investments of $2.1 million. Direct investments are included in other assets in the accompanying condensed consolidated balance sheets. There were no other-than-temporary impairments of direct investments for the six months ended June 30, 2009.

To the extent that changes in interest rates, credit movements and other factors that influence the fair value of investments occur, the Company may be required to record impairment charges for other-than-temporary impairment in future periods. See pages 84-89 of Webster’s 2008 Annual Report on Form 10-K for additional information regarding other-than-temporary impairment charges taken by the Company for the year ended December 31, 2008.

The following is a roll forward of the amount of credit related OTTI recognized in earnings:

 

(In thousands)

   Three months ended
June 30, 2009
    Six months ended
June 30, 2009
 

Balance of credit related OTTI at beginning of period

   $ 155,910      $ 173,496   

Additions for credit related OTTI not previously recognized

     23,610        23,610   

Reduction for securities sold

     (73,649     (73,649

Reduction for non-credit related OTTI previously recognized when there is no intent to sell and no requirement to sell before recovery of amortized cost basis (a)

     —          (17,586
                

Subtotal of additions

     (50,039     (67,625
                

Balance of credit-related OTTI at June 30, 2009

   $ 105,871      $ 105,871   
                

 

(a) Webster adopted FSP FAS 115-2 and FAS 124-2 on April 1, 2009. The reduction of non-credit related OTTI is related to the cumulative effect of the change in accounting principle of non-credit related OTTI when there is no intent to sell and no requirement to sell before recovery of the amortized cost basis of the investment.

See Note 12 - Fair Value Measurements for additional information related to the fair value of financial instruments held by Webster as of June 30, 2009.

 

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NOTE 5: Loans, Net

A summary of loans, net follows:

 

     June 30, 2009    December 31, 2008

(Dollars in thousands)

   Amount     %    Amount     %

Residential mortgage loans:

         

1-4 family

   $ 2,793,394      24.1    $ 2,939,025      24.2

Permanent - NCLC

     44,740      0.4      58,625      0.4

Construction

     27,765      0.2      42,138      0.3

Liquidating portfolio - construction loans

     6,540      0.1      18,735      0.2
                         

Total residential mortgage loans

     2,872,439      24.8      3,058,523      25.1
                         

Consumer loans:

         

Home equity loans

     2,851,008      24.6      2,952,366      24.2

Liquidating portfolio - home equity loans

     249,086      2.2      283,645      2.3

Other consumer

     27,350      0.2      28,886      0.3
                         

Total consumer loans

     3,127,444      27.0      3,264,897      26.8
                         

Commercial loans:

         

Commercial non-mortgage

     1,711,050      14.7      1,795,738      14.7

Asset-based loans

     624,075      5.4      753,143      6.2

Equipment financing

     985,430      8.5      1,022,718      8.4
                         

Total commercial loans

     3,320,555      28.6      3,571,599      29.3
                         

Commercial real estate:

         

Commercial real estate

     1,909,939      16.4      1,908,312      15.7

Commercial construction

     184,256      1.6      165,610      1.3

Residential development

     144,337      1.2      161,553      1.3
                         

Total commercial real estate

     2,238,532      19.2      2,235,475      18.3
                         

Net unamortized premiums

     13,364      0.1      14,580      0.1

Net deferred costs

     38,368      0.3      42,517      0.4
                         

Total net unamortized premiums and deferred costs

     51,732      0.4      57,097      0.5
                         

Total loans

     11,610,702      100.0      12,187,591      100.0
                         

Less: allowance for loan losses

     (305,999        (235,329  
                         

Loans, net

   $ 11,304,703         $ 11,952,262     
                         

Financial instruments with off-balance sheet risk

Webster is a party to financial instruments with off-balance sheet risk to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These instruments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the condensed consolidated balance sheets.

The following table summarizes financial instruments with off-balance sheet risk:

 

(In thousands)

   June 30,
2009
   December 31,
2008

Unused commercial letters and lines of credit

   $ 2,096,969    $ 2,196,514

Unused portion of home equity credit lines:

     

Continuing portfolio

     1,837,039      1,954,163

Liquidating portfolio

     16,226      21,792

Unadvanced portion of closed consumer construction loans

     13,066      14,611

Unadvanced portion of closed commercial construction loans

     172,727      262,234

Outstanding loan commitments

     91,745      85,291
             

Total financial instruments with off-balance sheet risk

   $ 4,227,772    $ 4,534,605
             

The interest rates for outstanding loan commitments are generally established shortly before closing. The interest rates on home equity lines of credit adjust with changes in the prime rate. At June 30, 2009, the fair value of financial instruments with off-balance sheet risk is considered insignificant to the condensed consolidated financial statements taken as a whole.

 

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NOTE 6: Allowance for Credit Losses

The disruption and volatility in the domestic and global financial and capital markets that began in 2008 continued to affect the banking industry through the second quarter of 2009. There continues to be rising unemployment, a substantial increase in delinquencies, limited refinancing options, and continued declining real estate values. Webster is not immune to some negative consequences arising from overall economic weakness and, in particular, a sharp downturn in the housing market, both locally and nationally. Decreases in real estate values could adversely affect the value of property used as collateral for loans. Adverse changes in the economy may have a negative effect on the ability of Webster’s borrowers to make timely loan payments, which would have an adverse impact on the Company’s earnings. A further increase in loan delinquencies would decrease net interest income and increase loan losses, causing potential increases in the provision and allowance for credit losses.

The allowance for credit losses is maintained at a level that management believes is adequate to absorb probable losses inherent in the loan portfolio and in unfunded credit commitments. This allowance is increased by provisions charged to operating expense and by recoveries on loans previously charged-off and is reduced by charge-offs on loans.

A summary of the changes in the allowance for credit losses follows:

 

     Three months ended June 30,     Six months ended June 30,  

(In thousands)

   2009     2008     2009     2008  

Continuing portfolio:

        

Beginning balance

   $ 226,562      $ 138,191      $ 191,426      $ 138,180   

Provision

     74,327        25,000        128,161        40,800   

Charge-offs:

        

Residential

     (4,793     (1,036     (7,757     (2,516

Consumer

     (10,242     (2,784     (16,783     (6,481

Commercial (a)

     (20,604     (8,664     (31,209     (20,103

Residential development

     (2,350     —          (2,398     —     
                                

Total charge-offs

     (37,989     (12,484     (58,147     (29,100

Recoveries

     1,259        1,290        2,719        2,117   
                                

Net charge-offs

     (36,730     (11,194     (55,428     (26,983
                                

Ending balance - continuing portfolio

   $ 264,159      $ 151,997      $ 264,159      $ 151,997   
                                

Liquidating portfolio:

        

Beginning balance

   $ 44,367      $ 42,117      $ 43,903      $ 49,906   

Provision

     10,673        —          22,539        —     

Charge-offs:

        

NCLC

     (3,387     (4,203     (5,473     (8,544

Consumer (home equity)

     (10,825     (5,450     (20,736     (8,898
                                

Total charge-offs

     (14,212     (9,653     (26,209     (17,442

Recoveries

     1,012        407        1,607        407   
                                

Net charge-offs

     (13,200     (9,246     (24,602     (17,035
                                

Ending balance - liquidating portfolio

   $ 41,840      $ 32,871      $ 41,840      $ 32,871   
                                

Ending balance - allowance for loan losses

   $ 305,999      $ 184,868      $ 305,999      $ 184,868   
                                

Reserve for unfunded credit commitments:(b)

        

Beginning balance

   $ 10,800      $ 9,500      $ 10,500      $ 9,500   

Provision

     —          —          300        —     

Reduction of provision previously recorded

     (762     —          (762     —     
                                

Ending balance reserve for unfunded commitments

   $ 10,038      $ 9,500      $ 10,038      $ 9,500   
                                

Ending balance - allowance for credit losses

   $ 316,037      $ 194,368      $ 316,037      $ 194,368   
                                

 

(a) All Business & Professional Banking loans, both commercial and commercial real estate, are considered commercial for purposes of reporting charge-offs and recoveries.
(b) The reserve for unfunded credit commitments is reported as a component of accrued expenses and other liabilities in the accompanying condensed consolidated balance sheets.

 

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NOTE 7: Goodwill and Other Intangible Assets

The following tables set forth the carrying values of goodwill and other intangible assets, net of accumulated amortization:

 

(In thousands)

   June 30,
2009
   December 31,
2008

Balances not subject to amortization:

     

Goodwill

   $ 529,887    $ 529,887

Balances subject to amortization:

     

Core deposit intangibles

     29,862      32,741

Other identified intangibles

     1,264      1,298
             

Total goodwill and other intangible assets

   $ 561,013    $ 563,926
             

Goodwill is allocated to Webster’s business segments as follows:

 

(In thousands)

   June 30,
2009
   December 31,
2008

Retail Banking

   $ 516,560    $ 516,560

Other

     13,327      13,327
             

Total goodwill

   $ 529,887    $ 529,887
             

Webster tests its goodwill for impairment annually in its third quarter. Accounting principles generally accepted in the U.S. require additional testing if events or circumstances indicate that impairment may exist. A continuing period of market disruption, or further market capitalization to book value deterioration, may result in the requirement to continue to perform testing for impairment between annual assessments. Management will continue to monitor the relationship of the Company’s market capitalization to its book value, which management attributes primarily to financial services industry-wide factors and to evaluate the carrying value of goodwill. To the extent that testing results in the identification of impairment, the Company may be required to record charges for the impairment of goodwill. Management did not perform any additional testing during the first half of 2009, but continues to monitor market conditions. For additional information regarding the valuation of goodwill and impairment charges recorded for the year ended December 31, 2008, see pages 94-95 of Webster’s 2008 Annual Report on Form 10-K.

Amortization of intangible assets for the three and six months ended June 30, 2009, totaled $1.4 million and $2.9 million, respectively. Estimated annual amortization expense of current intangible assets with finite useful lives, absent any impairment or change in estimated useful lives, is summarized below.

 

(In thousands)

    

For years ending December 31,

  

2009 (full year)

   $ 5,755

2010

     5,684

2011

     5,684

2012

     5,516

2013

     5,015

Thereafter

     6,385

 

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NOTE 8: Deposits

The following table summarizes the period end balance and the composition of deposits:

 

     June 30, 2009     December 31, 2008  

(In thousands)

   Amount    Percentage
of Total
    Amount    Percentage
of Total
 

Demand

   $ 1,595,390    12.1   $ 1,493,296    12.6

Negotiable Order of Withdrawal (NOW)

     1,954,359    14.8        1,271,569    10.7   

Money market

     1,618,910    12.3        1,356,360    11.4   

Savings

     2,778,970    21.1        2,361,169    19.9   

Health savings accounts (HSA)

     636,749    4.8        530,681    4.5   

Retail certificates of deposit

     4,422,033    33.6        4,677,615    39.3   

Brokered deposits

     168,171    1.3        194,200    1.6   
                          

Total

   $ 13,174,582    100.0   $ 11,884,890    100.0
                          

Interest expense on deposits is summarized as follows:

 

     Three months ended June 30,    Six months ended June 30,

(In thousands)

   2009    2008    2009    2008

NOW

   $ 816    $ 784    $ 1,363    $ 1,872

Money market

     5,137      8,341      10,813      19,998

Savings

     6,569      7,559      13,384      16,188

HSA

     2,707      2,621      5,380      5,427

Retail certificates of deposit

     33,443      38,915      69,000      87,583

Brokered deposits

     1,310      1,835      2,950      4,229
                           

Total

   $ 49,982    $ 60,055    $ 102,890    $ 135,297
                           

NOTE 9: Federal Home Loan Bank Advances

Advances payable to the Federal Home Loan Bank (“FHLB”) are summarized as follows:

 

     June 30, 2009    December 31, 2008

(In thousands)

   Total
Outstanding
    Callable    Total
Outstanding
   Callable

Fixed Rate:

          

0.07 % to 5.96 % due in 2009

   $ 118,000      $ 118,000    $ 792,616    $ 123,000

4.16 % to 8.44 % due in 2010

     235,058        135,000      235,099      135,000

3.19 % to 6.60 % due in 2011

     100,546        —        100,684      —  

4.00 % to 4.00 % due in 2012

     51,400        —        51,400      —  

2.40 % to 5.49 % due in 2013

     149,000        49,000      149,000      49,000

0.00 % to 6.00 % due after 2014

     6,052        —        2,398      —  
                            
     660,056        302,000      1,331,197      307,000

Hedge accounting adjustments

     (119     —        —        —  

Unamortized premiums

     3,186        —        4,799      —  
                            

Total advances

   $ 663,123      $ 302,000    $ 1,335,996    $ 307,000
                            

Webster Bank National Association (“Webster Bank”) had additional borrowing capacity from the FHLB of approximately $2.0 billion at June 30, 2009 and $1.6 billion at December 31, 2008. Advances are secured by a blanket lien against certain qualifying assets, principally residential mortgage loans. At June 30, 2009 and December 31, 2008, Webster Bank had unencumbered investment securities available to secure additional borrowings. If these securities had been used to secure FHLB advances, borrowing capacity at June 30, 2009 and December 31, 2008 would have been increased by an additional $1.6 billion and $1.0 billion, respectively. At June 30, 2009 and December 31, 2008, Webster Bank was in compliance with applicable FHLB collateral requirements.

 

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NOTE 10: Securities Sold Under Agreements to Repurchase and Other Short-term Debt

The following table summarizes securities sold under agreements to repurchase and other short-term borrowings:

 

(In thousands)

   June 30,
2009
   December 31,
2008

Securities sold under agreements to repurchase

   $ 868,402    $ 924,543

Federal Reserve term auction facility

     —        150,000

Federal funds purchased

     123,050      474,380

Treasury tax and loan

     13,987      5,748

Other

     7,500      13,180
             
     1,012,939      1,567,851

Unamortized premiums

     2,160      3,120
             

Total

   $ 1,015,099    $ 1,570,971
             

The following table sets forth certain information on short-term repurchase agreements:

 

(Dollars in thousands)

   June 30,
2009
    December 31,
2008
 

Quarter end balance

   $ 295,402      $ 251,543   

Quarter average balance

     281,508        262,563   

Highest month end balance during quarter

     295,402        261,581   

Weighted-average maturity (in months) at end of period

     0.16        0.18   

Weighted-average interest rate at end of period

     0.44     0.88

NOTE 11: Long-Term Debt

 

(In thousands)

   June 30,
2009
    December 31,
2008
 

Subordinated notes (due January 2013)

   $ 177,480      $ 200,000   

Senior notes (due April 2014)

     150,000        150,000   

Junior subordinated debt to related capital trusts (due 2027-2037):

    

Webster Capital Trust IV

     136,070        200,010   

Webster Statutory Trust I

     77,320        77,320   

People’s Bancshares Capital Trust II

     10,309        10,309   

Eastern Wisconsin Bancshares Capital Trust II

     2,070        2,070   

NewMil Statutory Trust I

     10,310        10,310   
                
     563,559        650,019   

Unamortized premiums, net

     (365     (399

Hedge accounting adjustments

     27,326        38,177   
                

Total long-term debt

   $ 590,520      $ 687,797   
                

On March 10, 2009, the Company announced the commencement of a fixed price cash tender offer, which expired on March 18, 2009, for any and all of Webster Bank’s outstanding 5.875% Subordinated Notes due in 2013. The consideration paid per $1,000 of principal was $800 plus all accrued and unpaid interest. Holders tendered $22.5 million of the outstanding principal of the subordinated debt for a total payment of $18.3 million including $0.2 million of accrued interest, resulting in a $4.3 million gain. In connection with the tender offer, the Company terminated $25 million of the fair value hedge associated with the subordinated notes. The termination of that portion of the swap resulted in a net gain of $1.9 million. Both the net gain from the tender offer and the termination of the fair value hedge were recorded in the three months ended March 31, 2009. The pro-rata share of the gain not directly related to the debt redemption was $188,480 which was deferred and is being amortized over the remaining life of the subordinated notes. A total gain of $6.2 million was recognized in the accompanying condensed consolidated statement of operations for the six months ended June 30, 2009.

On May 28, 2009, the Company announced the commencement of an exchange offer, which expired on June 24, 2009, with holders of Webster’s 8.50% Series A Non-Cumulative Perpetual Convertible Preferred Stock (the “Series A Preferred Stock”) and Webster Capital Trust IV’s 7.65% Fixed to Floating Rate Trust Preferred Securities (the “Trust Preferred Securities”). See Note 13 Shareholders’ Equity for additional information related to the effect of the exchange offer on the Series A Preferred Stock.

 

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The Company offered 82.0755 shares of its common stock plus accrued distributions in exchange for each $1,000 liquidation amount of the Trust Preferred Securities. Following the exchange, the Trust Preferred Securities held by Webster were used to liquidate Webster’s junior subordinated debentures of Webster Capital Trust IV. The exchange resulted in the liquidation of $63.9 million of Webster Capital Trust IV’s junior subordinated debentures and the issuance of 5.2 million shares of common stock at a fair value of $36.7 million net of issuance costs. The extinguishment of the Trust Preferred Securities resulted in the recognition of a $24.3 million net gain in the accompanying condensed consolidated statement of operations for the three and six months ended June 30, 2009.

NOTE 12: Fair Value Measurements

SFAS No. 157, Fair Value Measurements” (“SFAS 157”) establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

 

   

Level 1 Inputs - Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

 

   

Level 2 Inputs - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.

 

   

Level 3 Inputs - Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

A description of the valuation methodologies used for financial instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

Securities Available for Sale. Equity securities and government treasury bills are reported at fair value utilizing Level 1 inputs based upon quoted market prices. Other securities and certain preferred equity securities classified as available for sale are reported at fair value utilizing Level 2 inputs. For these securities, Webster obtains fair value measurements from various sources and utilizes matrix pricing to calculate fair value. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. Any investment security not valued based upon the methods previously discussed are considered Level 3. The Level 3 fair values are determined using unobservable inputs and included pooled trust preferred securities transferred to Level 3 in the third quarter of 2008. The market for pooled trust preferred securities has been relatively inactive for several quarters as secondary trading in these securities has dropped to a fraction of the levels experienced prior to the current financial market disruption. There has been no new issuance of pooled trust preferred securities since 2007 and few market participants willing or able to transact in these securities. Management utilizes an internally developed model to fair value the pooled trust preferred securities. The model utilizes certain assumptions which management evaluates for reasonableness. Management evaluates various factors for pooled trust preferred securities, including actual and estimated deferral and default rates that are implied from the underlying performance of the issuers in the structure. Contractual cash flows are reduced by both actual and expected deferrals and defaults and discounted at a rate that incorporates both liquidity and credit risk by credit rating to determine the fair market value of each security. Discount rates are implied from observable and unobservable inputs. The uncertainty in evaluating the credit risk in these securities required the Company to consider and weigh various inputs (see Note 4 for additional information).

Trading Securities. Securities classified as trading are reported at fair value utilizing Level 2 inputs in the same manner as described above for securities available for sale.

Derivatives. Derivatives are reported at fair value utilizing Level 2 inputs obtained from third parties to value interest rate swaps and caps. Fair values are compared to other independent third party values for reasonableness.

Impaired Loans. Certain impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from the collateral. When the fair value of the collateral is based on an observable market price or certain appraised values, Webster records the impaired loan using Level 2 inputs. For all other impairments, Webster records the impairment using Level 3 inputs. Loans totaling $587.2 million were deemed impaired at June 30, 2009. At June 30, 2009 $483.1 million were reported at amortized cost and $104.1 million was reported at fair value. At June 30, 2009 a valuation allowance of $23.0 million was maintained for loans reported at fair value.

Loans Held for Sale. Loans held for sale are required to be carried at the lower of cost or fair value. Under SFAS 157, market value is to represent fair value. As of June 30, 2009, Webster had $113.9 million of loans held for sale. Management obtains quotes or bids on all or part of these loans directly from the purchasing financial institutions which are considered to be Level 2 inputs. At June 30, 2009, $68.6 million of loans held for sale were recorded at cost and $45.3 million of loans held for sale were recorded at fair value.

Servicing Assets. Servicing assets are carried at cost and are subject to impairment testing. Fair value is estimated utilizing market based assumptions for loan prepayment speeds, servicing costs, discount rates and other economic factors which are considered to be Level 3 inputs. Where the carrying value exceeds fair value, a valuation allowance is established through a charge to non-interest

 

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income and subsequently adjusted for changes in fair value. For those servicing assets that experienced a change in fair value, Webster reduced its valuation allowance and recorded a valuation allowance recovery of $17,350 and $85,792 as a component of mortgage banking activities in the accompanying condensed consolidated statements of operations for the three and six months ended June 30, 2009.

The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of June 30, 2009, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

 

(In thousands)

   Balance as of
June 30, 2009
   Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
   Significant Other
Observable Inputs
(Level 2)
   Significant
Unobservable Inputs
(Level 3)

Financial assets held at fair value:

           

Available for sale securities:

           

Government treasury bills

   $ 500    $ 500    $ —      $ —  

Corporate bonds and notes

     114,753      —        31,713      83,040

Equity securities

     14,659      14,659      —        —  

Mortgage-backed securities-GSE

     1,195,348      —        1,195,348      —  

Mortgage-backed securities-other

     80,612      —        80,612      —  
                           

Total securities

     1,405,872      15,159      1,307,673      83,040

Derivatives instruments

     58,983      —        58,983      —  
                           

Total financial assets held at fair value

   $ 1,464,855    $ 15,159    $ 1,366,656    $ 83,040
                           

Financial liabilities held at fair value:

           

Derivative instruments

   $ 29,436    $ —      $ 29,436    $ —  
                           

The following table shows a reconciliation of the beginning and ending balances for Level 3 assets for the three and six months ended June 30, 2009:

 

     Three Months Ended
June 30, 2009
    Six Months Ended
June 30, 2009
 

Level 3 - available for sale securities, beginning of period

   $ 69,355      $ 62,697   

Change in unrealized losses included in other comprehensive income

     32,154        38,374   

Realized loss on sale of available for sale securities

     (11,912     (11,912

Net other-than-temporary impairment charges (a)

     (6,024     (6,024

Purchases, sales, issuances and settlements, net

     (533     (95
                

Level 3 - available for sale securities, end of period

   $ 83,040      $ 83,040   
                

 

(a) Net other-than-temporary impairment charges includes the net impact of the $23.6 million credit related OTTI charge taken in the second quarter, offset by the $17.6 million cumulative effect of the change in accounting principle for the adoption of FSP SFAS 115-2 and SFAS 124-2. See Note 4 – Investment Securities for additional information regarding these charges.

For the three and six months ended June 30, 2009 the change in the unrealized loss on investments held as of June 30, 2009 was $20.9 million and $40.6 million, respectively, after the impact of net credit related OTTI charges.

Certain assets and liabilities are measured at fair value on a non-recurring basis in accordance with GAAP. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period as well as assets that are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).

 

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The following table summarizes financial assets and financial liabilities measured at fair value on a non-recurring basis as of June 30, 2009, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

 

(In thousands)

   Balance as of
June 30, 2009
   Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
   Significant Other
Observable Inputs
(Level 2)
   Significant
Unobservable Inputs
(Level 3)

Assets:

           

Impaired loans

   $ 104,099    $ —      $ —      $ 104,099

Loans held for sale

     45,338      —        —        45,338

Servicing assets

     91      —        —        91

Certain non-financial assets measured at fair value on a non-recurring basis include foreclosed assets (upon initial recognition or subsequent impairment), non-financial assets and non-financial liabilities measured at fair value in the second step of a goodwill impairment test, and intangible assets and other non-financial long-lived assets measured at fair value for impairment assessment.

Foreclosed property and repossessed assets consists of loan collateral which has been repossessed through foreclosure. This collateral is comprised of commercial and residential real estate and other non-real estate property, including equipment and vehicles. Foreclosed property and repossessed assets are recorded as held for sale initially at the lower of the loan balance or fair value of the collateral less estimated selling costs. For the three and six months ended June 30, 2009, foreclosed properties and repossessed assets with a fair value of $11.0 million and $21.3 million were transferred to foreclosed property and repossessed assets from loans. Prior to the transfer, the assets were written down to fair value through a charge to the allowance for loan losses. For the three and six months ended June 30, 2009, valuation adjustments to reflect foreclosed properties and repossessed assets at fair value less cost to sell resulted in a charge to the allowance for loan losses of $2.6 million and $4.8 million, respectively. Subsequent to foreclosure, valuations are updated periodically, and the assets may be marked down further, reflecting a new cost basis. Subsequent valuation adjustments to foreclosed properties and repossessed assets totaled $2.8 million and $6.3 million, respectively, reflective of continued deterioration in market values. Fair value measurements may be based upon appraisals or third-party price opinions and, accordingly, those measurements are classified as Level 2. Other fair value measurements may be based on internally developed pricing methods, and those measurements are classified as Level 3.

SFAS 107 requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. A detailed description of the valuation methodologies used in estimating the fair value of financial instruments is set forth in the 2008 Form 10-K.

 

     June 30, 2009    December 31, 2008

(In thousands)

   Carrying
Amount
   Estimated
Fair Value
   Carrying
Amount
   Estimated
Fair Value

Assets:

           

Cash and due from depository institutions

   $ 254,638    $ 254,638    $ 259,208    $ 259,208

Short-term investments

     8,216      8,216      22,154      22,154

Investment securities

     4,173,837      4,206,577      3,711,293      3,748,527

Loans held for sale

     113,936      113,936      24,524      24,665

Loans, net

     11,304,703      11,024,084      11,952,262      11,623,835

Mortgage servicing rights

     5,753      10,708      4,358      8,304

Derivative instruments

     58,983      58,983      86,612      86,612

Liabilities:

           

Deposits other than time deposits

   $ 8,584,378    $ 8,109,714    $ 7,013,075    $ 6,601,991

Time deposits

     4,590,204      4,636,822      4,871,815      4,941,462

Securities sold under agreements to repurchase and other short-term debt

     1,015,099      1,031,755      1,570,971      1,561,748

FHLB advances and other long-term debt

     1,253,643      1,127,177      2,023,793      1,752,679

Derivative instruments

     29,436      29,436      53,246      53,246

 

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Table of Contents

NOTE 13: Shareholders’ Equity

Accumulated other comprehensive loss is comprised of the following components:

 

(In thousands)

   June 30,
2009
    December 31,
2008
 

Unrealized loss on available for sale securities, net of tax

   $ (34,568   $ (71,530

Unrealized loss upon transfer of available for sale securities to held-to-maturity, net of tax and amortization

     (903     (1,039

Net actuarial loss and prior service cost for pension and other postretirement benefit plans, net of tax

     (27,707     (28,823

Unrealized loss on cash flow hedge

     (5,659     (7,441

Deferred gain on hedge accounting transactions

     1,965        2,923   
                

Total

   $ (66,872   $ (105,910
                

The following table summarizes the components of other comprehensive income (loss):

 

     Three months ended June 30,  
     2009     2008  

(In thousands)

   Before tax     Tax (expense)
benefit
    Net of tax     Before tax     Tax (expense)
benefit
    Net of tax  

Other comprehensive income (loss):

            

Net unrealized (loss) gain on securities available for sale

   $ 74,478      $ (26,067   $ 48,411      $ (1,364   $ (602   $ (1,966

Amortization of deferred hedging gain

     (160     56        (104     (164     57        (107

Realized portion of deferred hedging gain

     (674     —          (674     —          —          —     

Amortization of unrealized loss on securities transferred to held to maturity

     116        (41     75        34        (12     22   

Unrealized gain on cash flow hedge

     2,247        (786     1,461        3,266        (1,143     2,123   

Amortization of net actuarial loss and prior service cost

     902        (316     586        18        (7     11   
                                                

Total other comprehensive income (loss)

   $ 76,909      $ (27,154   $ 49,755      $ 1,790      $ (1,707   $ 83   
                                                

 

     Six months ended June 30,  
     2009     2008  

(In thousands)

   Before tax     Tax (expense)
benefit
    Net of tax     Before tax     Tax (expense)
benefit
    Net of tax  

Other comprehensive (loss) income:

            

Net unrealized (loss) gain on securities available for sale

   $ 74,371      $ (25,978   $ 48,393      $ (47,745   $ 15,421      $ (32,324

Amortization of deferred hedging gain

     (437     153        (284     (332     116        (216

Realized portion of deferred hedging gain

     (674     —          (674     —          —          —     

Amortization of unrealized loss on securities transferred to held to maturity

     209        (73     136        231        (81     150   

Unrealized gain on cash flow hedge

     2,741        (959     1,782        3,266        (1,143     2,123   

Amortization of net actuarial loss and prior service cost

     1,717        (601     1,116        36        (13     23   
                                                

Total other comprehensive income (loss)

   $ 77,927      $ (27,458   $ 50,469      $ (44,544   $ 14,300      $ (30,244
                                                

Exchange Offer

On May 28, 2009, the Company announced the commencement of an exchange offer, which expired on June 24, 2009, with holders of the Series A Preferred Stock and the Trust Preferred Securities. See Note 11 - Long-Term Debt for additional information related to the effect of the exchange offer on the Trust Preferred Securities.

The Company offered 35.8046 shares of its common stock and $350 in cash as consideration for each share of the Series A Preferred Stock tendered. A total of 168,500 shares of Series A Preferred Stock were accepted, resulting in the issuance of 6.03 million common shares at a fair value of $43.7 million and delivery of $59.0 million in cash. The exchange was accounted for as a redemption resulting in the de-recognition of the $168.5 million carrying amount of Series A Preferred Stock tendered,

 

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elimination of $5.5 million of original issuance costs, recognition of the $43.6 million excess of the fair value of the common stock issued over par, net of issuance costs, as additional paid in capital (“APIC”), and the recognition of the $58.8 million excess of the carrying amount of the preferred stock retired over the fair value of the common shares issued and cash delivered as an increase to retained earnings.

NOTE 14: Regulatory Matters

Capital guidelines issued by the Federal Reserve Board and the Office of the Comptroller of Currency of the United States (“OCC”) require Webster and its banking subsidiary to maintain certain minimum ratios, as set forth below. At June 30, 2009, Webster and Webster Bank, were deemed to be “well capitalized” under the regulations of the Federal Reserve Board and the OCC, respectively, and in compliance with the applicable capital requirements.

The following table provides information on the capital ratios of the Company and Webster Bank:

 

     Actual     Capital Requirements     Well Capitalized  

(Dollars in thousands)

   Amount    Ratio     Amount    Ratio     Amount    Ratio  

At June 30, 2009

               

Webster Financial Corporation

               

Total risk-based capital

   $ 1,776,752    13.9   $ 1,020,044    8.0   $ 1,275,055    10.0

Tier 1 capital

     1,508,948    11.8        510,020    4.0        765,030    6.0   

Tier 1 leverage capital ratio

     1,508,948    8.9        677,105    4.0        846,382    5.0   

Webster Bank, N.A.

               

Total risk-based capital

   $ 1,554,455    12.3   $ 1,012,792    8.0   $ 1,265,991    10.0

Tier 1 capital

     1,287,605    10.2        506,396    4.0        759,594    6.0   

Tier 1 leverage capital ratio

     1,287,605    7.6        674,318    4.0        842,898    5.0   

At December 31, 2008

               

Webster Financial Corporation

               

Total risk-based capital

   $ 1,982,426    15.0   $ 1,054,173    8.0   $ 1,317,716    10.0

Tier 1 capital

     1,656,710    12.6        527,086    4.0        790,629    6.0   

Tier 1 leverage capital ratio

     1,656,710    9.7        681,592    4.0        851,990    5.0   

Webster Bank, N.A.

               

Total risk-based capital

   $ 1,572,893    12.1   $ 1,044,134    8.0   $ 1,305,167    10.0

Tier 1 capital

     1,248,727    9.6        522,067    4.0        783,100    6.0   

Tier 1 leverage capital ratio

     1,248,727    7.4        678,732    4.0        848,415    5.0   

NOTE 15: (Loss) Earnings Per Common Share

SFAS 128 provides the two-class method earnings allocation formula that determines earnings per share for each class of stock according to dividends declared and participation rights in undistributed earnings. In June 2008, the FASB issued FSP EITF 03-6-1, which clarifies that share-based payment awards that entitle their holders to receive nonforfeitable dividends before vesting should be considered participating securities. As participating securities, these instruments should be included in the earnings allocation in computing basic earnings per share under the two-class method described in SFAS 128. The FSP requires all prior period earnings per share data presented to be adjusted retrospectively to conform with the provisions of this pronouncement. FSP EITF 03-6-1 was effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those years. Accordingly, the Company adopted FSP EITF 03-6-1 effective January 1, 2009.

 

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The following table presents undistributed and distributed earnings (losses) allocated to common shareholders.

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 

(In thousands)

   2009    2008     2009     2008  

Net income (loss) applicable to common shareholders

   $ 16,799    $ (28,940   $ (4,754   $ (4,575

Less: income (loss) from discontinued operations; net of tax

     313      (439     313        (2,563
                               

Income (loss) from continuing operations applicable to common shareholders

     16,486      (28,501     (5,067     (2,012

Less:

         

Dividends paid - common shareholders

     522      15,724        1,043        31,448   

Dividends paid - participating shares

     5      23        11        46   
                               

Undistributed income (loss) from continuing operations

   $ 15,959    $ (44,248   $ (6,121   $ (33,506

Income (loss) from continuing operations available to common shareholders

         

Distributed earnings to common shareholders

   $ 522    $ 15,724      $ 1,043      $ 31,448   

Allocation of undistributed earnings (losses) to common shareholders

     15,795      (44,248     (6,121     (33,506
                               

Income (loss) from continuing operations available to common shareholders

   $ 16,317    $ (28,524   $ (5,078   $ (2,058

Income (loss) from discontinued operations available to common shareholders

         

Distributed earnings to common shareholders

   $ —      $ —        $ —        $ —     

Allocation of undistributed income (loss) from discontinued operations available to common shareholders

     309      (439     309        (2,563
                               

Income (loss) from discontinued operations available to common shareholders

   $ 309    $ (439   $ 309      $ (2,563
                               

Undistributed earnings (loss) available to common shareholders is calculated by dividing weighted average shares outstanding by the total of weighted shares outstanding plus weighted average of unvested participating securities multiplied by undistributed earnings. The weighted average number of unvested participating securities for the three and six months ended June 30, 2009 and 2008 is 549,846, 562,394, 408,218 and 408,940, respectively. The weighted average number of participating securities at June 30, 2009 was deemed to be anti-dilutive for the six month period ended June 30, 2009 and therefore has been excluded from the calculation of basic and dilutive loss per share for the six months ended June 30, 2009.

The following table shows weighted average shares outstanding and diluted shares outstanding for the three month period ended:

 

(In thousands)

   June 30,
2009
   June 30,
2008

Weighted average basic shares outstanding:

   53,398    52,017

Add: dilutive effects of stock options

   —      —  
         

Weighted average shares outstanding, including the effects of dilutive common shares

   53,398    52,017
         

Options to purchase 3.2 million and 2.0 million shares that were outstanding at June 30, 2009 and 2008, respectively, were excluded from the calculation of diluted earnings per share because the options’ exercise price was greater than the average market price of the shares.

 

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The following table provides the calculation of basic and diluted earnings per common share from continuing and discontinued operations.

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 

(In Thousands except share information)

   2009    2008     2009     2008  

Basic:

         

Income (loss) from continuing operations available to common shareholders

   $ 16,317    $ (28,524   $ (5,078   $ (2,058

Shares outstanding (average)

     53,398      52,017        52,478        52,009   
                               

Basic earnings (loss) per common share from continuing operations

   $ 0.30    $ (0.55   $ (0.10   $ (0.04
                               

Income (loss) from discontinued operations available to common shareholders

   $ 309    $ (439   $ 309      $ (2,563

Shares outstanding (average)

     53,398      52,017        52,478        52,009   
                               

Basic earnings (loss) per common share from discontinued operations

   $ 0.01    $ (0.01   $ 0.01      $ (0.05
                               

Basic earnings (loss) earnings per common share

   $ 0.31    $ (0.56   $ (0.09   $ (0.09
                               

Diluted:

         

Income (loss) from continuing operations available to common shareholders

   $ 16,317    $ (28,524   $ (5,078   $ (2,058

Diluted shares (average)

     53,398      52,017        52,478        52,009   
                               

Diluted earnings (loss) per common share from continuing operations

   $ 0.30    $ (0.55   $ (0.10   $ (0.04
                               

Income (loss) from discontinued operations available to common shareholders

   $ 309    $ (439   $ 309      $ (2,563

Diluted shares (average)

     53,398      52,017        52,478        52,017   
                               

Diluted earnings (loss) per common share from discontinued operations

   $ 0.01    $ (0.01   $ 0.01      $ (0.05
                               

Diluted earnings (loss) per common share

   $ 0.31    $ (0.56   $ (0.09   $ (0.09
                               

Upon adoption, there was no change for the continuing operations basic and diluted income per common share for the three and six month periods ended June 30, 2008. Basic income and dilutive income per share was unchanged for discontinued operations.

A total of 3,570,347 and 2,749,893 shares at June 30, 2009 and 2008, respectively, represented by non-participating stock options granted, and 2,075,779 and 3,282,276 shares represented by convertible preferred stock and warrants, respectively, at June 30, 2009 and 8,281,035 in convertible preferred at June 30, 2008 are not included in the above calculations as they are anti-dilutive. There were no warrants at June 30, 2008 for purposes of calculating earnings per share for the three and six months ended June 30, 2008.

NOTE 16: Business Segments

For purposes of reporting segment results, Webster has four business segments: Commercial Banking, Retail Banking, Consumer Finance and Other. Commercial Banking includes middle market, asset-based lending, commercial real estate equipment finance, wealth management and insurance premium finance lines of business. Retail Banking includes retail banking, business and professional banking and investment services. Consumer Finance includes residential mortgage, consumer lending and mortgage banking activities. Other includes HSA Bank and Government Finance. As of January 2009, Webster’s equipment finance, wealth management and insurance premium finance lines of business, previously reported within the Company’s Other segment were realigned within the Company’s organizational hierarchy to be included within the Commercial Banking segment, while certain support functions were realigned within the corporate functions.

The Corporate and reconciling amounts include the Company’s Treasury unit, the results of discontinued operations and the amounts required to reconcile profitability metrics to GAAP reported amounts. For further discussion of Webster’s business segments, see pages 46-49 in this report and Note 22, “Business Segments”, on pages 125-127 of Webster’s 2008 Annual Report on Form 10-K.

 

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Table of Contents

The following tables present the operating results and total assets for Webster’s reportable segments for the three and six months ended June 30, 2009 and 2008. The results for the three and six months ended June 30, 2009 incorporate the allocation of the increase in the provision for credit losses and income tax benefit to each of Webster’s business segments, resulting in a reduction in the income tax expense (benefit).

Three months ended June 30, 2009

 

(In thousands)

   Commercial
Banking
   Retail
Banking
    Consumer
Finance
   Other    Total
Reportable
Segments
   Corporate &
Reconciling
Amounts
    Consolidated
Total
 

Net interest income

   $ 36,904    $ 42,258      $ 30,940    $ 4,521    $ 114,623    $ 4,665      $ 119,288   

Provision for credit losses

     10,764      2,336        5,747      —        18,847      66,153        85,000   
                                                    

Net interest income after provision

     26,140      39,922        25,193      4,521      95,776      (61,488     34,288   

Non-interest income

     8,921      30,033        5,563      2,798      47,315      (11,937     35,378   

Non-interest expense

     25,085      71,568        15,600      6,385      118,638      11,439        130,077   
                                                    

Income (loss) from continuing operations before income taxes

     9,976      (1,613     15,156      934      24,453      (84,864     (60,411

Income tax expense (benefit)

     7,114      (1,110     10,939      245      17,188      (45,724     (28,536
                                                    

Income (loss) from continuing operations

     2,862      (503     4,217      689      7,265      (39,140     (31,875

Gain from discontinued operations

     —        —          —        —        —        313        313   
                                                    

Consolidated net income (loss)

     2,862      (503     4,217      689      7,265      (38,827     (31,562

Less noncontrolling interest

     —        —          —        —        —        —          —     
                                                    

Net income (loss) attributable to Webster Financial Corporation

   $ 2,862    $ (503   $ 4,217    $ 689    $ 7,265    $ (38,827   $ (31,562
                                                    

Total assets at period end

   $ 4,758,010    $ 1,587,964      $ 6,301,270    $ 23,637    $ 12,670,881    $ 4,781,695      $ 17,452,576   
                                                    

Three months ended June 30, 2008, as reclassified (a)

 

(In thousands)

   Commercial
Banking (a)
    Retail
Banking
    Consumer
Finance
    Other (a)    Total
Reportable
Segments
    Corporate &
Reconciling
Amounts (a)
    Consolidated
Total
 

Net interest income

   $ 34,704      $ 53,947      $ 29,807      $ 3,953    $ 122,411      $ 3,275      $ 125,686   

Provision for credit losses

     5,311        1,164        3,443        —        9,918        15,082        25,000   
                                                       

Net interest income after provision

     29,393        52,783        26,364        3,953      112,493        (11,807     100,686   

Non-interest income

     9,603        31,615        3,429        2,500      47,147        (52,896     (5,749

Non-interest expense

     31,110        71,045        17,844        6,192      126,191        11,316        137,507   
                                                       

Income (loss) from continuing operations before income taxes

     7,886        13,353        11,949        261      33,449        (76,019     (42,570

Income tax (benefit) expense

     (6,390     (5,510     (5,330     164      (17,066     2,781        (14,285
                                                       

Income (loss) from continuing operations

     14,276        18,863        17,279        97      50,515        (78,800     (28,285

Loss from discontinued operations

     —          —          —          —        —          (439     (439
                                                       

Consolidated net income (loss)

     14,276        18,863        17,279        97      50,515        (79,239     (28,724

Less noncontrolling interest

     —          —          1        —        1        —          1   
                                                       

Net income (loss) attributable to Webster Financial Corporation

   $ 14,276      $ 18,863      $ 17,278      $ 97    $ 50,514      $ (79,239   $ (28,725
                                                       

Total assets at period end

   $ 5,159,166      $ 1,590,234      $ 7,030,345      $ 23,635    $ 13,803,380      $ 3,675,256      $ 17,478,636   
                                                       

 

(a) As of January 1, 2009 management realigned its business segments balances for Webster’s equipment finance, wealth management and insurance premium finance operating units, previously reported as a component of the Other reporting segment. Each has been reclassified to be included within the Commercial reporting segment while certain support functions were realigned within the corporate function. The 2008 balances were reclassified for comparability to the 2009 presentation.

 

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Six months ended June 30, 2009

 

(In thousands)

   Commercial
Banking
   Retail
Banking
    Consumer
Finance
   Other    Total
Reportable
Segments
   Corporate &
Reconciling
Amounts
    Consolidated
Total
 

Net interest income

   $ 72,696    $ 86,576      $ 63,058    $ 7,503    $ 229,833    $ 7,652      $ 237,485   

Provision for credit losses

     20,255      4,293        10,636   

 

—  

     35,184      115,816        151,000   
                                                    

Net interest income after provision

     52,441      82,283        52,422      7,503      194,649      (108,164     86,485   

Non-interest income

     17,436      57,704        7,555      5,936      88,631      862        89,493   

Non-interest expense

     51,169      142,899        31,186      12,880      238,134      9,959        248,093   
                                                    

Income (loss) from continuing operations before income taxes

     18,708      (2,912     28,791      559      45,146      (117,261     (72,115

Income tax expense (benefit)

     7,557      (1,176     11,629      226      18,236      (47,365     (29,129
                                                    

Income (loss) from continuing operations

     11,151      (1,736     17,162      333      26,910      (69,896     (42,986

Gain from discontinued operations

     —        —          —        —        —        313        313   
                                                    

Consolidated net income (loss)

     11,151      (1,736     17,162      333      26,910      (69,583     (42,673

Less noncontrolling interest

     —        —          13      —        13      —          13   
                                                    

Net income (loss) attributable to Webster Financial Corporation

   $ 11,151    $ (1,736   $ 17,149    $ 333    $ 26,897    $ (69,583   $ (42,686
                                                    

Total assets at period end

   $ 4,758,010    $ 1,587,964      $ 6,301,270    $ 23,637    $ 12,670,881    $ 4,781,695      $ 17,452,576   
                                                    

Six months ended June 30, 2008, as reclassified (a)

 

(In thousands)

   Commercial
Banking (a)
    Retail
Banking
    Consumer
Finance
    Other (a)     Total
Reportable
Segments
    Corporate &
Reconciling
Amounts (a)
    Consolidated
Total
 

Net interest income

   $ 69,481      $ 110,174      $ 62,038      $ 7,683      $ 249,376      $ 1,166      $ 250,542   

Provision for credit losses

     9,616        2,400        6,881        —          18,897        21,903        40,800   
                                                        

Net interest income after provision

     59,865        107,774        55,157        7,683        230,479        (20,737     209,742   

Non-interest income

     18,232        61,478        7,228        4,817        91,755        (49,657     42,098   

Non-interest expense

     52,729        141,034        36,025        12,704        242,492        10,919        253,411   
                                                        

Income (loss) from continuing operations before income taxes

     25,368        28,218        26,360        (204     79,742        (81,313     (1,571

Income tax (benefit) expense

     (291     (323     (302     2        (914     932        18   
                                                        

Income (loss) from continuing operations

     25,659        28,541        26,662        (206     80,656        (82,245     (1,589

Loss from discontinued operations

     —          —          —          —          (8     (2,563     (2,563
                                                        

Consolidated net income (loss)

     25,659        28,541        26,662        (206     80,664        (84,808     (4,152

Less noncontrolling interest

     —          —          (8     —          —          —          (8
                                                        

Net income (loss) attributable to Webster Financial Corporation

   $ 25,659      $ 28,541      $ 26,670      $ (206   $ 80,648      $ (84,808   $ (4,144
                                                        

Total assets at period end

   $ 5,159,166      $ 1,590,234      $ 7,030,345      $ 23,635      $ 13,803,380      $ 3,675,256      $ 17,478,636   
                                                        

 

(a) As of January 1, 2009 management realigned its business segments balances for Webster’s equipment finance, wealth management and insurance premium finance operating units, previously reported as a component of the Other reporting segment. Each has been reclassified to be included within the Commercial reporting segment while certain support functions were realigned within the corporate function. The 2008 balances were reclassified for comparability to the 2009 presentation.

NOTE 17: Derivative Financial Instruments

The fair value of derivative positions outstanding is included in accrued interest receivable and other assets and accrued expense and other liabilities in the accompanying condensed consolidated balance sheets and in the net change in each of these financial statement line items in the accompanying condensed consolidated statements of cash flows.

The Company utilizes interest rate swaps and caps to mitigate exposure to interest rate risk and to facilitate the needs of its customers. The Company’s objectives for utilizing these derivative instruments are described below:

The Company has entered into an interest rate swap contract with a total notional amount of $150.0 million. The interest rate swap contract was designated as a hedging instrument in a fair value hedge with the objective of hedging the quarterly interest payments on the Company’s $150.0 million 5.125% fixed rate senior notes throughout the ten-year period beginning in April 2004 and ending in April 2014 from the risk of variability of those payments resulting from changes in the three and six month LIBOR interest rate. Under the swap, the Company will receive a fixed interest rate of 4.602% and pay a variable interest rate of three month LIBOR on a total notional amount of $150.0 million with quarterly settlements.

 

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The Company entered into two interest rate swap contracts on its subordinated notes with a total notional amount of $200 million. The interest rate swap contracts were designated as hedging instruments in a fair value hedge with the objective of converting the interest expense to floating rate from fixed rate on the Company’s $200 million 5.875% fixed rate subordinated notes throughout the ten-year period beginning May and July 2003, respectively, and ending in January 2013 from changes in the fair value of the subordinated notes as a result of movements in market interest rates. On March 13, 2009, $25.0 million of the interest rate swaps on the subordinated notes was terminated in connection with the early extinguishment of $22.5 million of Webster Bank’s subordinated notes. The termination of the swap resulted in the recognition of a net gain of $1.9 million. The pro-rata share of the gain not directly related to the debt redemption has been deferred and will be amortized over the remaining life of the liability. Under the swaps, the Company will pay a variable interest rate of three month LIBOR and receive a weighted average fixed interest rate of 4.25% on a total notional amount of $175.0 million.

During April 2008, the Company entered into an interest rate swap contract on an FHLB advance with a total notional amount of $100 million. The interest rate swap contract was designated as a cash flow hedge with the objective of making the quarterly interest payments fixed on the Company’s variable-rate (three month LIBOR plus a margin of three basis points) FHLB advance effective April 2008 and ending in April 2013 from the risk of variability of those payments resulting from changes in the three month LIBOR interest rate. On April 30, 2009 the cash flow swap contract for the FHLB advance was terminated. At the time of termination, the swap had an unrealized loss of $5.9 million, which will be amortized over the remaining life of the advance.

The Company entered into two interest rate swap contracts on its FHLB advances with a total notional amount of $200 million. The interest rate swap contracts were designated as hedging instruments in a fair value hedge with the objective of converting the interest expense to a floating rate from fixed rate on two FHLB advances totaling $200 million. The first swap is a $100.0 million advance with a fixed rate of 4.99% maturing August 16, 2010 and the second is a $100.0 million advance with a fixed rate of 3.19% maturing February 1, 2011. Under the first swap the Company will receive a fixed rate of 4.99% and pay a variable rate of (1 month libor plus 425.25 bp) on a notional amount of $100.0 million with interest payments made on the 1st of each month, until maturity, for both the swap and the FHLB advance. Under the second swap the Company will receive a fixed rate of 3.19% and a pay a variable rate of (1 month libor plus 222 bp) on a notional amount of $100.0 million with interest payments made on the 1st of each month, until maturity, for both the swap and the FHLB advance.

The Company has entered into certain interest rate swaps and caps and swaps with floors contracts that are not designated as hedging instruments. These derivative contracts relate to transactions in which the Company enters into an interest rate swap, cap and/or swap with a floor with a customer while at the same time entering into an offsetting interest rate swap, cap and/or swap with a floor with another financial institution. In connection with each swap transaction, the Company agrees to pay interest to/receive interest from the customer on a notional amount at a variable interest rate and receive interest from/pay interest to the customer on a similar notional amount at a fixed interest rate. At the same time, the Company agrees to pay to/receive from another financial institution the same fixed interest rate on the same notional amount and receive/pay the same variable interest rate on the same notional amount. The transaction allows the Company’s customer to effectively convert a variable/fixed rate loan to a fixed/variable rate. Due to the offsetting nature of the contracts, changes in the fair value of the underlying derivative contracts for the most part offset each other and do not significantly impact the Company’s results of operations.

 

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The following table presents the notional amounts and estimated fair values of the Company’s interest rate derivative contracts outstanding at June 30, 2009 and December 31, 2008. The Company utilizes internal valuation models in addition to obtaining dealer quotations to value its interest rate derivative contracts designated as hedges.

 

(in thousands)

  

Condensed

Consolidated

Balance Sheet

Location

  

 

June 30, 2009

   

 

December 31, 2008

 
      Notional
Amount
   Estimated
Fair Value
    Notional
Amount
   Estimated
Fair Value
 

Interest rate derivatives designated as hedges of fair value:

             

Interest rate swaps on senior notes

   Other assets    $ 150,000    $ 12,891      $ 150,000    $ 18,452   

Interest rate swap on subordinated notes

   Other assets      175,000      14,262        200,000      19,725   

Interest rate swap on FHLB advances

   Other liabilities      200,000      (123     100,000      (7,441

Non-hedging interest rate derivatives - customer position:

             

Commercial loan interest rate swaps

   Other assets      427,426      31,471        446,870      48,434   

Commercial loan interest rate swaps

   Other liabilities      15,823      (352     —        —     

Commercial loan interest rate swaps with floors

   Other assets      11,294      359        —        —     

Commercial loan interest rate swaps with floors

   Other liabilities      3,291      (22     —        —     

Commercial loan interest rate caps

   Other assets      —        —          8,498      9   

Commercial loan interest rate caps

   Other liabilities      7,712      (36     —        —     

Non-hedging interest rate derivatives - Webster position:

             

Commercial loan interest rate swaps

   Other liabilities      443,212      (28,601     446,822      (45,805

Commercial loan interest rate swaps with floors

   Other liabilities      14,585      (167     —        —     

Commercial loan interest rate caps

   Other liabilities      7,712      36        8,498      (9

The weighted-average rates paid and received for interest rate swaps outstanding at June 30, 2009 were as follows:

 

     Weighted-Average  
     Interest
Rate Paid
    Interest
Rate Received
 

Interest rate swaps:

    

Fair value hedge interest rate swaps on senior notes

   1.1313   4.6020

Fair value hedge interest rate swaps on subordinated notes

   1.1313      4.2536   

Fair value hedge interest rate swaps on FHLB advances

   3.5525      4.0900   

Non-hedging interest rate swaps

   2.1161      2.2498   

The weighted-average strike rates for interest rate caps and floors outstanding at June 30, 2009 were as follows:

 

  

 

Non-hedging commercial loan interest rate caps

   6.64  

Non-hedging commercial loan interest rate swaps with floors

   1.02     

Foreign Currency Derivatives. The Company enters into foreign currency forward contracts that are not designated as hedging instruments primarily to accommodate the business needs of its customers. Upon the origination of a foreign currency forward contract with a customer, the Company simultaneously enters into an offsetting contract with a third party to negate the exposure to fluctuations in foreign currency exchange rates. The notional amounts and fair values of open foreign currency forward contracts were not significant at June 30, 2009 and December 31, 2008.

Other Swap. During June 2009, in conjunction with the sale of the VISA Class B stock, the Company entered into a swap transaction. The swap is recorded as a trading swap, at fair value with the changes in fair value recognized currently in earnings. The notional amount and fair value were not significant at June 30, 2009.

Gains, Losses and Derivative Cash Flows. For fair value hedges, the changes in the fair value of both the derivative hedging instrument and the hedged item are included in interest expense. Net cash flows from interest rate swaps on the senior and subordinated notes are included in interest expense on borrowings. The extent that such changes in fair value do not offset represents hedge ineffectiveness. For cash flow hedges, the effective portion of the gain or loss due to changes in the fair value of the derivative hedging instrument is included in other comprehensive income, while the ineffective portion (indicated by the excess of the cumulative change in the fair value of the derivative over that which is necessary to offset the cumulative change in expected future cash flows on the hedge transaction) is included in other non-interest expense. Net cash flows from interest rate swaps on FHLB

 

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advances designated as hedging instruments in effective hedges of cash flows are included in interest expense on borrowings. For non-hedging derivative instruments, gains and losses due to changes in fair value and all cash flows are included in other non-interest income.

Amounts included in the condensed consolidated statements of operations related to non-hedging derivative instruments were not significant during any of the reported periods. As stated above, the Company enters into non-hedge related derivative positions primarily to accommodate the business needs of its customers. Upon the origination of a derivative contract with a customer, the Company simultaneously enters into an offsetting derivative contract with a third party. The Company recognizes immediate income based upon the difference in the bid/ask spread of the underlying transactions with its customers and the third party. Due to the offsetting nature of the contracts, subsequent changes in the fair value of the underlying derivative contracts for the most part offset each other and do not significantly impact the Company’s results of operations.

Amounts included in the condensed consolidated statements of operations related to non-hedging derivative instruments were as follows:

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,

(In thousands)

   2009     2008    2009    2008

Non-hedging interest rate derivatives:

          

Other non-interest (loss), income

   $ (123   $ 375    $ 212    $ 676

Counterparty Credit Risk. Derivative contracts involve the risk of dealing with both bank customers’ and institutions’ derivative counterparties and their ability to meet contractual terms. Institutional counterparties must have an investment grade credit rating and be approved by the Company’s Chief Credit Risk Officer. The Company’s credit exposure on interest rate swaps is limited to the net favorable value and interest payments of all swaps by each counterparty for the amounts up to the established threshold for collateralization. Credit exposure may be reduced by the amount of collateral pledged by the counterparty. The Company’s credit exposure relating to interest rate swaps with bank customers was approximately $29.5 million at June 30, 2009. This credit exposure is partly mitigated as transactions with customers are secured by the collateral, if any, securing the underlying transaction being hedged. The Company’s credit exposure, net of collateral pledged, relating to interest rate swaps with upstream financial institution counterparties was approximately $9.4 million at June 30, 2009. Collateral levels for upstream financial institution counterparties are monitored and adjusted as necessary.

Certain derivative instruments, primarily forward sales of mortgage loans and mortgage-backed securities (“MBS”) are utilized by Webster Bank in its efforts to manage risk of loss associated with its mortgage loan commitments and mortgage loans held for sale. Prior to closing and funding certain single-family residential mortgage loans, an interest-rate locked commitment is generally extended to the borrower. During the period from commitment date to closing date, Webster Bank is subject to the risk that market rates of interest may change. If market rates rise, investors generally will pay less to purchase such loans resulting in a reduction in the gain on sale of the loans or, possibly, a loss. In an effort to mitigate such risk, forward delivery sales commitments, under which Webster agrees to deliver whole mortgage loans to various investors or issue MBS, are established. At June 30, 2009, outstanding rate locks totaled approximately $91.7 million and the outstanding commitments to sell residential mortgage loans totaled $163.7 million. Forward sales, which include mandatory forward commitments of approximately $163.7 million at June 30, 2009, establish the price to be received upon the sale of the related mortgage loan, thereby mitigating certain interest rate risk. There is, however, still certain execution risk specifically related to Webster’s ability to close and deliver to its investors the mortgage loans it has committed to sell.

The interest rate locked loan commitments and forward sales commitments are recorded at fair value, with changes in fair value recorded in current period earnings. Loans held for sale are carried at the lower of aggregate cost or fair value.

 

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NOTE 18: Employee Benefits

The following table provides information regarding net benefit costs for the periods shown:

 

(In thousands)    Pension Benefits     Other Benefits

Three months ended June 30,

   2009     2008     2009    2008

Service cost

   $ 63      $ 38      $ —      $ —  

Interest cost

     1,779        1,962        69      82

Expected return on plan assets

     (2,277     (2,375     —        —  

Amortization of prior service cost

     —          —          18      18

Amortization of the net actuarial loss

     885        —          —        —  
                             

Net periodic benefit cost (income)

   $ 450      $ (375   $ 87    $ 100
                             

 

(In thousands)    Pension Benefits     Other Benefits

Six months ended June 30,

   2009     2008     2009    2008

Service cost

   $ 126      $ 76      $ —      $ —  

Interest cost

     3,736        3,924        139      164

Expected return on plan assets

     (4,094     (4,750     —        —  

Amortization of prior service cost

     —          —          36      36

Amortization of the net actuarial loss

     1,682        —          —        —  
                             

Net periodic benefit cost (income)

   $ 1,450      $ (750   $ 175    $ 200
                             

On December 31, 2007, both the Webster Pension Plan and the supplemental pension plan were frozen. Therefore, as of January 1, 2008, employees no longer accrue additional qualified or supplemental retirement benefits.

On June 8, 2009 Webster made a contribution of $20.0 million into the Webster Bank Pension Plan. As a result, the liability for pension funding was reduced from $23.5 million to $3.5 million at June 30, 2009. Additional contributions will be made as deemed appropriate by management in conjunction with the Plan’s actuaries.

As a result of a prior acquisition, Webster has assumed the obligations of a pension plan. The plan was not merged into the Webster Bank Pension Plan, but continued to be included in a multiple employer plan. Webster Bank made $0.2 million and $0.5 million in contributions to this pension plan during the three and six months ended June 30, 2009.

 

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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the Company’s consolidated financial statements, and notes thereto, for the year ended December 31, 2008, included in the 2008 Form 10-K and in conjunction with the condensed consolidated financial statements and notes thereto included in Item 1 to this report. Operating results for the three and six months ended June 30, 2009 are not necessarily indicative of the results for the full year ending December 31, 2009 or any future period.

Dollar amounts in tables are stated in thousands, except for per share amounts.

Forward-Looking Statements and Factors that Could Affect Future Results

Certain statements contained in this Quarterly Report on Form 10-Q that are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”), notwithstanding that such statements are not specifically identified as such. In addition, certain statements may be contained in the Company’s future filings with the SEC, in press releases, and in oral and written statements made by or with the approval of the Company that are not statements of historical fact and constitute forward-looking statements within the meaning of the Act. Examples of forward-looking statements include, but are not limited to: (i) projections of revenues, expenses, income or loss, earnings or loss per share, the payment or nonpayment of dividends, capital structure and other financial items; (ii) statements of plans, objectives and expectations of Webster or its management or Board of Directors, including those relating to products or services; (iii) statements of future economic performance; and (iv) statements of assumptions underlying such statements. Words such as “believes”, “anticipates”, “expects”, “intends”, “targeted”, “continue”, “remain”, “will”, “should”, “may” and other similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.

Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those in such statements. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to:

 

   

Local, regional, national and international economic conditions and the impact they may have on the Company and its customers and the Company’s assessment of that impact.

 

   

Volatility and disruption in national and international financial markets.

 

   

Government intervention in the U.S. financial system.

 

   

Changes in the level of non-performing assets and charge-offs.

 

   

Inflation, interest rate, securities market and monetary fluctuations.

 

   

Acts of God or of war or terrorism.

 

   

The timely development and acceptance of new products and services and perceived overall value of these products and services by users.

 

   

Changes in consumer spending, borrowings and savings habits.

 

   

Technological changes.

 

   

The ability to increase market share and control expenses.

 

   

Changes in the competitive environment among financial holding companies and other financial service providers.

 

   

The effect of changes in laws and regulations (including laws and regulations concerning taxes, banking, securities and insurance) with which the Company and its subsidiaries must comply.

 

   

The effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters.

 

   

Changes in the Company’s organization, compensation and benefit plans.

 

   

The costs and effects of legal and regulatory developments including the resolution of legal proceedings or regulatory or other governmental inquiries and the results of regulatory examinations or reviews.

 

   

The Company’s success at managing the risks involved in the foregoing items.

Forward-looking statements speak only as of the date on which such statements are made. The Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made, or to reflect the occurrence of unanticipated events.

 

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Critical Accounting Policies

The Company’s significant accounting policies are described in Note 1 to the consolidated financial statements included in its 2008 Annual Report on Form 10-K. The preparation of the consolidated financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and to disclose contingent assets and liabilities. Actual results could differ from those estimates. Management has identified accounting for the allowance for credit losses, valuation and analysis for impairment of goodwill and other intangible assets, and the analysis of other-than-temporary impairment for its investment securities, income taxes and pension and other post retirement benefits as the Company’s most critical accounting policies and estimates in that they are important to the portrayal of the Company’s financial condition and results, and they require management’s most subjective and complex judgment as a result of the need to make estimates about the effects of matters that are inherently uncertain. These accounting policies, including the nature of the estimates and types of assumptions used, are described throughout this Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations and Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s 2008 Annual Report on Form 10-K.

 

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RESULTS OF OPERATIONS

Summary of Performance

Webster’s net loss was $(31.6) million, or $0.31 per diluted common share, for the three months ended June 30, 2009, compared to a net loss of $(28.7) million, or $(0.56) per diluted common share, for the three months ended June 30, 2008. The net loss from continuing operations was $(31.9) million, or $0.30 per diluted common share, for the three ended June 30, 2009, compared to net loss from continuing operations of $(28.3) million, or $(0.55) per diluted common share for the three months ended June 30, 2008. The year-over-year increase in net loss from continuing operations is primarily attributable to a $60.0 million increase in the provision for credit losses and a $13.7 million increase in the net loss on investment securities for the three months ended June 30, 2009 compared to June 30, 2008, partially offset by a $24.3 million gain on the exchange of $63.9 million of Trust Preferred Securities for common stock and a decrease in the loss on write-downs of investments to fair value of $27.8 million at June 30, 2009 compared to June 30, 2008. Net interest income, which decreased $6.4 million for the three months ended June 30, 2009 from the comparable period in the prior year, was negatively impacted by the declining interest rate environment, and the effect that declining short-term interest rates and a flattening of the yield curve had on the net interest margin, as assets reprice faster than liabilities.

For the six months ended June 30, 2009, Webster’s net loss was $(42.7) million compared to a net loss of $(4.2) million for the comparable period in 2008. Net loss per diluted share was $(0.09) for the six months ended June 30, 2009 compared to a net loss per diluted share of $(0.09) for the comparable period in 2008. The year-over-year increase in net loss is primarily attributable to a $110.2 million increase in the provision for credit losses for the six months ended June 30, 2009 compared to June 30, 2008, partially offset by a $24.3 million gain on the exchange of $63.9 million of Trust Preferred Securities for common stock. The year-over-year comparisons for the six months ended June 30, 2009 as compared to the comparable period in 2008 are also impacted by the declining interest rate environment, and the effect that declining short-term interest rates and a flattening of the yield curve have had on net interest margin. The effect of these market conditions has been partially offset by the growth in the loan portfolio, particularly in higher yielding commercial and consumer loans. Income (loss) from discontinued operations, net of taxes totaled $0.3 million for the six months ended June 30, 2009 and $(2.6) million for the six months ended June 30, 2008. The $2.9 million decrease in the loss from discontinued operations is due to the realization of a loss on the sale of Webster Risk Services in the June 30, 2008 period.

 

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Selected financial highlights are presented in the table below.

 

     At or for the
Three months ended June 30,
    At or for the
Six months ended June 30,
 

(In thousands, except per share data)

   2009     2008     2009     2008  

Income (Loss) and Per Share Amounts

        

Net interest income

   $ 119,288      $ 125,686      $ 237,485      $ 250,542   

Total non-interest income

     35,378        (5,749     89,493        42,098   

Total non-interest expense

     130,077        137,507        248,093        253,411   

Loss from continuing operations, net of tax

     (31,875     (28,285     (42,986     (1,589

Income (loss) from discontinued operations, net of tax

     313        (439     313        (2,563

Net income (loss) attributable to noncontrolling interests

     —          1        13        (8

Net loss attributable to Webster Financial Corporation

     (31,562     (28,725     (42,686     (4,144

Net income (loss) available to common shareholders

     16,799        (28,940     (4,754     (4,575

Income (loss) from continuing operations per common share - diluted

   $ 0.30      $ (0.55   $ (0.10   $ (0.04

Net income (loss) per common share - diluted

     0.31        (0.56     (0.09     (0.09

Dividends declared per common share

     0.01        0.30        0.02        0.60   

Book value per common share

     21.73        31.71        21.73        31.71   

Tangible book value per common share

     13.15        17.57        13.15        17.57   

Diluted shares (average) (c)

     53,398        52,017        52,478        52,009   

Dividends declared per Series A preferred share

     21.25        —          42.50        —     

Dividends incurred per Series B preferred share

     12.50        —          25.00        —     

Dividends declared per affiliate preferred share

     0.215        0.215        0.431        0.431   

Selected Ratios

        

Return on average assets (b)

     (0.73 )%      (0.66 )%      (0.49 )%      (0.02 )% 

Return on average shareholders’ equity (b)

     (6.88     (6.41     (4.63     (0.18

Net interest margin

     3.04        3.26        3.01        3.27   

Efficiency ratio (a)

     66.40        65.35        66.91        67.87   

Tangible capital ratio

     7.58        6.79        7.58        6.79   

 

(a) Calculated using SNL’s methodology-non-interest expense (excluding foreclosed property expenses, intangible amortization, goodwill impairments and other charges) as a percentage of net interest income (FTE basis) plus non-interest income (excluding gain/loss on securities and other charges).
(b) Calculated based on income from continuing operations for all periods presented.
(c) For the three and six months ended June 30, 2009 and 2008, respectively, the effect of stock options, restricted stock, convertible preferred stock and the outstanding warrant to purchase common stock on the computation of diluted earnings per share was anti-dilutive. Therefore, the effect of these instruments were not included in the determination of diluted shares (average).

 

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The following summarizes the major categories of assets and liabilities together with their respective interest income or expense and the rates earned or paid by Webster.

 

     Three months ended June 30,  
     2009     2008  

(Dollars in thousands)

   Average
Balance
   Interest (a)     Average
Yields
    Average
Balance
   Interest (a)     Average
Yields
 

Assets

              

Interest-earning assets:

              

Loans

   $ 12,003,362    $ 137,533      4.57   $ 12,686,784    $ 175,786      5.52

Securities (b)

     3,804,936      51,689      5.32        2,882,509      40,435      5.48   

Federal Home Loan and Federal Reserve Bank stock

     137,841      670      1.95        126,073      1,366      4.36   

Short-term investments

     12,124      43      1.39        6,374      40      2.50   

Loans held for sale

     77,787      833      4.28        5,705      92      6.45   
                                          

Total interest-earning assets

     16,036,050      190,768      4.72        15,707,445      217,719      5.51   

Noninterest-earning assets

     1,443,322          1,541,441     
                      

Total assets

   $ 17,479,372        $ 17,248,886     
                      

Liabilities and equity

              

Interest-bearing liabilities:

              

Demand deposits

   $ 1,567,026    $ —        —     $ 1,487,433    $ —        —  

Savings, NOW & money market deposits

     6,745,909      15,229      0.91        5,891,261      19,305      1.31   

Certificates of deposit

     4,778,929      34,753      2.92        4,626,051      40,751      3.53   
                                          

Total interest-bearing deposits

     13,091,864      49,982      1.53        12,004,745      60,056      2.01   

Repurchase agreements and other short-term debt

     1,031,671      4,554      1.75        1,298,709      8,561      2.61   

Federal Home Loan Bank advances

     666,604      6,459      3.83        1,358,648      10,548      3.07   

Long-term debt

     653,712      6,882      4.21        660,642      9,142      5.54   
                                          

Total borrowings

     2,351,987      17,895      3.02        3,317,999      28,251      3.38   
                                          

Total interest-bearing liabilities

     15,443,851      67,877      1.76        15,322,744      88,307      2.31   

Noninterest-bearing liabilities

     171,611          149,663     
                      

Total liabilities

     15,615,462          15,472,407     

Equity

     1,863,910          1,776,479     
                      

Total liabilities and equity

   $ 17,479,372        $ 17,248,886     
                      

Fully tax-equivalent net interest income

        122,891             129,412     

Less: tax equivalent adjustments

        (3,603          (3,726  
                          

Net interest income

      $ 119,288           $ 125,686     
                          

Interest-rate spread

        2.96        3.20

Net interest margin (b)

        3.04        3.26
                      

 

(a) On a fully tax-equivalent basis.
(b) For purposes of this computation, net unrealized losses on available for sale securities of $78.3 million and $68.9 million as of June 30, 2009 and 2008, respectively, are excluded from the average balance for rate calculations.

 

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     Six months ended June 30,  
     2009     2008  

(Dollars in thousands)

   Average
Balance
   Interest (a)     Average
Yields
    Average
Balance
   Interest (a)     Average
Yields
 

Assets

              

Interest-earning assets:

              

Loans

   $ 12,076,781    $ 278,300      4.61   $ 12,613,449    $ 367,058      5.80

Securities (b)

     3,808,227      105,575      5.40        2,860,599      81,735      5.61   

Federal Home Loan and Federal Reserve Bank stock

     136,366      1,296      1.92        121,135      3,039      5.05   

Short-term investments

     16,114      74      0.92        5,032      77      3.05   

Loans held for sale

     49,259      997      4.05        51,039      1,492      5.85   
                                          

Total interest-earning assets

     16,086,747      386,242      4.77        15,651,254      453,401      5.76   

Noninterest-earning assets

     1,454,622          1,540,169     
                      

Total assets

   $ 17,541,369        $ 17,191,423     
                      

Liabilities and equity

              

Interest-bearing liabilities:

              

Demand deposits

   $ 1,537,297    $ —        —     $ 1,462,493    $ —        —  

Savings, NOW & money market deposits

     6,346,814      30,940      0.98        5,843,966      43,485      1.49   

Certificates of deposit

     4,808,525      71,950      3.02        4,782,166      91,813      3.85   
                                          

Total interest-bearing deposits

     12,692,636      102,890      1.63        12,088,625      135,298      2.25   

Repurchase agreements and other short-term debt

     1,361,792      10,355      1.51        1,329,236      19,780      2.94   

Federal Home Loan Bank advances

     767,923      13,513      3.50        1,199,292      20,427      3.37   

Long-term debt

     667,465      14,680      4.40        659,715      19,950      6.05   
                                          

Total borrowings

     2,797,180      38,548      2.75        3,188,243      60,157      3.75   
                                          

Total interest-bearing liabilities

     15,489,816      141,438      1.84        15,276,868      195,455      2.56   

Noninterest-bearing liabilities

     185,515          155,088     
                      

Total liabilities

     15,675,331          15,431,956     

Equity

     1,866,038          1,759,467     
                      

Total liabilities and equity

   $ 17,541,369        $ 17,191,423     
                      

Fully tax-equivalent net interest income

        244,804             257,946     

Less: tax equivalent adjustments

        (7,319          (7,404  
                          

Net interest income

      $ 237,485           $ 250,542     
                          

Interest-rate spread

        2.93        3.20

Net interest margin (b)

        3.01        3.27
                      

 

(a) On a fully tax-equivalent basis.
(b) For purposes of this computation, net unrealized losses on available for sale securities of $100.2 million and $52.0 million as of June 30, 2009 and 2008, respectively, are excluded from the average balance for rate calculations.

 

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The following table describes the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have impacted interest income and interest expense during the periods indicated. Information is provided in each category with respect to changes attributable to changes in volume (changes in volume multiplied by prior rate), changes attributable to changes in rates (changes in rates multiplied by prior volume) and the total net change. The change attributable to the combined impact of volume and rate has been allocated proportionately to the change due to volume and the change due to rate. The table presented below is based upon reported net interest income.

 

     Three months ended June 30,
2009 vs. 2008
Increase (decrease) due to
    Six months ended June 30,
2009 vs. 2008
Increase (decrease) due to
 

(In thousands)

   Rate     Volume     Total     Rate     Volume     Total  

Interest on interest-earning assets:

            

Loans

   $ (29,134   $ (9,119   $ (38,253   $ (73,513   $ (15,245   $ (88,758

Loans held for sale

     (41     782        741        (445     (50     (495

Securities and short-term investments

     (2,347     13,031        10,684        (2,826     25,005        22,179   
                                                

Total interest income

     (31,522     4,694        (26,828     (76,784     9,710        (67,074
                                                

Interest on interest-bearing liabilities:

            

Deposits

     (15,226     5,152        (10,074     (38,938     6,530        (32,408

Borrowings

     (2,774     (7,582     (10,356     (14,801     (6,808     (21,609
                                                

Total interest expense

     (18,000     (2,430     (20,430     (53,739     (278     (54,017
                                                

Net change in net interest income

   $ (13,522   $ 7,124      $ (6,398   $ (23,045   $ 9,988      $ (13,057
                                                

Net Interest Income

Net interest income totaled $119.3 million and $237.5 million for the three and six months ended June 30, 2009, respectively, a decrease of $6.4 million and $13.1 million from the comparable periods in the prior year, respectively, as average earning assets grew by 2.8% to $16.1 billion at June 30, 2009 from $15.7 billion at June 30, 2008, while the net interest margin declined from 3.26% and 3.27% for the three and six months ended June 30, 2008, respectively, to 3.04% and 3.01% for the three and six months ended June 30, 2009, respectively. The securities portfolio totaled $4.2 billion at June 30, 2009 compared to $3.7 billion at December 31, 2008 and $2.9 billion a year ago. The yield in the securities portfolio for the three and six months ended June 30, 2009 was 4.84% and 4.91%, respectively, compared with 5.18% and 5.10% for the same periods in 2008.

Net interest income can change significantly from period to period based on general levels of interest rates, customer prepayment patterns, the mix of interest earning assets and the mix of interest bearing and non-interest bearing deposits and borrowings. Webster manages the risk of changes in interest rates on its net interest income through an Asset/Liability Management Committee and through related interest rate risk monitoring and management policies. See “Asset/Liability Management and Market Risk” for further discussion of Webster’s interest rate risk position.

Interest Income

Interest income (on a fully tax-equivalent basis) for the three months ended June 30, 2009 decreased $26.8 million, or 12.5%, from the comparable period in 2008. The decrease in short-term interest rates had an unfavorable impact on interest sensitive loans as well as lower rates on new volumes. The average balance for investment securities for the three months ended June 30, 2009 was $3.8 billion, an increase of $0.9 billion from the comparable period in 2008. The average balance for loans for the three months ended June 30, 2009 was $12.1 billion, a decrease of $0.5 billion from the comparable period in 2008.

Interest income (on a fully tax-equivalent basis) for the six months ended June 30, 2009 decreased $67.2 million, or 14.8%, from the comparable period in 2008. The decrease in short-term interest rates had an unfavorable impact on interest sensitive loans as well as increased non-performing loans. The average balance for investment securities for the six months ended June 30, 2009 was $3.8 billion, an increase of $0.9 billion from the comparable period in 2008. The average balance for loans for the six months ended June 30, 2009 was $12.1 billion, a decrease of $0.5 billion from the comparable period in 2008.

The yield on interest-earning assets decreased 99 basis points for the six months ended June 30, 2009, from the comparable period in 2008. The decrease reflects the declining interest rate environment during these periods as well as increased non-performing loans.

The loan portfolio yield decreased 119 basis points to 4.61% for the six months ended June 30, 2009 and comprised 75.1% of average interest-earning assets compared to 80.6% of average interest-earning assets for the six months ended June 30, 2008.

 

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Interest Expense

Interest expense on a fully tax-equivalent basis for the three months ended June 30, 2009 decreased $20.4 million, or 23.1%, from the comparable period in 2008. The decrease for the three month period ended June 30, 2009 was primarily due to declining deposit funding costs. The cost of total interest bearing liabilities was 1.76% for the three months ended June 30, 2009, a decrease of 55 basis points from 2.31% for the comparable period in 2008. Deposit costs for the three months ended June 30, 2009 decreased 48 basis points to 1.53% from 2.01% for the comparable period in 2008. Total borrowing costs for the three months ended June 30, 2009 decreased 36 basis points to 3.02% from 3.38% for the comparable period in 2008.

For the six months ended June 30, 2009, interest expense on a fully tax-equivalent basis decreased $54.0 million, or 27.6%, from the comparable period in 2008. The decrease for the six month period ended June 30, 2009 was primarily due to declining deposit funding costs and short-term borrowing interest rates. The cost of total interest bearing liabilities was 1.84% for the six months ended June 30, 2009, a decrease of 72 basis points from 2.56% for the comparable period in 2008. Deposit costs for the six months ended June 30, 2009 decreased 62 basis points to 1.63% from 2.25% for the comparable period in 2008. Total borrowing costs for the six months ended June 30, 2009 decreased 100 basis points to 2.75% from 3.75% for the comparable period in 2008.

Provision for Credit Losses

The provision for credit losses was $85.0 million and $151.0 million for the three and six months ended June 30, 2009, respectively, an increase of $60.0 million and $110.2 million compared to $25.0 million and $40.8 million for the three and six months ended June 30, 2008, respectively. The increase in the provision for the three and six months ended June 30, 2009 reflects increased levels of nonperforming loans and charge-offs. Of the $85.0 million and $151.0 million in provision for credit losses for the three and six months ended June 30, 2009, $74.3 million and $128.2 million was for the continuing portfolio. Non-performing loans within the continuing portfolio increased $40.4 million and $122.3 million for the three and six months ended June 30, 2009. Net charge-offs for Webster’s continuing portfolio for the three and six months ended June 30, 2009 were $36.7 million and $55.4 million, respectively, compared to $11.2 million and $27.0 million for the comparable periods in 2008. The annualized net charge-off ratio for the continuing portfolio for the three and six months ended June 30, 2009 was 1.25% and 0.94% compared to 0.36% and 0.44% for the comparable periods in 2008. The provision for loan losses for the liquidating portfolio for the three and six months ended June 30, 2009 was $10.7 million and $22.5 million, respectively. The annualized net charge-off ratio for the liquidating portfolio for the three and six months ended June 30, 2009 was 19.69% and 17.57% compared to 8.68% and 7.93% for the comparable periods in 2008. Net charge-offs within Webster’s liquidating portfolio were $13.2 million and $24.6 million, respectively, for the three and six months ended June 30, 2009 compared to $9.2 million and $17.0 million for the comparable period in 2008.

Management performs a quarterly review of the loan portfolio and unfunded commitments to determine the adequacy of the allowance for credit losses and the amount of provision for credit losses required. Several factors influence the amount of the provision, including loan growth and changes in portfolio mix as well as net charge-offs, and the economic environment.

The allowance for credit losses, which is comprised of the allowance for loan losses and the reserve for unfunded commitments, totaled $316.0 million, or 2.72% of total loans at June 30, 2009, and $245.8 million, or 2.02% of total loans at December 31, 2008. The allowance for credit losses related to the continuing portfolio was $274.2 million, or 2.41% of loans within the continuing portfolio at June 30, 2009 and $201.9 million, or 1.70% of loans within the continuing portfolio at December 31, 2008. The allowance for credit losses related to the liquidating portfolio was $41.8 million, or 16.37% of loans within the liquidating portfolio at June 30, 2009 and $43.9 million, or 14.52% of loans within the liquidating portfolio at December 31, 2008.

For further information, see “Loan Portfolio Review and Allowance for Credit Losses Methodology” included in the “Financial Condition—Asset Quality” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations on page 52-57 of this report.

 

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Non-Interest Income

The following summarizes the major categories of non-interest income for the three and six months ended June 30, 2009 and 2008.

 

     Three months ended June 30,     Six months ended June 30,  

(In thousands)

   2009     2008     2009     2008  

Non-Interest Income:

        

Deposit service fees

   $ 29,984      $ 29,943      $ 57,943      $ 58,376   

Loan related fees

     6,350        7,891        12,832        14,749   

Wealth and investment services

     6,081        7,634        11,831        14,590   

Mortgage banking activities

     3,433        104        4,039        844   

Increase in cash surrender value of life insurance

     2,665        2,623        5,257        5,204   

Net (loss) gain on investment securities

     (13,593     126        (9,135     249   

Loss on write-down of investments to fair value

     (27,110     (54,924     (27,110     (56,177

Gain on exchange of trust preferreds for common stock

     24,336        —          24,336        —     

Gain on early extinguishment of subordinated notes

     —          —          5,993        —     

Visa share transaction

     1,907        —          1,907        1,625   

Other income

     1,325        854        1,600        2,638   
                                

Total non-interest income

   $ 35,378      $ (5,749   $ 89,493      $ 42,098   
                                

Total non-interest income was $35.4 million for the three months ended June 30, 2009, an increase of $41.1 million from the comparable period in 2008. The increase for the three months ended June 30, 2009 is primarily attributable to the $24.3 million gain on the exchange of $63.9 million of Trust Preferred Securities for common stock and a $27.8 million reduction in other-than-temporary impairment charges, offset by a $13.7 million increase in net losses on the sales of investment securities.

Loan-related fees were $6.4 million for the three months ended June 30, 2009, down $1.5 million due to lower prepayment penalties and loan origination volumes for the quarter when compared to results from the year ago period. Wealth and investment services were $6.1 million for the three months ended June 30, 2009, down $1.5 million when compared to results from the year ago period, primarily from lower valuation on assets under management given market declines year over year. Mortgage banking activities were $3.4 million for the three months ended June 30, 2009, up $3.3 million due to increased mortgage lending activity when compared to results from the year ago period. Net losses from the sale of securities were approximately $13.6 million for the quarter, a decrease of $13.7 million when compared to a gain of $0.1million recorded a year ago. Losses on sales of investment securities are primarily due to management’s intent to reduce the concentration and exposure to other financial service entities. Webster sold its Class B VISA Inc. shares realizing a $1.9 million gain for the three months ended June 30, 2009. Other non-interest income was $1.3 million for the quarter compared to $0.8 million a year ago.

Total non-interest income was $89.5 million for the six months ended June 30, 2009, an increase of $47.4 million from the comparable period in 2008. The increase for the six months ended June 30, 2009 is primarily attributable to the $24.3 million gain on the exchange of $63.8 million of Trust Preferred Securities for common stock, a $29.1 million reduction in other-than-temporary impairment charges and a $6.0 million gain on the early extinguishment of subordinated notes offset by a $9.4 million increase in net losses on the sale of investment securities.

Deposit service fees totaled $57.9 million for the six months ended June 30, 2009, down from $58.4 million in the year-ago period due to reduced customer overdraft fees and ATM usage. Loan-related fees were $12.8 million for the six months ended June 30, 2009, down $1.9 million when compared to results from the year ago period due to lower prepayment penalties and loan origination volumes. Wealth and investment services were $11.8 million for the six months ended June 30, 2009, down $2.8 million when compared to results from the year ago period, primarily from lower valuation on assets under management given market declines year over year. Net losses from the sale of securities was approximately $9.1 million for the six months ended June 30, 2009; a decrease of $9.3 million when compared to a net gain of $0.2 million recorded a year ago. The net loss on the sale of securities is primarily due to management’s intent to reduce the concentration and exposure to other financial service entities. Other non-interest income was $1.6 million for the six months ended June 30, 2009 compared to $2.6 million a year ago.

 

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Non-Interest Expense

The following summarizes the major categories of non-interest expense for the three and six months ended June 30, 2009 and 2008.

 

     Three months ended June 30,    Six months ended June 30,

(In thousands)

   2009    2008    2009    2008

Non-Interest Expenses:

           

Compensation and benefits

   $ 59,189    $ 62,866    $ 115,658    $ 126,309

Occupancy

     13,594      13,128      27,889      26,810

Furniture and equipment

     15,288      15,634      30,428      30,794

Intangible assets amortization

     1,450      1,464      2,913      3,012

Goodwill impairment

     —        8,500      —        8,500

Marketing

     3,196      4,940      6,302      8,583

Outside services

     3,394      3,706      7,178      7,859

FDIC deposit insurance assessment

     5,959      344      10,549      698

FDIC special assessment

     8,000      —        8,000      —  

Severance and other costs

     1,313      9,368      1,553      8,718

Foreclosed and repossessed property write-downs

     2,829      484      6,279      717

Foreclosed and repossessed property expenses

     1,799      1,068      2,978      1,348

Other expenses

     14,066      16,005      28,366      30,063
                           

Total non-interest expenses

   $ 130,077    $ 137,507    $ 248,093    $ 253,411
                           

Total non-interest expenses were $130.1 million for the three months ended June 30, 2009 compared to $137.5 million for the comparable period in 2008. Foreclosed write-downs were $2.8 million for the three months ended June 30, 2009 compared to $0.5 million for the comparable period in 2008. Foreclosed and repossessed property expenses were $1.8 million for the three months ended June 30, 2009 compared to $1.1 million for the comparable period in 2008. The $2.3 million increase in write-downs and $0.7 million increase in foreclosed and repossessed property expenses are due to the increase in foreclosure activity as well as declining asset values that resulted in the write-downs to realizable value while increased expenses are associated with higher levels of repossessed assets. The FDIC deposit insurance assessment was $6.0 million for the three months ended June 30, 2009 compared to $0.3 million for the comparable period in 2008 due to the utilization of FDIC premium credits during fiscal 2008. In addition, an $8.0 million FDIC special assessment was recorded for the three months ended June 30, 2009 in connection with the FDIC’s final rule dated May 22, 2009 that required financial institutions to pay a special assessment on September 30, 2009 equal to 5 basis points on the institution’s assets, minus Tier I Capital, as of June 30, 2009. The increase in non-interest expenses related to foreclosed properties and repossessed assets and FDIC deposit insurance assessments were offset by a $3.7 million decrease in compensation and benefits for the three months ended June 30, 2009 when compared to the same period in 2008. The decrease in compensation and benefits is directly related to the benefits realized as a result of the OneWebster initiative. For additional information on the OneWebster initiatives and FDIC deposit insurance assessment see pages 7-8 and 14, respectively, of Webster’s Annual Report on Form 10-K for the year ended December 31, 2008. For additional information on foreclosed and repossessed assets see the section entitled Nonperforming Assets in the Asset Quality discussion beginning on page 52 of this report.

Total non-interest expenses were $248.1 million for the six months ended June 30, 2009, compared to $253.4 million for the comparable periods in 2008. The decrease of $10.6 million in compensation and benefits is directly related to the benefits realized as a result of the OneWebster initiative. Foreclosed and repossessed write-downs were $6.3 million for the six months ended June 30, 2009 compared to $0.7 million for the comparable period in 2008. Foreclosed and repossessed property expenses were $3.0 million for six months ended June 30, 2009 compared to $1.3 million for the comparable period in 2008. The $5.6 million increase in write-downs and $1.7 million increase in foreclosed and repossessed property expenses is due to the increase in foreclosure activity as well as declining asset values that resulted in the write-down to realizable value while increased expenses are associated with higher levels of repossessed assets. The FDIC deposit insurance assessment was $10.5 million for the six months ended June 30, 2009 compared to $0.7 million for the comparable period in 2008 due to the utilization of FDIC premium credits during fiscal 2008. As previously discussed, an $8.0 million special FDIC assessment based upon 5 basis points of Webster’s assets less Tier I Capital was required to be accrued as of June 30, 2009. The increase in non-interest expenses related to foreclosed properties and repossessed assets and FDIC deposit insurance assessments were offset by the $10.6 million decrease in compensation and benefits for the six months ended June 30, 2009 when compared to the same period in 2008. For additional information on the OneWebster initiatives and FDIC deposit insurance assessment see pages 7-8 and 14, respectively, of Webster’s Annual Report on Form 10-K for the year ended December 31, 2008. For additional information on foreclosed and repossessed assets see the section entitled Nonperforming Assets in the Asset Quality discussion beginning on page 55 of this report.

 

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Income Taxes

Income tax (benefit) expense applicable to continuing operations for the three and six months ended June 30, 2009, were $(28.5) million and $(29.1) million, respectively, compared to $(14.3) million and $18,000 in the year-ago periods. Due primarily to the existence of pre-tax losses in 2009, an analytical comparison of the 2009 and 2008 effective tax rates is not meaningful for these purposes.

The $28.5 million tax benefit on the $60.4 million pre-tax loss in the second quarter of 2009 reflects the application of an estimated annual effective tax-benefit rate of 40.0% to the $72.1 million pre-tax loss for the six months ended June 30, 2009. The 40.0% tax-benefit rate is based on the pre-tax loss estimated for the full year of 2009. In the first quarter of 2009, the $0.6 million tax benefit on the $11.7 million pre-tax loss reflected the application of a 20.0% effective tax rate to the loss in the quarter, as well as $1.8 million of additional tax expense recognized for certain items specific to the quarter. The estimated tax rate of 20.0% was based on the pre-tax income then-estimated for the full year of 2009.

In the year-ago periods, Webster’s income tax expense (benefit) was impacted by the $8.5 million goodwill impairment during the second quarter of 2008, for which no tax benefit was recognized.

Business Segment Results

For purposes of reporting segment results, Webster has four business segments: Commercial Banking, Retail Banking, Consumer Finance and Other. The segments are based upon the products and services provided, or the type of customer served, and they reflect the way that financial information is currently evaluated by management. The Company’s Treasury unit is included in Corporate and Reconciling amounts along with the results of discontinued operations, noncontrolling interests and the amounts required to reconcile profitability metrics to GAAP reported amounts. As of January 2009, Webster’s equipment finance, wealth management and insurance premium finance lines of business, previously reported within the Company’s Other segment, were realigned within the Company’s organizational hierarchy to be included within the Commercial Banking segment, while certain support functions were realigned within the corporate functions. For further information regarding Business Segments, see pages 125-127 of Webster’s 2008 Annual Report on Form 10-K.

Webster’s business segments results are intended to reflect each segment as if it were a stand-alone business. The following tables present the results for Webster’s business segments for the three and six months ended June 30, 2009 and 2008. The results for the three and six months ended June 30, 2009 incorporate the allocation of the increased provision for loan losses and the related income tax benefit to each of Webster’s business segments.

Business Segment Performance Summary:

 

     For the three months ended
June 30,
    For the six months ended
June 30,
 

Net Income (Loss) (In thousands)

   2009     2008 (a)     2009     2008 (a)  

Commercial Banking

   $ 2,862      $ 14,276      $ 11,151      $ 25,659   

Retail Banking

     (503     18,863        (1,736     28,541   

Consumer Finance

     4,217        17,278        17,149        26,670   

Other

     689        97        333        (206
                                

Total reportable segments

     7,265        50,514        26,897        80,664   

Corporate & Reconciling items

     (38,827     (79,239     (69,583     (84,808
                                

Net loss attributable to Webster Financial Corporation

   $ (31,562   $ (28,725   $ (42,686   $ (4,144
                                

 

(a) As of January 1, 2009 management realigned its business segments balances for Webster’s equipment finance, wealth management and insurance premium finance operating units, previously reported as a component of the Other reporting segment. Each has been reclassified to be included within the Commercial reporting segment while certain support functions were realigned within the corporate function. The 2008 balances were reclassified for comparability to the 2009 presentation.

 

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Commercial Banking

The Commercial Banking segment includes Webster’s middle market, asset-based lending, commercial real estate, equipment finance, wealth management and insurance premium finance lines of business.

Commercial Banking Results:

 

     For the three months ended
June 30,
    For the six months ended
June 30,
 

(In thousands)

   2009    2008 (a)     2009    2008 (a)  

Net interest income

   $ 36,904    $ 34,704      $ 72,696    $ 69,481   

Provision for credit losses

     10,764      5,311        20,255      9,616   
                              

Net interest income after provision

     26,140      29,393        52,441      59,865   

Non-interest income

     8,921      9,603        17,436      18,232   

Non-interest expense

     25,085      31,110        51,169      52,729   
                              

Income before income taxes

     9,976      7,886        18,708      25,368   

Income tax expense (benefit)

     7,114      (6,390     7,557      (291
                              

Net income

   $ 2,862    $ 14,276      $ 11,151    $ 25,659   
                              

Total assets at period end

   $ 4,758,010    $ 5,159,166      $ 4,758,010    $ 5,159,166   
                              

 

(a) As of January 1, 2009 management realigned its business segments balances for Webster’s equipment finance, wealth management and insurance premium finance operating units, previously reported as a component of the Other reporting segment. Each has been reclassified to be included within the Commercial reporting segment while certain support functions were realigned within the corporate function. The 2008 balances were reclassified for comparability to the 2009 presentation

Income before taxes increased $2.1 million, or 26.5%, for the three months ended June 30, 2009 compared to the comparable period in 2008, primarily reflecting an increase of $2.2 million in net interest income and a $6.0 million decrease in non-interest expense, offset by an increase in provision for credit losses of $5.5 million.

For the six months ended June 30, 2009, income before taxes decreased $6.7 million, or 26.3%, compared to the year ago period in 2008. Provision for credit losses increased by $10.6 million. Net interest income increased by $3.2 million and non-interest expenses decreased $1.6 million.

The increases in the provision for credit losses is directly related to the increase in non-performing loans and internal risk classifications when compared to the year ago period. The decrease in assets is attributable to decreases in line usage of asset based loans and a general slowing of business activity.

Retail Banking

Included in the Retail Banking segment is retail, business and professional banking, and investment services.

Retail Banking Results:

 

     For the three months ended
June 30,
    For the six months ended
June 30,
 

(In thousands)

   2009     2008     2009     2008  

Net interest income

   $ 42,258      $ 53,947      $ 86,576      $ 110,174   

Provision for credit losses

     2,336        1,164        4,293        2,400   
                                

Net interest income after provision

     39,922        52,783        82,283        107,774   

Non-interest income

     30,033        31,615        57,704        61,478   

Non-interest expense

     71,568        71,045        142,899        141,034   
                                

(Loss) income before income taxes

     (1,613     13,353        (2,912     28,218   

Income tax (benefit) expense

     (1,110     (5,510     (1,176     (323
                                

Net (loss) income

   $ (503   $ 18,863      $ (1,736   $ 28,541   
                                

Total assets at period end

   $ 1,587,964      $ 1,590,234      $ 1,587,964      $ 1,590,234   
                                

Income before taxes for the three and six months ended June 30, 2009 decreased by $15.0 million and $31.1 million respectively, from the comparable periods in 2008. The decline in the Retail Banking Segment’s earnings was driven by two factors: 1) a decrease in period contribution from deposits which are linked to the recent rapid decline in interest rates and 2) an increase in FDIC premiums. With a loan to deposit ratio of only 8.9%, the Retail Banking Segment’s contribution is driven largely by deposit balances which fund Webster’s other business segments. Net interest income for the second quarter decreased $11.7 million, or 21.7% from the prior year, driven by a decline in revenue earned on the Retail Banking deposit portfolio. The cost of Retail deposits in the second quarter of 2009 was 1.72%, a decline of 28 basis points from the same period in 2008. The internal earnings credit, or Funds Transfer

 

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Pricing, associated with Webster’s wholesale funding costs dropped by 76 basis points during the same time period, which resulted in a 25.0% decrease in the margin on deposits. Wholesale funding costs dropped significantly as the Federal Reserve reduced short term interest rates in late 2008 and early 2009. Based upon Webster’s Funds Transfer Pricing methodology, the reduction in market interest rates also reduced the spread on many deposit products, such as checking and regular savings accounts, that were priced at or near historic minimums. Based on Webster’s internal Funds Transfer Pricing methodology, the near term operating contribution from this business segment is negatively impacted by the current unprecedented low interest rate environment. These results are near term and do not reflect the long-term value of the liquidity and funding provided by Webster’s retail deposit base which would be more evident in a higher interest rate environment. Non-interest income for the second quarter ended June 30, 2009 decreased $1.6 million, or 5.0%, driven by a reduction in customer overdraft activity and ATM usage and a 21.0% decrease in investment revenues linked to a decline in investor confidence and a corresponding drop in sales activity. Non-interest expenses increased by less than 1%, driven primarily by a $5.1 million increase in FDIC assessments and expenses associated with the opening of two de novo branches. The increase in FDIC insurance costs were driven by both a discontinuation of credits earned from previous periods and an actual increase in the rate assessed on deposits. The expense increases were primarily offset by a decrease in compensation and internal support costs driven by OneWebster initiatives.

Consumer Finance

Consumer Finance includes residential mortgage and consumer lending, as well as mortgage banking activities.

Consumer Finance Results:

 

     For the three months ended
June 30,
    For the six months ended
June 30,
 

(In thousands)

   2009    2008     2009    2008  

Net interest income

   $ 30,940    $ 29,807      $ 63,058    $ 62,038   

Provision for credit losses

     5,747      3,443        10,636      6,881   
                              

Net interest income after provision

     25,193      26,364        52,422      55,157   

Non-interest income

     5,563      3,429        7,555      7,228   

Non-interest expense

     15,600      17,844        31,186      36,025   
                              

Income before income taxes

     15,156      11,949        28,791      26,360   

Income tax expense (benefit)

     10,939      (5,330     11,629      (302
                              

Income before noncontrolling interest

     4,217      17,279        17,162      26,662   

Noncontrolling interest

     —        1        13      (8
                              

Net income

   $ 4,217    $ 17,278      $ 17,149    $ 26,670   
                              

Total assets at period end

   $ 6,301,270    $ 7,030,345      $ 6,301,270    $ 7,030,345   
                              

Net income decreased $13.1 million and $9.5 million, or 75.6% and 35.7%, for the three and six months ended June 30, 2009, respectively, compared to the comparable periods in 2008. The decrease in net income is primarily attributable to an increase in income tax expense related to tax credits reflected in the 2008 periods. Income before taxes increased $3.2 million and $2.4 million, or 26.8% and 9.2%, for the three and six months ended June 30, 2009, respectively, compared to the comparable periods in 2008. This increase is the result of the lower short term interest rates, an increase in the interest on loans held-for-sale and gains from loan sales due to increased mortgage activity offset by an increase in the provision for credit losses. The $2.1 million and $0.3 million increase in non-interest income for the three and six months ended June 30, 2009, respectively, compared to the comparable periods in 2008, are primarily related to the increased mortgage banking activities. Non-interest expense decreased by $2.2 million and $4.8 million for the three and six months ended June 30, 2009, respectively, due to decreased operating costs resulting from business line restructuring and cost containment initiatives offset by an increase in foreclosed property expenses. The decrease in assets is attributable to securitizations of $203.0 million and $466.5 million in residential mortgage loans from the continuing portfolio during the second quarter of 2009 and the fourth quarter of 2008, respectively.

 

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Other

Other includes HSA Bank and Government Finance.

Other Results.

 

     For the three months ended
June 30,
   For the six months ended
June 30,
 

(In thousands)

   2009    2008 (a)    2009    2008 (a)  

Net interest income

   $ 4,521    $ 3,953    $ 7,503    $ 7,683   

Provision for credit losses

     —        —        —        —     
                             

Net interest income after provision

     4,521      3,953      7,503      7,683   

Non-interest income

     2,798      2,500      5,936      4,817   

Non-interest expense

     6,385      6,192      12,880      12,704   
                             

Income (loss) before income taxes

     934      261      559      (204

Income tax expense

     245      164      226      2   
                             

Net income (loss)

   $ 689    $ 97    $ 333    $ (206
                             

Total assets at period end

   $ 23,637    $ 23,635    $ 23,637    $ 23,635   
                             

 

(a) As of January 1, 2009 management realigned its business segments balances for Webster’s equipment finance, wealth management and insurance premium finance operating units, previously reported as a component of the Other reporting segment. Each has been reclassified to be included within the Commercial reporting segment while certain support functions were realigned within the corporate function. The 2008 balances were reclassified for comparability to the 2009 presentation.

Net income of $0.7 million for the three months ended June 30, 2009 increased by $0.6 million when compared to the comparable period in 2008. Net interest income improved $0.6 million, or 14.4%, when compared to the three months ended June 30, 2008 due to improved margins on deposits relative to the earnings credit associated with Webster’s wholesale funding costs. The increase in non-interest income of $0.3 million, or 11.9%, compared to the three months ended June 30, 2008, is related to increased deposit fees at the HSA Bank division and increased financial advisory fees.

Net income for the six months ended June 30, 2009 of $0.3 million increased $0.5 million when compared to the comparable period in 2008. The increase in net income was primarily due to the increase in deposit service fees earned on the growing deposits held at HSA. The increase in non-interest income was offset with a $0.2 million increase in income tax expense.

Reconciliation of reportable segments’ net income (loss) to condensed consolidated net income (loss):

 

     For the three months ended
June 30,
    For the six months ended
June 30,
 

(In thousands)

   2009     2008 (a)     2009     2008 (a)  

Net income from reportable segments

   $ 7,265      $ 50,514      $ 26,897      $ 80,664   

Adjustments, net of taxes:

        

Corporate Treasury Unit

     (20,226     4,886        353        20,600   

Allocation of provision for credit losses

     (19,618     (15,103     (69,034     (21,872

Allocation of net interest income

     (507     (1,034     (3,520     (6,008

Discontinued operations

     313        (439     313        (2,563

Allocation of non-interest income

     4,522        (56,417     7,922        (64,323

Allocation of non-interest expense

     (3,311     (11,132     (5,617     (10,641
                                

Net loss attributable to Webster Financial Corporation

   $ (31,562   $ (28,725   $ (42,686   $ (4,143
                                

 

(a) As of January 1, 2009 management realigned its business segments balances for Webster’s equipment finance, wealth management and insurance premium finance operating units, previously reported as a component of the Other reporting segment. Each has been reclassified to be included within the Commercial reporting segment while certain support functions were realigned within the corporate function. The 2008 balances were reclassified for comparability to the 2009 presentation

Financial Condition

Webster had total assets of $17.5 billion and $17.6 billion at June 30, 2009 and December 31, 2008, respectively.

Total loans, net decreased by $647.6 million, or 5.4%, from December 31, 2008 and $1.3 billion, or 10.1%, from June 30, 2008. The decrease from December 31, 2008 reflects lower loan demand, payoffs, an increase in the allowance for loan losses and a $203.0 million loan securitization in the second quarter of 2009, while the decrease from June 30, 2008 is principally due to the two loan securitizations; a $466.5 million securitization in the fourth quarter of 2008 and a $203.0 million securitization in the second quarter of 2009. At the same time, total deposits increased $1.3 billion, or 10.9%, from December 31, 2008 and $1.1 billion, or 9.1%, from June 30, 2008 as a result of increases in Retail, Government Finance and HSA deposits. Webster’s loan to deposit ratio improved to 88.1% at June 30, 2009 compared with 102.5% and 105.7% at December 31, 2008 and June 30, 2008, respectively.

 

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At June 30, 2009, total equity of $50.5 billion represented a net decrease of $32.6 million from December 31, 2008. The change in equity for the six months ended June 30, 2009 consisted of a $60.6 million decrease from the Series A convertible preferred stock exchange offer, a net loss of $42.7 million, $1.1 million of dividends to common shareholders, and $20.0 million of dividends to preferred shareholders, partially offset by a $50.5 increase in other comprehensive income, $36.8 million from the trust preferred share tender offer, and $4.5 million in employee stock options. At June 30, 2009, the tangible capital ratio was 7.58% compared to 7.70% at December 31, 2008 and 6.79% at June 30, 2008. See Note 14 of Notes to condensed consolidated financial statements for information on Webster’s regulatory capital levels and ratios.

Investment Securities Portfolio

The following table presents a summary of the cost and fair value of Webster’s investment securities:

 

     As of June 30, 2009    As of December 31, 2008

(In thousands)

   Par Value    Amortized
Cost (a)(b)
   Unrealized     Estimated
Fair
Value
   Par Value    Amortized
Cost (a)(b)
   Unrealized     Estimated
Fair
Value
         Gains    Losses              Gains    Losses    

Trading:

                           

Municipal bonds and notes

              $ —                 $ 77
                                                                       

Available for Sale:

                           

Government Treasury Bills

   $ 500    $ 500    $ —      $ —        $ 500    $ 2,000    $ 1,998    $ 2    $ —        $ 2,000

Corporate bonds and notes (a)

     256,295      139,417      9,490      (34,154     114,753      359,996      159,610      —        (66,092     93,518

Equity securities (b)

     N/A      15,373      627      (1,341     14,659      N/A      30,925      2,024.00      (2,174     30,775

Mortgage-backed securities - GSE

     1,150,334      1,169,901      27,540      (2,093     1,195,348      970,905      972,323      16,592      (152     988,763

Mortgage-backed securities - other

     135,000      133,862      —        (53,250     80,612      135,000      133,814      —        (60,165     73,649
                                                                       

Total available for sale

   $ 1,542,129    $ 1,459,053    $ 37,657    $ (90,838   $ 1,405,872    $ 1,467,901    $ 1,298,670    $ 18,618    $ (128,583   $ 1,188,705
                                                                       

Held-to-maturity:

                           

Municipal bonds and notes

   $ 694,984    $ 691,240    $ 8,576    $ (17,000   $ 682,816    $ 703,944    $ 700,365    $ 9,627    $ (14,481   $ 695,511

Mortgage-backed securities - GSE

     2,003,026      2,015,508      47,904      (5,632     2,057,780      1,749,399      1,751,679      43,912      —          1,795,591

Mortgage-backed securities - other

     61,217      61,217      —        (1,108     60,109      70,493      70,467      —        (1,824     68,643
                                                                       

Total held-to-maturity

   $ 2,759,227    $ 2,767,965    $ 56,480    $ (23,740   $ 2,800,705    $ 2,523,836    $ 2,522,511    $ 53,539    $ (16,305   $ 2,559,745
                                                                       

Total Investment Securities

   $ 4,301,356    $ 4,227,018    $ 94,137    $ (114,578   $ 4,206,577    $ 3,991,737    $ 3,821,181    $ 72,157    $ (144,888   $ 3,748,527
                                                                       

 

(a) Amortized cost is net of $100.6 million and $118.0 million of credit related other-than-temporary impairments at June 30, 2009 and December 31, 2008, respectively.
(b) Amortized cost is net of $15.1 million and $11.6 million of non-credit related other-than-temporary impairments at June 30, 2009 and December 31, 2008, respectively.

Webster, either directly or through Webster Bank, maintains an investment securities portfolio that is primarily structured to provide a source of liquidity for its operating needs, generate interest income and provide a means to balance interest rate sensitivity. The investment securities portfolio totaled $4.2 billion at June 30, 2009 compared to $3.7 billion at December 31, 2008 and $2.9 billion a year ago. The yield in the securities portfolio was 5.40% for the six months ended June 30, 2009 compared with 5.61% for the comparable period in 2008 on a fully tax-equivalent tax basis.

During the three and six months ended June 30, 2009, the Fed Funds target rate remained flat at 0.25% in response to the economic downturn. Short term rates, such as LIBOR, have declined while intermediate and long term rates have risen as the prospects for economic recovery emerge. Credit spreads have narrowed for the most liquid and highest rated credits but for the less liquid and lower credit securities those markets remain challenged.

All investment securities held by the Company at June 30, 2009 that were in an unrealized loss position were evaluated by management and determined not to be other-than-temporarily impaired. Management does not have the intent to sell the security, and it is more likely than not it will not have to sell the security before recovery of its cost basis. To the extent that changes in true credit quality of the securities negatively impacts the realizability of future estimated cash flows, the Company may be required to record additional impairment charges for other-than-temporary impairment in future periods. For additional information on the other-than-temporary charges, refer to the “Supplemental Information” link on the Investor Relations page on Webster’s website at www.wbst.com. This information does not constitute a part of this report and is not incorporated by reference herein.

 

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Loan Portfolio

At June 30, 2009, total loans were $11.6 billion, a decrease of $0.6 billion from December 31, 2008. The decrease reflects the impact of the June 2009 securitization of $203.0 million in residential mortgage loans from the continuing portfolio, $80 million in net charge-offs, $21.3 million in foreclosed and repossessed properties and a decline in new origination volume.

Commercial loans (including commercial real estate) represented 47.9% of the loan portfolio at June 30, 2009, up from 47.7% at December 31, 2008 and up from 46.5% at June 30, 2008. Residential mortgage loans decreased to 24.8% of the loan portfolio at June 30, 2009 from 25.1% at December 31, 2008 primarily due to the $203.0 million securitization discussed previously, and decreased from 28.1% at June 30, 2008. The remaining portion of the loan portfolio consisted of consumer loans, principally home equity loans and lines of credit.

The following paragraphs highlight, by business segment, the lending activities in the various portfolios during the three and six months ended June 30, 2009. Please refer to Webster’s 2008 Annual Report on Form 10-K, pages 1 through 6, for a complete description of Webster’s lending activities and credit administration policies and procedures.

COMMERCIAL BANKING

Middle-Market Banking

At June 30, 2009, middle market loans, including commercial and owner-occupied commercial real estate, totaled $760.7 million, a decrease of 7.1% compared to $819.1 million at December 31, 2008 and a decrease of 13.1% compared to $875.8 million at June 30, 2008. Originations for the three and six months ended June 30, 2009 totaled $23.8 million and $37.4 million, respectively, as compared to $43.9 million and $80.0 million for the comparable period in 2008. Lower originations in the three and six months ended June 30, 2009 reflect a slowing business economy and fewer transactions that met Webster’s risk return criteria.

Commercial Real Estate

At June 30, 2009, commercial real estate loans totaled $1.4 billion, unchanged from December 31, 2008 and June 30, 2008. The portfolio is administered by the Commercial Real Estate Division. Originations for the three and six months ended June 30, 2009 totaled $24.9 million and $34.0 million, respectively, as compared to $112.0 million and $241.4 million for the comparable period in 2008. Lower originations in the three and six months ended June 30, 2009 reflects a slowing business economy and fewer transactions that met Webster’s risk return criteria.

Residential Development Lending

At June 30, 2009, loans for residential development totaled $144.3 million, a decrease of 10.7% compared to $161.6 million at December 31, 2008 and a decrease of 30.1% compared to $206.4 million at June 30, 2008. Webster has materially reduced its new commitments for this segment, given slowing demand for new housing. This portfolio is administered by the Commercial Real Estate Division.

Webster Business Credit Corporation

At June 30, 2009, asset-based loans totaled $626.3 million, a decrease of 16.8% compared to $753.1 million at December 31, 2008 and a decrease of 25.7% compared to $843.0 million at June 30, 2008. Webster Business Credit Corporation (“WBCC”) is the Company’s asset-based lending subsidiary which is headquartered in New York, NY. During the three and six months ended June 30, 2009, WBCC had new commitments of $8.0 million and $14.4 million, respectively, compared to $14.0 million and $55.5 million for the comparable periods in 2008.

Equipment Financing

Webster’s equipment financing portfolio totaled $1.0 billion at June 30, 2009, unchanged from December 31, 2008 and June 30, 2008. Webster’s equipment financing business is conducted by Center Capital Corporation (“Center Capital”), its nationwide equipment financing subsidiary. Center Capital originated $73.4 million and $140.5 million in loans during the three and six months ended June 30, 2009, respectively, compared to $125.7 million and $227.3 million during the comparable periods in 2008.

Insurance Premium Financing

Budget Installment Corporation (“BIC”), Webster’s insurance premium financing subsidiary, provides products covering commercial property and casualty policies for businesses throughout the United States. BIC had total loans outstanding of $99.1 million at June 30, 2009, an increase of 15.1% compared to $86.1 million at December 31, 2008 and an increase of 32.1% compared to $75.0 million at June 30, 2008. Loans originated in the three and six months ended June 30, 2009 totaled $60.8 million and $117.3 million, compared to $45.6 million and $84.6 million, for the comparable periods in 2008.

 

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RETAIL BANKING

Business & Professional Banking

Business & Professional Banking, Webster’s small business banking division, had loans outstanding of $904.8 million at June 30, 2009, a decrease of 2.4% as compared to $927.0 million outstanding at December 31, 2008, and a decrease of 0.4% compared to $908.6 million at June 30, 2008. Included in the portfolio is $508.9 million of loans secured by commercial real estate. New originations for the three and six months ended June 30, 2009 totaled $61.5 million and $117.3 million, respectively, compared to $113.5 million and $208.0 million for the comparable periods in 2008.

CONSUMER FINANCE

Residential Mortgage and Mortgage Banking

For the three and six months ended June 30, 2009, residential mortgage loan originations totaled $301.9 million and $621.1 million, respectively, compared with $127.2 and $269.5 million for the comparable periods in 2008. Due to the increased mortgage origination activity during the three and six months ended June 30, 2009, there are increased levels of loans designated as held for sale. At June 30, 2009 and December 31, 2008, there were $96.6 million and $5.5 million, respectively, of residential mortgage loans held for sale in the secondary market.

The residential mortgage loan continuing portfolio totaled $2.9 billion at June 30, 2009 and $3.0 billion at December 31, 2008. At June 30, 2009, approximately $0.8 billion, or 28.8%, of the portfolio consisted of adjustable rate loans. Adjustable rate mortgage loans are offered at initial interest rates discounted from the fully-indexed rate. At June 30, 2009, approximately $2.1 billion, or 71.2%, of the total residential mortgage loan portfolio consisted of fixed rate loans.

The liquidating portfolio of residential construction loans totaled $6.5 million at June 30, 2009, a decrease of 65.2%, compared with $18.7 million at December 31, 2008, the result of continued property dispositions during the quarter ended June 30, 2009.

Consumer Loans

Consumer finance includes home equity loans and lines of credit and other consumer loans. At June 30, 2009, consumer loans within the continuing portfolio totaled $2.9 billion, a decrease of 3.5%, or $0.1 billion, compared to December 31, 2008. At June 30, 2009, consumer loans within the liquidating portfolio totaled $249.1 million, a decrease of 12.2%, or $34.5 million compared to December 31, 2008. The decline in the liquidating portfolio reflects paydown activity and charge-offs taken in the quarter.

Asset Quality

Loan Portfolio Review and Allowance for Credit Losses Methodology

Webster strives to maintain asset quality through its underwriting standards, servicing of loans and management of nonperforming assets. The allowance for credit losses is maintained at a level estimated by management to provide adequately for probable losses inherent in the current loan portfolio and unfunded commitments. Probable losses are estimated based upon a quarterly review of the loan portfolio, past loss experience, specific problem loans, economic conditions and other pertinent factors which, in management’s judgment, deserve current recognition in estimating credit losses. In assessing the specific risks inherent in the portfolio, management takes into consideration the risk of loss on nonaccrual loans, criticized loans and watch list loans, including an analysis of the collateral for such loans.

The quarterly allowance for credit loss analysis includes consideration of the risks associated with unfunded loan commitments and letters of credit. These commitments are converted to estimates of potential loss using loan equivalency factors, and include internal and external historic loss experience. At June 30, 2009, the reserve for unfunded credit commitments was $10.0 million and is included in accrued expenses and other liabilities on the accompanying Condensed Consolidated Balance Sheets.

Management considers the adequacy of the allowance for credit losses to be a critical accounting policy. The adequacy of the allowance is subject to judgment in its determination. Actual loan losses could differ materially from management’s estimate if actual loss factors and conditions differ significantly from the assumptions utilized. These factors and conditions include the general economic conditions within Webster’s market and nationally, trends within industries where the loan portfolio is concentrated, real estate values, interest rates and the financial condition of individual borrowers. While management believes the allowance for credit losses is adequate as of June 30, 2009, actual results may prove different and these differences could be significant.

 

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A summary of the changes in the allowance for credit losses follows:

 

     Three months ended June 30,     Six months ended June 30,  

(In thousands)

   2009     2008     2009     2008  

Continuing portfolio:

        

Beginning balance

   $ 226,562      $ 138,191      $ 191,426      $ 138,180   

Provision

     74,327        25,000        128,161        40,800   

Charge-offs:

        

Residential

     (4,793     (1,036     (7,757     (2,516

Consumer

     (10,242     (2,784     (16,783     (6,481

Commercial (a)

     (20,604     (8,664     (31,209     (20,103

Residential development

     (2,350     —          (2,398     —     
                                

Total charge-offs

     (37,989     (12,484     (58,147     (29,100

Recoveries

     1,259        1,290        2,719        2,117   
                                

Net charge-offs

     (36,730     (11,194     (55,428     (26,983
                                

Ending balance - continuing portfolio

   $ 264,159      $ 151,997      $ 264,159      $ 151,997   
                                

Liquidating portfolio:

        

Beginning balance

   $ 44,367      $ 42,117      $ 43,903      $ 49,906   

Provision

     10,673        —          22,539        —     

Charge-offs:

        

NCLC

     (3,387     (4,203     (5,473     (8,544

Consumer (home equity)

     (10,825     (5,450     (20,736     (8,898
                                

Total charge-offs

     (14,212     (9,653     (26,209     (17,442

Recoveries

     1,012        407        1,607        407   
                                

Net charge-offs

     (13,200     (9,246     (24,602     (17,035
                                

Ending balance - liquidating portfolio

   $ 41,840      $ 32,871      $ 41,840      $ 32,871   
                                

Ending balance - allowance for loan losses

   $ 305,999      $ 184,868      $ 305,999      $ 184,868   
                                

Reserve for unfunded credit commitments:(b)

        

Beginning balance

   $ 10,800      $ 9,500      $ 10,500      $ 9,500   

Provision

     —          —          300        —     

Reduction of provision previously recorded

     (762     —          (762     —     
                                

Ending balance reserve for unfunded commitments

   $ 10,038      $ 9,500      $ 10,038      $ 9,500   
                                

Ending balance - allowance for credit losses

   $ 316,037      $ 194,368      $ 316,037      $ 194,368   
                                

 

(a) All Business & Professional Banking loans, both commercial and commercial real estate, are considered commercial for purposes of reporting charge-offs and recoveries.
(b) Reserve for unfunded credit commitments is reported as a component of accrued expenses and other liabilities in the accompanying Condensed Consolidated Balance Sheets.

A summary of annualized net charge-offs to average outstanding loans by category follows:

 

     Three months ended June 30,     Six months ended June 30,  
     2009     2008     2009     2008  

Net charge-offs continuing:

        

Residential

   0.60   0.10   0.49   0.13

Commercial (a)

   1.59      0.53      1.14      0.64   

Consumer

   1.29      0.35      1.03      0.41   
                        

Net charge-offs continuing

   1.25   0.36   0.94   0.44
                        

Net charge-offs liquidating:

        

NCLC

   101.57   23.00   39.76   19.39

Consumer (home equity)

   16.49      6.75      15.34      5.15   
                        

Net charge-offs liquidating

   19.69      8.68      17.57      7.93   
                        

Total net charge-offs to total average loans (b)

   1.66   0.64   1.33   0.69
                        

 

(a) All Business & Professional Banking loans, both commercial and commercial real estate, are considered commercial for purposes of reporting charge-offs and recoveries.
(b) Net loan charge-offs as a percentage of average loans is calculated by annualizing the net charge off amounts for the three month period and dividing the result by average total loans for the respective periods.

 

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See the Allowance for Credit Losses Methodology section within Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, on pages 54 through 56 of Webster’s 2008 Annual Report on Form 10-K for additional information.

Asset Quality information at June 30, 2009 and December 31, 2008:

 

     June 30, 2009     December 31, 2008  

(Dollars in thousands)

   Amount    %     Amount    %  

Nonaccrual loans

   $ 306,349    79.7      $ 228,207    86.7   

Nonaccrual restructured loans

     44,046    11.5        4,359    1.7   

Foreclosed property

     33,808    8.8        30,623    11.6   
                          

Nonperforming assets

   $ 384,203    100.0      $ 263,189    100.0   
                          

Loans 90 days or more past due and still accruing

   $ 920      $ 1,110   

Asset Quality Ratios:

          

Nonaccrual and restructured loans as a percentage of total loans

      3.01      1.91

Nonperforming assets as a percentage of:

          

Total assets

      2.20         1.50   

Total loans plus foreclosed property

      3.30         2.15   

Net charge-offs as a percentage of average loans (annualized)

      1.66         1.09   

Allowance for loan losses as a percentage of total loans

      2.64         1.93   

Allowance for credit losses as a percentage of total loans

      2.72         2.02   

Ratio of allowance for loan losses to:

          

Net charge-offs

      6.13      1.70

Nonaccrual and restructured loans

      0.87         1.01   

 

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Nonperforming Assets

The following table details nonperforming assets:

 

     June 30, 2009     December 31, 2008  

(Dollars in thousands)

   Amount    Percent (1)     Amount    Percent (1)  

Loans:

          

Continuing Portfolio:

          

Consumer finance:

          

Residential

   $ 93,597    3.27   $ 52,502    1.73

Consumer

     38,350    1.33        29,939    1.00   
                          

Total consumer finance

     131,947    2.30        82,441    1.37   
                          

Commercial:

          

Commercial banking

     93,435    4.00        49,987    1.96   

Equipment financing

     35,675    3.62        13,138    1.28   
                          

Total commercial

     129,110    3.89        63,125    1.77   
                          

Commercial real estate

     16,707    0.80        8,032    0.39   

Residential development

     46,808    32.43        48,628    30.10   
                          

Total commercial real estate

     63,515    2.84        56,660    2.53   
                          

Non-performing loans - continuing portfolio

     324,572    2.87        202,226    1.71   
                          

Liquidating Portfolio:

          

NCLC

     5,628    86.06        13,402    71.53   

Consumer (home equity)

     20,195    8.11        16,938    5.97   
                          

Non-performing loans - liquidating portfolio

     25,823    10.10        30,340    10.03   
                          

Total non-performing loans

   $ 350,395    3.03   $ 232,566    1.92
                          

Foreclosed and repossessed assets:

          

Continuing Portfolio:

          

Residential and consumer

   $ 7,379      $ 3,107   

Commercial

     19,662        22,868   
                          

Total foreclosed and repossessed assets - continuing

   $ 27,041      $ 25,975   
                          

Liquidating Portfolio:

          

NCLC/Consumer

     6,767        4,648   
                          

Total foreclosed and repossessed assets

   $ 33,808      $ 30,623   
                          

Total non-performing assets

   $ 384,203      $ 263,189   
                          

 

(1) Represents the principal balance of past due loans as a percentage of the outstanding principal balance within the comparable loan category. The percentage excludes the impact of deferred costs and unamortized premiums.

The allowance for loan losses at June 30, 2009 was $306.0 million and represented 2.6% of total loans compared to an allowance of $235.3 million that represented 1.9% of total loans at December 31, 2008. The allowance for loan losses allocated to the continuing portfolio at June 30, 2009 was $264.2 million and represented 2.34% of the principal balance of loans within the continuing portfolio compared to an allowance of $191.4 million that represented 1.6% of the principal balance of loans within the continuing portfolio at December 31, 2008. The allowance for loan losses allocated to the liquidating portfolio at June 30, 2009 was $41.8 million and represented 16.4% of loans within the liquidating portfolio compared to an allowance of $43.9 million that represented 14.5% of loans within the liquidating portfolio December 31, 2008. For additional information on the allowance, see Note 6 of Notes to Condensed Consolidated Financial Statements elsewhere in this report.

Webster’s total nonperforming assets (NPAs) increased to $384.2 million at June 30, 2009 in comparison with $263.2 million at December 31, 2008. NPAs in the continuing portfolio were $351.6 million at June 30, 2009 compared to $228.2 million at December 31, 2008. NPAs in the commercial and consumer finance continuing portfolio increased $62.8 million and $53.8 million, respectively, from December 31, 2008.

Credit metrics in the $2.9 billion continuing home equity portfolio have shown a decrease in delinquencies as loans greater than 30 days past due were 0.99% at June 30, 2009 down from 1.14% at December 31, 2008, while the nonaccrual rate increased to 1.33% from 1.00% at December 31, 2008.

Webster’s liquidating portfolios consisting of indirect, out of market, home equity and national construction loans had $255.6 million outstanding at June 30, 2009 compared to $302.4 million at December 31, 2008. The total of $255.6 million consists of $6.5 million in construction loans, and $249.1 million in home equity lines and loans. Liquidating portfolio charge-offs were $14.2 million and $26.2 million for the three and six months ended June 30, 2009, respectively. They consisted of $3.4 million and $5.5 million, respectively, in gross charges for construction loans and $10.8 million and $20.7 million, respectively, in gross charges for consumer

 

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home equity loans. Provision for loan losses related to the liquidating portfolios totaled $10.7 million and $22.5 million for the three and six months ended June 30, 2009, respectively. The increase in charge-off activity from the prior quarters reflects the expedited resolution approach taken by management for the NCLC portfolio. As of June 30, 2009, Webster has reserves of $1.5 million and $40.3 million, respectively, against the residential and consumer liquidating portfolios or $41.8 million in total reserves against $255.6 million in the total liquidating portfolio.

Other Past Due Loans

The following table sets forth information regarding Webster’s over 30-day delinquent loans, excluding loans held for sale and nonaccrual loans.

 

     June 30, 2009     December 31, 2008  

(Dollars in thousands)

   Principal
Balances
   Percent (1)     Principal
Balances
   Percent (1)  

Past due 30-89 days:

          

Continuing Portfolio:

          

Residential

   $ 39,955    1.39   $ 45,909    1.51

Consumer

     28,354    0.99        33,848    1.14   

Commercial

     21,924    0.66        29,353    0.82   

Commercial real estate

     19,053    0.91        7,158    0.35   

Residential development

     3,210    2.22        2,096    1.30   
                          

Total continuing portfolio

     112,496    1.00        118,364    1.00   
                          

Liquidating Portfolio:

          

NCLC

     1    0.02        4,487    23.95   

Consumer (home equity)

     9,880    3.97        15,621    5.51   
                          

Liquidating portfolio

     9,881    3.87        20,108    6.65   
                          

Total loans past due 30-89 days

     122,377    1.06        138,472    1.14   
                          

Past due 90 days or more and accruing:

          

Continuing portfolio

          

Commercial

     445    0.01        459    0.01   

Commercial real estate

     475    0.02        450    0.02   

Residential development

     —      —          201    0.12   
                          

Total loans past due 90 days and still accruing

     920    0.01        1,110    0.01   
                          

Total over 30-day delinquent loans

   $ 123,297    1.07   $ 139,582    1.15
                          

 

 

(1) Represents the principal balance of past due loans as a percentage of the outstanding principal balance within the comparable loan portfolio category. The percentage excludes the impact of deffered costs and unamortized premiums.

Declines in real estate values in certain markets in which Webster conducts business, coupled with a reduction in the ability of certain homeowners to refinance or repay their residential and/or consumer obligations has resulted in an increase in delinquencies in Webster’s continuing residential and consumer portfolios.

Troubled Debt Restructures

A loan whose terms have been modified due to the financial difficulties of a borrower is reported by Webster as a troubled debt restructure (“TDR”). All TDRs are placed in non-accruing status until the loan qualifies for return to accrual status. Loans qualify for return to accrual status once they have demonstrated performance with the restructured terms of the loan agreement for a minimum of six months. All fees and expenses associated with a TDR are expensed as incurred. The following table presents loans that have been restructured as a TDR as of the date presented.

 

(In thousands)

   June 30,
2009
   December 31,
2008

Residential

   $ 30,400    $ 3,698

Consumer

     5,165      473

Commercial

     80,934      7,803
             

Total

   $ 116,499    $ 11,974
             

The increase in residential and consumer troubled debt restructures reflect the impact of Webster’s expansion of mortgage assistance programs to keep borrowers in their homes.

 

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Webster individually reviews classified loans greater than $250,000 for impairment based on the fair value of collateral or expected cash flows. At June 30, 2009 impaired loans totaled $587.2 million including loans of $127.1 million with an impairment allowance of $23.0 million. At December 31, 2008 impaired loans totaled $203.4 million including loans of $32.6 million with an impairment allowance of $2.8 million. The increase in impaired loans is directly related to the $117.8 million increase in non-performing loans from December 31, 2008, the increase in mortgage assistance program participation as well as the increase in classified loans greater than $250,000.

Deposits

Total deposits increased $1.3 billion, or 10.9%, to $13.2 billion at June 30, 2009 from $11.9 billion at December 31, 2008 and $1.1 billion, or 9.1%, from $12.1 billion at June 30, 2008. The increase occurred primarily in money market accounts, savings and health savings accounts, and reflects the Company’s commitment on deposit gathering in 2009.

Borrowings and Other Debt Obligations

Total borrowed funds, including long-term debt, decreased $1.3 billion, or 36.9%, to $2.3 billion at June 30, 2009 from $3.6 billion at December 31, 2008 and $1.1 billion, or 32.2%, from June 30, 2008. Borrowings represented 13.0% of assets at June 30, 2009 compared to 20.4% at December 31, 2008 and 19.2% at June 30, 2008. See Notes 10 and 11 of Notes to Condensed Consolidated Financial Statements for additional information.

Asset/Liability Management and Market Risk

Interest rate risk is the sensitivity of earnings to changes in interest rates and the sensitivity of the economic value of interest-sensitive assets and liabilities over short-term and long-term time horizons. The Asset/Liability Management Committee manages interest rate risk to maximize net income and net economic value over time in changing interest rate environments, within limits set by the Board of Directors. Management measures interest rate risk using simulation analyses to measure earnings and equity at risk. Earnings at risk is defined as the change in earnings from a base scenario due to changes in interest rates. Earnings simulation analysis incorporates assumptions about balance sheet changes such as asset and liability growth, loan and deposit pricing and changes to the mix of assets and liabilities. Equity at risk is defined as the change in the net economic value of assets and liabilities due to changes in interest rates compared to a base net economic value. Economic value is measured as the net present value of future cash flows. Key assumptions in both Earnings and Equity at risk include the behavior of interest rates and spreads, prepayment speeds and the run-off of deposits. From these interest rate risk measures, interest rate risk is quantified and appropriate strategies are formulated and implemented.

Interest rate risk simulation analyses cannot precisely measure the impact that higher or lower rate environments will have on net income or net economic value. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes, changes in cash flow patterns and market conditions, as well as changes in management’s strategies. Results may also vary based upon actual customer loan and deposit behaviors as compared with those simulated. These simulations assume that management does not take any action to mitigate any negative effects from changing interest rates.

The following table summarizes the estimated impact that gradual parallel changes in interest rates of 100 and 200 basis points over a twelve month period starting June 30, 2009 and December 31, 2008 might have on Webster’s net income for the subsequent twelve month period.

 

     -200bp    -100bp    +100bp     +200bp  

June 30, 2009

   N/A    N/A    +2.9   +8.8

December 31, 2008

   N/A    N/A    +1.9   +5.3

Interest rates are assumed to change up or down in a parallel fashion and net income results are compared to a flat rate scenario as a base. The flat rate scenario holds the end of period yield curve constant over a twelve month forecast horizon. Webster is within policy limits for all scenarios. The flat rate scenario at the end of 2008 assumed a federal funds rate of .25%. The flat rate scenario as of June 30, 2009 assumed a federal funds rate of .25%. The increase in sensitivity to higher rates since year end is due to increased deposit balances, decreased short-term borrowings, and lower overall expected earnings in the flat rate scenario as a result of the current environment. As the federal funds rate was at .25% on June 30, 2009, the -100 and -200 basis point scenarios have been excluded.

 

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The following table summarizes the estimated impact that immediate non-parallel changes in interest rates might have on Webster’s net income for the subsequent twelve month period starting June 30, 2009 and December 31, 2008.

 

     Short End of the Yield Curve     Long End of the Yield Curve  
     -100bp    -50bp    +50bp     +100bp     -100bp     -50bp     +50bp     +100bp  

June 30, 2009

   N/A    N/A    -4.3   -5.4   -19.3   -9.0   +7.5   +13.8

December 31, 2008

   N/A    N/A    -3.5   -5.0   -16.2   -7.6   +6.6   -12.3

The non-parallel scenarios are modeled with the short end of the yield curve moving up or down 50 and 100 basis points while the long end of the yield curve remains unchanged and vice versa. The short end of the yield curve is defined as terms less than 18 months and the long end is terms of greater than 18 months. Webster’s net income generally benefits from a rise in long term interest rates since more new and existing assets than liabilities are tied to long term rates. A decline in long term interest rates has the opposite effect and is relatively greater in the -100 basis point scenario due to an acceleration of mortgage related asset prepayments. Webster’s net income generally benefits from a fall in short term interest rates since more new and existing liabilities than assets are tied to short term rates over a twelve month period. The ultimate benefit Webster derives from this mismatch is dependent on the pricing elasticity of its large managed rate core deposit base. An increase in short term interest rates has the opposite effect on net income. The primary driver of percentage increases in both short end and long end sensitivity is lower overall expected earnings in the flat rate scenario as a result of the current environment. In this slow growth, low earnings environment, base case earnings have been adjusted higher to reflect more normalized credit losses. Earnings sensitivity expressed in dollar terms decreased from last quarter. Webster is within policy for all scenarios except the Long End declines. The risk arising from Long End declines is primarily driven by mortgage prepayments. The prevailing distress in the housing market has created uncertainty as to the predictability of mortgage prepayments for declines in market interest rates. Webster’s ALCO has approved the exception to the policy limits and continues to evaluate prepayment projections for these scenarios as well as potential hedging strategies.

The following table summarizes the estimated economic value of assets, liabilities and off-balance sheet contracts at June 30, 2009 and December 31, 2008 and the projected change to economic values if interest rates instantaneously increase or decrease by 100 basis points.

 

     Book
Value
   Estimated
Economic
Value
   Estimated Economic Value
Change
 

(Dollars in thousands)

         -100 BP    +100 BP  

June 30, 2009

           

Assets

   $ 17,452,576    $ 17,141,519    N/A    $ (363,419

Liabilities

     15,601,426      15,071,960    N/A      (220,100
                           

Total

   $ 1,851,150    $ 2,069,559    N/A    $ (143,319

Net change as % of base net economic value

              (6.9 )% 

December 31, 2008

           

Assets

   $ 17,583,537    $ 17,092,247    N/A    $ (316,917

Liabilities

     15,699,799      15,096,460    N/A      (230,612
                           

Total

   $ 1,883,738    $ 1,995,787    N/A    $ (86,305

Net change as % of base net economic value

              (4.3 )% 

The book value of assets exceeded the estimated economic value at June 30, 2009 and December 31, 2008 principally because the equity at risk model assigns no value to goodwill and other intangible assets, which totaled $561.0 million and $563.9 million, as of June 30, 2009 and December 31, 2008, respectively.

Changes in net economic value are primarily driven by changing durations of assets and liabilities which are caused by changes in the level of interest rates, spreads and volatilities. Changes in rates, spreads and volatility have had a modest impact on equity at risk at June 30, 2009 versus December 31, 2008 in the +100 basis point scenarios as seen in the table above. Due to the low level of interest rates, the -100 basis point scenario has been excluded.

These net income and economic values estimates assume that management does not take any action to mitigate any positive or negative effects from changing interest rates. The estimates are subject to factors that could cause actual results to differ. Management believes that Webster’s interest rate risk position at June 30, 2009 represents a reasonable level of risk given the current interest rate outlook. Management is prepared to act in the event that interest rates do change rapidly.

 

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Liquidity and Capital Resources

Liquidity management allows Webster to meet its cash needs at a reasonable cost under various operating environments. Liquidity is actively managed and reviewed in order to maintain stable, cost-effective funding to support the balance sheet. Liquidity comes from a variety of sources such as the cash flow from operating activities, including principal and interest payments on loans and investments, unpledged securities, which can be sold or utilized as collateral to secure funding and by the ability to attract new deposits. Webster’s goal is to maintain a strong increasing base of core deposits to support its balance sheet.

Management monitors current and projected cash needs and adjusts liquidity, as necessary. Webster has a detailed liquidity contingency plan, which is designed to respond to liquidity concerns in a prompt and comprehensive manner. It is designed to provide early detection of potential problems and details specific actions required to address liquidity risks.

At June 30, 2009 and December 31, 2008, FHLB advances outstanding totaled $0.7 billion and $1.3 billion, respectively. Webster Bank is a member of the FHLB system and had additional borrowing capacity from the FHLB of approximately $2.0 billion at June 30, 2009 and $1.6 billion at December 31, 2008. In addition, unpledged securities could have been used to increase borrowing capacity at the FHLB by an additional $1.6 billion at June 30, 2009 or used to collateralize other borrowings, such as repurchase agreements. At June 30, 2009 Webster Bank also had additional borrowing capacity from unused collateral at the Federal Reserve of $407.3 million, and had $309.8 million in capacity to issue FDIC backed debt through its Temporary Liquidity Guarantee Program (TLGP).

Webster’s primary sources of liquidity at the parent company level are dividends from Webster Bank, investment income and net proceeds from borrowings, investment sales and capital offerings. The main uses of liquidity are purchases of available for sale securities, the payment of dividends to common stockholders, repurchases of Webster’s common stock and the payment of principal and interest to holders of senior notes and capital securities. There are certain restrictions on the payment of dividends by Webster Bank to the Company. At June 30, 2009, there were no retained earnings available for the payment of dividends to the Company.

For the three and six months ended June 30, 2009, a total of 2,446 and 8,569 shares of common stock were repurchased at an average cost of $6.14 and $6.01 per common share, respectively. No shares were repurchased as part of the September 26, 2007, 2.7 million share stock buyback program with 2.1 million shares remaining available to be repurchased under the program at June 30, 2009. All 2,446 and 8,569 shares for the three and six months ended June 30, 2009 were repurchased outside of the publicly announced repurchase program in the open market to fund equity compensation plans.

Off-Balance Sheet Arrangements

In the normal course of operations, Webster engages in a variety of financial transactions that, in accordance with GAAP, are not recorded in the financial statements, or are recorded in amounts that differ from the notional amounts. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used for general corporate purposes or for customer needs. Corporate purpose transactions are used to help manage credit, interest rate and liquidity risk or to optimize capital. Customer transactions are used to manage customers’ requests for funding.

For the three and six months ended June 30, 2009, Webster did not engage in any off-balance sheet transactions that would have a material effect on its condensed consolidated financial condition.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Information regarding quantitative and qualitative disclosures about market risk appears under Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, beginning on page 56 under the caption “Asset/Liability Management and Market Risk”.

 

ITEM 4. CONTROLS AND PROCEDURES

As of June 30, 2009, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and its Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934). Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2009 for recording, processing, summarizing and reporting the information the Company is required to disclose in the reports it files under the Securities Exchange Act of 1934, within the time periods specified in the SEC’s rules and forms. There was no change in the Company’s internal control over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II. – OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

There are no material pending legal proceedings, other than ordinary routine litigation incidental to its business, to which Webster or any of its subsidiaries is a party or of which any of their property is the subject.

 

ITEM 1A. RISK FACTORS

During the three and six months ended June 30, 2009 there were no material changes to the risk factors as previously disclosed in Webster’s Annual Report on Form 10-K for the year ended December 31, 2008.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

(c) The following table provides information with respect to any purchase made by or on behalf of Webster or any “affiliated purchaser”, as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934, of shares of Webster common stock.

 

Period

   Total Number of
Shares
Purchased
   Average Price
Paid Per Share
   Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
   Maximum Number of
Shares that May Yet Be
Purchased under the
Plans or Programs (1)

April 1-30, 2009

   716    $ 6.01    —      2,111,200

May 1-31, 2009

   1,182      5.30    —      2,111,200

June 1-30, 2009

   548      8.12    —      2,111,200

Total

   2,446    $ 6.14    —      2,111,200

 

(1) The Company’s current stock repurchase program, which was announced on September 26, 2007, authorized the Company to purchase up to an additional 5% of Webster’s common stock outstanding at the time of authorization, or 2.7 million shares. The program will remain in effect until fully utilized or until modified, superseded or terminated. All 2,446 shares repurchased during the three months ended June 30, 2009 were repurchased outside of the repurchase program in the open market to fund equity compensation plans.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

(a) The annual meeting of shareholders was held on April 23, 2009.

 

(b) The following individuals were elected as directors for a three-year term at the annual meeting: Robert A. Finkenzeller, Laurence C. Morse and Mark Pettie. The other continuing directors are: Joel S. Becker, John J. Crawford, C. Michael Jacobi, Karen R. Osar and James C. Smith.

 

(c) The following matters were voted upon and approved by Webster’s shareholders at the 2009 Annual Meeting of Shareholders held on April 23, 2009: (i) election of three directors to serve for three-year terms (Proposal 1); (ii) ratification of the appointment of Ernst & Young LLP as the independent registered public accounting firm of Webster for the fiscal year ending December 31, 2009 (Proposal 2); and (iii) approval of an advisory proposal on Webster’s executive compensation philosophy, policies and procedures.

The votes tabulated by an independent inspector of election for the above-listed proposals were as follows:

Proposal 1

Robert A. Finkenzeller received 43,870,714 votes for election and 2,166,546 votes were withheld; Laurence C. Morse received 43,974,602 votes for election and 2,062,658 votes were withheld; and Mark Pettie received 44,012,050 votes for election and 2,025,210 votes were withheld. There were no abstentions or broker non-votes for any of the nominees.

 

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Proposal 2

Shareholders cast 45,204,740 votes for, 729,983 votes against and 102,537 abstentions.

Proposal 3

Shareholders cast 42,017,893 votes for, 3,603,859 votes against and 415,508 abstentions.

 

(d) Not applicable.

 

ITEM 5. OTHER INFORMATION

As previously reported in Webster’s Current Reports on Form 8-K filed with the SEC on July 21, 2009 and July 31, 2009, Messrs. Charles W. Shivery and David A. Coulter recently joined Webster’s board of directors. Mr. Shivery is the Chairman, President and Chief Executive Officer of Northeast Utilities. Mr. Coulter is a managing director at the private equity firm Warburg Pincus LLC and is the former Chairman and Chief Executive Officer of BankAmerica Corp and former Vice Chairman of JP Morgan.

 

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ITEM 6. EXHIBITS

 

  3.1 Second Restated Certificate of Incorporation (filed as Exhibit 3.1 to the Company’s Annual Report on Form 10-K filed within the SEC on March 29, 2000 and incorporated herein by reference).

 

  3.2 Certificate of Amendment (filed as Exhibit 3.2 to the Company’s Annual Report on Form 10-K filed with the SEC on March 29, 2000 and incorporated herein by reference).

 

  3.3 Certificate of Elimination Relating to the Company’s Series C Participating Preferred Stock (filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on February 9, 2006 and incorporated herein by reference).

 

  3.4 Certificate of Designations establishing the rights of the Company’s 8.50% Series A Non-Cumulative Perpetual Convertible Preferred Stock (filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on June 11, 2008 and incorporated herein by reference).

 

  3.5 Certificate of Designations establishing the rights of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series B (filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on November 24, 2008 and incorporated herein by reference).

 

  3.6 Bylaws, as amended effective December 18, 2007 (filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on December 19, 2007 and incorporated herein by reference).

 

  3.7 Certificate of Designations of Perpetual Participating Preferred Stock, Series C of Webster Financial Corporation (filed as exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on July 31, 2009 and incorporated herein by reference).

 

  3.8 Certificate of Designations of Non-Voting Perpetual Participating Preferred Stock, Series D of Webster Financial Corporation (filed as exhibit 3.2 to the Company’s Current Report on Form 8-K filed with the SEC on July 31, 2009 and incorporated herein by reference).

 

  3.9 Amendment to Article III of the Webster Financial Corporation Bylaws effective July 28, 2009 (filed as exhibit 3.3 to the Company’s Current Report on Form 8-K filed with the SEC on July 31, 2009 and incorporated herein by reference).

 

  4.1 A Warrant, Series 1 to purchase shares of Corporation common stock (filed as exhibit A.1 to the Company’s Current Report on Form 8-K filed with the SEC on July 31, 2009 and incorporated herein by reference).

 

  4.2 B Warrant, Series 1 to purchase shares of Corporation’s Series C Perpetual Participating Preferred Stock (filed as exhibit 4.2 to the Company’s Current Report on Form 8-K filed with the SEC on July 31, 2009 and incorporated herein by reference).

 

  4.3 Form of A Warrant, Series 2 to purchase shares of Corporation’s Series C Perpetual Participating Preferred Stock (filed as exhibit 4.3 to the Company’s Current Report on Form 8-K filed with the SEC on July 31, 2009 and incorporated herein by reference).

 

  4.4 Form of B Warrant, Series 2 to purchase shares of Corporation’s Series C Perpetual Participating Preferred Stock (filed as exhibit 4.4 to the Company’s Current Report on Form 8-K filed with the SEC on July 31, 2009 and incorporated herein by reference).

 

  10.1 Investment Agreement, dated as of July 27, 2009 by and between Webster Financial Corporation and Warburg Pincus Private Equity X, L.P., (filed as exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on July 31, 2009 and incorporated herein by reference).

 

  31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, signed by the Company’s Chief Executive Officer.

 

  31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, signed by the Company’s Chief Financial Officer.

 

  32.1 Written Statement pursuant to 18 U.S.C. § 1350, as created by section 906 of the Sarbanes-Oxley Act of 2002, signed by the Company’s Chief Executive Officer.

 

  32.2 Written Statement pursuant to 18 U.S.C. § 1350, as created by section 906 of the Sarbanes-Oxley Act of 2002, signed by the Company’s Chief Financial Officer.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  WEBSTER FINANCIAL CORPORATION
 

Registrant

Date: August 7, 2009   By:  

/s/ James C. Smith

    James C. Smith
    Chairman and Chief Executive Officer
Date: August 7, 2009   By:  

/s/ Gerald P. Plush

    Gerald P. Plush
   

Senior Executive Vice President -

Chief Financial Officer and Chief Risk Officer

    (Principal Financial Officer)
Date: August 7, 2009   By:  

/s/ Douglas O. Hart

    Douglas O. Hart
   

Executive Vice President -

Chief Accounting Officer

    (Principal Accounting Officer)

 

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EXHIBIT INDEX

 

  3.1 Second Restated Certificate of Incorporation (filed as Exhibit 3.1 to the Company’s Annual Report on Form 10-K filed within the SEC on March 29, 2000 and incorporated herein by reference).

 

  3.2 Certificate of Amendment (filed as Exhibit 3.2 to the Company’s Annual Report on Form 10-K filed with the SEC on March 29, 2000 and incorporated herein by reference).

 

  3.3 Certificate of Elimination Relating to the Company’s Series C Participating Preferred Stock (filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on February 9, 2006 and incorporated herein by reference).

 

  3.4 Certificate of Designations establishing the rights of the Company’s 8.50% Series A Non-Cumulative Perpetual Convertible Preferred Stock (filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on June 11, 2008 and incorporated herein by reference).

 

  3.5 Certificate of Designations establishing the rights of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series B (filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on November 24, 2008 and incorporated herein by reference).

 

  3.6 Bylaws, as amended effective December 18, 2007 (filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on December 19, 2007 and incorporated herein by reference).

 

  3.7 Certificate of Designations of Perpetual Participating Preferred Stock, Series C of Webster Financial Corporation (filed as exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on July 31, 2009 and incorporated herein by reference).

 

  3.8 Certificate of Designations of Non-Voting Perpetual Participating Preferred Stock, Series D of Webster Financial Corporation (filed as exhibit 3.2 to the Company’s Current Report on Form 8-K filed with the SEC on July 31, 2009 and incorporated herein by reference).

 

  3.9 Amendment to Article III of the Webster Financial Corporation Bylaws effective July 28, 2009 (filed as exhibit 3.3 to the Company’s Current Report on Form 8-K filed with the SEC on July 31, 2009 and incorporated herein by reference).

 

  4.1 A Warrant, Series 1 to purchase shares of Corporation common stock (filed as exhibit A.1 to the Company’s Current Report on Form 8-K filed with the SEC on July 31, 2009 and incorporated herein by reference).

 

  4.2 B Warrant, Series 1 to purchase shares of Corporation’s Series C Perpetual Participating Preferred Stock (filed as exhibit 4.2 to the Company’s Current Report on Form 8-K filed with the SEC on July 31, 2009 and incorporated herein by reference).

 

  4.3 Form of A Warrant, Series 2 to purchase shares of Corporation’s Series C Perpetual Participating Preferred Stock (filed as exhibit 4.3 to the Company’s Current Report on Form 8-K filed with the SEC on July 31, 2009 and incorporated herein by reference).

 

  4.4 Form of B Warrant, Series 2 to purchase shares of Corporation’s Series C Perpetual Participating Preferred Stock (filed as exhibit 4.4 to the Company’s Current Report on Form 8-K filed with the SEC on July 31, 2009 and incorporated herein by reference).

 

  10.1 Investment Agreement, dated as of July 27, 2009 by and between Webster Financial Corporation and Warburg Pincus Private Equity X, L.P., (filed as exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on July 31, 2009 and incorporated herein by reference).

 

  31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, signed by the Company’s Chief Executive Officer.

 

  31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, signed by the Company’s Chief Financial Officer.

 

  32.1 Written Statement pursuant to 18 U.S.C. § 1350, as created by section 906 of the Sarbanes-Oxley Act of 2002, signed by the Company’s Chief Executive Officer.

 

  32.2 Written Statement pursuant to 18 U.S.C. § 1350, as created by section 906 of the Sarbanes-Oxley Act of 2002, signed by the Company’s Chief Financial Officer.

 

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