Webster Financial 10-K 2010
Documents found in this filing:
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2009
Commission File Number: 001-31486
WEBSTER FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Webster Plaza, Waterbury, Connecticut 06702
(Address and zip code of principal executive offices)
Registrants telephone number, including area code: (203) 465-4364
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act Not Applicable
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933. Yes x No ¨.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes ¨ No x.
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. Yes x No ¨.
Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate Website, 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
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.
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2) Yes ¨ No x.
The aggregate market value of the common stock held by non-affiliates of Webster Financial Corporation was approximately $0.5 billion, based on the closing sale price of the common stock on the New York Stock Exchange on June 30, 2009, the last trading day of the registrants most recently completed second quarter.
The number of shares of common stock outstanding, as of January 29, 2010: 78,409,425.
DOCUMENTS INCORPORATED BY REFERENCE
Part III: Portions of the Definitive Proxy Statement for the Annual Meeting of Shareholders to be held on April 29, 2010.
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
WEBSTER FINANCIAL CORPORATION
2009 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. For a discussion of forward-looking statements, see the section captioned Forward-Looking Statements in Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations.
Webster Financial Corporation (Webster or the Company), a bank holding company and financial holding company under the Bank Holding Company Act of 1956, as amended, was incorporated under the laws of Delaware in 1986. Webster, on a consolidated basis, at December 31, 2009 had assets of $17.7 billion and equity of $2.0 billion. Websters principal assets at December 31, 2009 were all of the outstanding capital stock of Webster Bank, National Association (Webster Bank).
Webster, through Webster Bank and various non-banking financial services subsidiaries, delivers financial services to individuals, families and businesses throughout southern New England and into eastern New York State. Webster also offers equipment financing, commercial real estate lending, asset-based lending, and health savings accounts on a regional or national basis. Webster provides business and consumer banking, mortgage lending, financial planning, trust and investment services through 181 banking offices, 501 ATMs, telephone banking and its Internet website (www.websteronline.com). Webster Bank offers, through its HSA Bank division, (www.hsabank.com), health savings accounts on a nationwide basis. Websters common stock is traded on the New York Stock Exchange under the symbol WBS.
Websters mission statement, the foundation of its operating principles, is stated simply as We Find A Way to help individuals, families and businesses achieve their financial goals. The Company operates with a local market orientation and with a vision to be New Englands bank. Operating objectives include acquiring and developing customer relationships through marketing, on boarding and cross-sale efforts to fuel internal growth and expanding geographically in contiguous markets through a build and buy strategy. Webster also pursues acquisitions of like-minded partners who share Websters vision to be New Englands bank.
Websters operations are managed along four reportable operating segments consisting of Commercial, Retail, Consumer Finance and Other. For further information regarding the operating segments of the Company, see the sections captioned Business Segment Results in Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations and Note 22 Business Segments in Notes to Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data, which are located elsewhere in this report.
Websters Commercial Banking group provides lending, deposit and cash management services to middle-market companies in its four-state franchise territory and commercial real estate loans principally in New England and the mid-Atlantic region. Additionally, it serves as a primary referral source to wealth management and retail banking. All credit underwriting, contract preparation and closings, as well as servicing (including collections) are centrally performed by the applicable group. At December 31, 2009 the loan portfolio of the Commercial Banking group declined 14.0% to $4.3 billion from $5.0 billion at December 31, 2008. The majority of this decline is due to a planned reduction in equipment financing and asset based lending as well as the sale of Websters insurance premium finance subsidiary in November 2009. The following discussion provides information regarding the components of the Commercial Banking group.
The Middle-Market group delivers Websters broad range of financial services to a diversified group of companies with revenues greater than $10 million, primarily privately held companies located within southern New England. Typical loan facilities include lines of credit for working capital, term loans to finance purchases of equipment and commercial real estate loans for owner-occupied buildings. Unit and relationship managers within the Middle-Market group average over 20 years of experience in their markets. The Middle-Market loan portfolio was $714.0 million at December 31, 2009, a decrease of 12.8%, compared to $819.1 million at December 31, 2008, primarily due to prepayment activity. Total Middle-Market new loan originations were $74.2 million in 2009 compared to $106.2 million in 2008. Total Middle-Market new credit lines issued were $26.2 million in 2009 compared to $73.0 million in 2008. The decline in volume is directly related to the weak economic climate.
Commercial Real Estate Lending
The Commercial Real Estate group provides variable rate and fixed rate financing alternatives (primarily in Connecticut, Massachusetts, Rhode Island, New York, New Jersey and Pennsylvania) for the purpose of acquiring, developing, constructing, improving or refinancing commercial real estate where the property is the primary collateral securing the loan, and the income generated from the property is the primary repayment source. Loans are typically secured by investment quality real estate, including apartments, anchored retail and industrial and office properties. Loan types include construction, construction mini-perm and permanent loans, in amounts that generally range from $2 million to $15 million and are diversified by property type and geographic location. The lending group consists of a team of professionals with a high level of expertise and experience. The majority of the lenders have more than 15 years of national lending experience in construction and permanent lending with major banks and insurance companies. The commercial real estate portfolio declined by $0.1 billion or 5.9% to $1.6 billion at December 31, 2009 as compared to $1.7 billion at December 31, 2008. Total new loan originations for the Commercial Real Estate portfolio were $34.4 million in 2009 compared to $356.6 million in 2008. The reduction reflects the Companys adoption of a cautious posture in light of economic conditions.
Webster Business Credit Corporation
Webster Business Credit Corporation (WBCC) is Webster Banks asset-based lending subsidiary. WBCC is headquartered in New York, New York and has regional offices in South Easton, Massachusetts and Hartford, Connecticut. Asset-based loans are generally secured by accounts receivable and inventories of the borrower and, in some cases, also include additional collateral such as property and equipment. The segment of the commercial portfolio underwritten by WBCC was $533.3 million at December 31, 2009, a decrease of 29.2%, compared to $753.4 million at December 31, 2008. Total new loan and line originations for the asset-based lending portfolio were $71.2 million in 2009 compared to $83.5 million in 2008. In the fourth quarter of 2009, as part of the Companys intent to have WBCC focus its efforts on the New England and Mid-Atlantic regions, WBCC offices in Chicago, Atlanta, Cleveland, and Memphis were closed.
Center Capital Corporation (Center Capital) is Webster Banks equipment financing subsidiary, and is headquartered in Farmington, CT. Center Capital transacts business with end users of equipment, either by soliciting this business on a direct basis or through referrals from various equipment manufacturers, dealers and distributors with whom it has relationships. The equipment financing portfolio was $0.9 billion at December 31, 2009, a decrease of 10%, compared to $1.0 billion at December 31, 2008. The decline reflects the decision to exit the aviation financing business in early 2009 and a decline in demand overall given economic uncertainty. In the fourth quarter of 2009, management elected to re-focus Center Capitals efforts on three distinct financing niches: construction and transportation, environmental, and manufacturing. As part of the narrowing of business focus in the fourth quarter of 2009, headcount was reduced by 29 people.
Center Capital markets its products regionally through a direct sales force of equipment financing professionals who are grouped by customer type or collateral-specific business line. During 2009, financing initiatives
encompassed three distinct industry/equipment niches, each operating as a division: Construction and Transportation, Environmental and Manufacturing.
Within each division, Center Capital seeks to finance equipment that retains value throughout the term of the underlying transaction. Financing terms are for less than the financed equipments projected useful life, with a focus on having minimal residual value risk. All credit underwriting, contract preparation and closings, as well as servicing (including collections) are performed centrally at Center Capitals headquarters in Farmington, Connecticut.
Wealth Management and Investment Planning
Webster Financial Advisors ("WFA") primary customers are high net worth clients, not-for-profit organizations and business clients with investment management, trust, credit and deposit products and financial planning services. WFA takes a comprehensive view when dealing with clients in order to fully serve their short- and long-term financial objectives. Proprietary and non-proprietary investment products are offered through WFA and the J. Bush & Co. division. WFA provides several different levels of financial planning expertise including specialized services through another wholly-owned subsidiary, Fleming, Perry & Cox. At December 31, 2009 there were approximately $1.8 billion of client assets under management and administration, an increase of 5.9% when compared to $1.7 billion of client assets under management and administration at December 31, 2008. The increase in assets under management and administration is directly related to a recovery of the market value of these assets. These assets are not included in the Consolidated Balance Sheets.
Deposit and Cash Management Services
Webster offers a wide range of deposit and cash management services for clients ranging from sole proprietors to large corporations. For depository needs, Webster offers products ranging from core checking and money market accounts, to treasury sweep options including repurchase agreements and euro-dollar deposits. For clients with more sophisticated cash management needs, available services include ACH origination and payment services such as lockbox for receipts posting, positive pay for fraud control and controlled disbursement for cash forecasting. All of these services are available through Websters online banking system Webster Web-Link (tm) which uses image technology to provide online information to customers.
Retail Banking is dedicated to serving the needs of over 412,000 consumer households and approximately 60,000 small business customers in southern New England and eastern New York State. Retail Banking is focused on growing its customer base through the acquisition of new customer relationships and the retention and expansion of existing customer relationships.
Retail Bankings distribution network provides convenience and easy access to Websters full range of products and services. This multi-channel network is comprised of 181 banking offices and 501 ATMs in Connecticut, Massachusetts, Rhode Island and New York. The distribution network also includes a full-range of internet banking services as well as a telephone banking center. In addition to transaction and servicing convenience, Retail Bankings distribution network delivers a full range of deposit, lending and investment products and services to both consumer and small business customers within Websters regional footprint.
Retail Deposit Activities
Retail Bankings primary focus is on core deposit growth, which provides a low-cost funding source for the Bank in addition to an increasing stream of fee revenues. As of December 31, 2009, consumer retail deposits within the
branch footprint totaled $8.8 billion. Consumer retail deposits exclude deposits of the Business & Professional Banking division, which is discussed below. Websters successful execution of its deposit strategy from retail and other lines of business is evidenced by its #2 ranking in deposit market share in the state of Connecticut. Core retail deposit growth is driven by a growing base of checking relationships, strong customer retention and successful cross-sell efforts including increasing debit card and on-line banking usage. Growth is achieved by offering a range of deposit products that pay competitive interest rates to meet customer savings and liquidity management needs and deepen customer relationships.
Business & Professional Banking
The Business & Professional Banking division (B&P) is focused on the development and delivery of a full array of credit and deposit-related products to small businesses and professional services firms with annual revenue up to $10 million. B&P markets and sells to these customers through a combination of direct sales (Business Bankers) and branch-delivered efforts. B&P is a significant generator of deposits to Webster. The B&P lending effort is focused on those customers with borrowing needs from $10,000 to $2 million. Deposits from B&P customers totaled $1.3 billion as of December 31, 2009. Webster was recognized in 2009, for the eighth consecutive year, by the Connecticut district of the Small Business Administration (SBA) as the states leading bank SBA 504 lender. Webster was also recognized as the leading Connecticut lender based on number of loans and dollars of loans approved for the second consecutive year and led the State of Connecticut in the SBAs newly initiated (Americas Recovery Capital) ARC loan program. Webster remains a leader in the SBAs Patriot Express Program and was awarded the Veterans Champion of the Year by the Connecticut District Office of the SBA. The B&P loan portfolio was $868.7 million in 2009 compared to $927.0 million in 2008. Total new loan originations and credit lines for B&P Banking were $80.8 million in 2009 compared to $238.0 million in 2008.
Webster offers investment and securities-related services, including brokerage and investment advice through a strategic partnership with UVEST Financial Services Group, Inc. Webster, through its relationship with UVEST, has over 100 dual employees who are registered representatives, located throughout its branch network, offering customers an array of insurance and investment products including stocks and bonds, mutual funds, annuities and managed accounts. Brokerage and online investing services are available for customers. At December 31, 2009, Webster had $1.8 billion of assets under administration in its strategic partnership with UVEST, compared with $1.6 billion of assets under administration at December 31, 2008. These assets are not included in the Consolidated Balance Sheets. UVEST, a provider of investment and insurance programs in financial institutions branches, is a broker dealer registered with the Securities and Exchange Commission, a registered investment advisor under federal and applicable state laws, a member of the Financial Industry Regulatory Authority (FINRA), and a member of the Securities Investor Protection Corporation (SIPC).
Expansion in 2009
An important element of Websters growth strategy is to increase share in existing markets, especially newer markets, and work to optimize all delivery channels. The Company opened two de novo banking centers in the first and third quarter of 2009, one in Cranston, Rhode Island, and one in East Greenwich, Rhode Island. In the fourth quarter of 2009, Webster opened a flagship office in Boston, Massachusetts in the heart of the financial district there and also relocated its Providence, Rhode Island regional offices and opened a new banking center in the heart of the Providence financial district.
The Boston flagship office located in the former Boston Stock Exchange Building brings the totality of Webster to this new market including middle market banking, business and professional banking, government banking, cash management and retail banking. In Providence, moving the Companys regional headquarters and opening a
new banking center in a premier location at 100 Westminster sets the stage for significant growth for Webster in the Providence Metropolitan Statistical Area (MSA) where Webster is already growing market share. Webster currently has 33 banking offices in the Boston to Providence corridor.
The Consumer Finance division provides a comprehensive suite of lending products, including residential first mortgages, home equity lines of credit, home equity loans and other installment loans to Webster customers and prospects in Websters branch footprint. These products are delivered through various distribution channels including the branch network, customer care center, loan originators and via the internet.
Consumer loan products are underwritten in accordance with internal credit policies and accepted industry guidelines including, but not limited to, the evaluation of the creditworthiness of the borrower(s) and collateral. Independent credit reporting agencies, Fair Isaac scoring model (FICO) and the analysis of personal financial information are utilized to determine the credit worthiness of potential borrowers. Also, the Consumer Finance division obtains and evaluates an independent appraisal of collateral value to determine the adequacy of the collateral. Updated FICO scores and collateral values are obtained on at least a quarterly basis.
Residential Mortgages and Mortgage Banking
Consumer Finance is dedicated to providing a full complement of residential mortgage loan products that are available to meet the financial needs of Websters customers. Webster offers products including conventional conforming and jumbo fixed rate loans, conforming and jumbo adjustable rate loans, Federal Housing Authority (FHA), Veterans Administration (VA) and state agency mortgage loans through the Connecticut Housing Finance Authority (CHFA). Various programs are offered to support the Community Reinvestment Act goals at the state level. Types of properties consist of one-to-four family residences, owner and non-owner occupied, second homes, construction, permanent and improved single family building lots. Webster both retains and sells servicing on originated loans. The determination to sell or retain servicing is dependent on several factors including borrower relationships with Webster and interest rate risk.
Total residential mortgage originations for the group were $1.1 billion in 2009 compared to $0.6 billion in 2008. The $0.5 billion increase in originations resulted from a high level of refinancing activity within the industry in response to lower interest rates that began in the first quarter of 2009. Approximately $470.5 million of the loans originated were sold during 2009.
Webster Bank offers home equity lines of credit and loans and other installment loans as part of Consumer Finance. Webster also offers its customers credit card programs issued by a third party provider. The liquidating segment in Consumer Finance largely comprises of home equity loans that were originated out of footprint prior to 2008 and this portfolio is rapidly declining as planned. The liquidating portfolio receivables reduced by 23% year over year from $283.7 million at December 31, 2008 to $219.1 million at December 31, 2009. The continuing segment, which largely comprises of retail originations in footprint, declined by 7% year over year from $3.0 billion at December 31, 2008 to $2.8 billion at December 31, 2009. New originations for consumer loans are included in the continuing portfolio and declined from $0.9 billion in 2008 to $0.3 billion in 2009.
Health Savings Accounts
HSA Bank is a division of Webster Bank and is a leader in providing health savings accounts in conjunction with consumer directed health plans. HSA Bank focuses entirely on marketing and servicing health savings accounts (HSAs). HSA Bank serves customers in every state, combining specialized knowledge, convenience and service with competitive rates and fees, 24-hour access online (www.hsabank.com) and telephone service. As of
December 31, 2009, HSA Bank had approximately 260,000 accounts compared to approximately 224,000 accounts at December 31, 2008. HSA deposit balances totaled $668.2 million at December 31, 2009, an increase of 25.9%, compared to $530.7 million at December 31, 2008.
Websters Government Banking division provides a full range of banking, cash management, investment, and credit-related services to public entities across Websters four-state footprint. The group offers customized products that are delivered locally through single points of contact through offices located in Connecticut, Rhode Island and Massachusetts. By acquiring and developing relationships that consider Webster to be their primary bank, Government Banking has become a consistent and significant source of funding for the Bank. This business effort has been enhanced by the consistent investment the Bank has made in recent years in both the depth and breadth of cash management services and overall infrastructure. Government Banking divisions deposits were $1.9 billion at December 31, 2009, an increase of 137.5%, compared to $0.8 billion at December 31, 2008.
Risk Management Functions
Websters risk management framework has been designed to identify, monitor, report and manage risk issues throughout the Company. The Audit and Risk Committees of the Board of Directors, comprised solely of independent directors, oversee all Websters risk-related matters. Websters Enterprise Risk Management Committee, which reports directly to the Risk Committee of the Board, is chaired by Websters Chief Risk Officer and is comprised of Websters Executive Management Committee and Senior Risk Officers. Websters Senior Risk Officers oversee matters related to market, credit and operational risk and report directly to the Chief Risk Officer. Websters Corporate Treasurer, Chief Credit Risk Officer and Chief Compliance and Operating Risk Officer are Websters Senior Risk Officers and are responsible for overseeing matters related to the Companys risk environment.
Market risk refers to the risk of loss arising from adverse changes in interest rates, foreign currency exchange rates, commodity prices and other relevant market rates and prices, such as equity prices. The risk of loss can be assessed from the perspective of adverse changes in fair values, cash flows and future earnings. Due to the nature of its operations, Webster is primarily exposed to interest rate risk and, liquidity risk. Accordingly, Websters interest rate sensitivity and liquidity are monitored on an ongoing basis by its Asset and Liability Committee (ALCO). ALCOs primary goals are to manage interest rate risk to maximize net income and net economic value over time within agreed upon risk parameters, in changing interest rate environments and to ensure an adequate supply of liquidity over time in changing business environments subject to Board of Director approved risk limits. ALCO is chaired by Websters Treasurer who, as a Senior Risk Officer, regularly reports ALCO findings to the Enterprise Risk Management Committee and the Risk Committee of the Board of Directors.
Webster Bank manages and controls risk in its loan and investment portfolios through adherence to consistent standards. Written credit policies establish underwriting standards, place limits on exposure and set other limits or standards as deemed necessary and prudent. Exceptions to the underwriting policies arise periodically, and to ensure proper identification and disclosure, additional approval requirements and a tracking requirement for all qualified exceptions have been established.
The Credit Risk Management Committee (CRMC), which consists of senior managers responsible for lending and senior managers from credit risk management, is chaired by Websters Chief Credit Risk Officer who, as a Senior Risk Officer, regularly reports CRMC findings to the Enterprise Risk Management Committee and the Risk Committee of the Board of Directors regarding the credit quality of the loan and investment portfolios.
Operational Risk is the risk of loss resulting from inadequate or failed internal processes, people or systems or from external events. The definition includes the risk of loss from failure to comply with laws, ethical standards and contractual obligations and includes oversight of key operational risks including cash transfer risk. Websters Chief Compliance and Operating Risk Officer oversees the management and effectiveness of Websters compliance, enterprise risk management and operational risk management framework which includes the Compliance Program, the Bank Secrecy Act Program, the CRA and Fair Lending Programs, the Privacy Program, the Information Security Program, the Identity Theft Prevention Program, the Bank Security Program and the Enterprise Risk Management Program. The Chief Compliance and Operating Risk Officer is responsible for reporting on the adequacy of all operating risk management components and programs to the Enterprise Risk Management Committee and the Risk Committee of the Board of Directors and/or other committees of the Board as provided for under relevant charters, and is responsible for supervision of the following areas:
Websters Operating Risk Management Committee (ORMC), which consists of senior managers responsible for human resources, legal, information security and operations and senior managers from operating risk management, is chaired by Websters Chief Compliance and Operating Risk Officer who, as a Senior Risk Officer, regularly reports ORMC findings to the Enterprise Risk Management Committee and the Risk Committee of the Board of Directors regarding compliance, security, BSA, CRA and enterprise risk management as well as operating risk matters.
Internal Audit provides an independent assessment of the quality of internal controls for all major business units and operations throughout Webster. Results of Internal Audit reviews are reported to management and the Audit Committee. Corrective measures are monitored to ensure risk issues are mitigated or resolved. The General Auditor reports directly to the Audit Committee and administratively to the Chief Risk Officer.
Additional information on risks and uncertainties and additional factors that could affect the results anticipated in these forward-looking statements or from historical performance can be found in Item 1A. and elsewhere within this Form 10-K for the year ended December 31, 2009 and in other reports filed by Webster with the SEC.
The OneWebster and OneWebster Plus Initiatives
The OneWebster and OneWebster Plus Initiatives, which began in January 2008 and continued through the first quarter of 2009, were a company-wide review of business practices designed to enhance the customer experience and improve the Companys overall operating efficiency. As a result of these initiatives, Webster expects annual pre-tax benefits of $50 million by the middle of 2010 through actions that will save approximately $40 million in costs and achieve an additional $10 million in incremental revenue growth on an annual run-rate basis compared with 2007. Webster plans to achieve the $40 million in cost savings by streamlining processes and by instituting other efficiency initiatives. About 240 positions were eliminated, with more than half achieved through attrition and elimination of open positions as part of the OneWebster Initiative. An additional 240 positions were eliminated in connection with the OneWebster Plus Initiative again with more than half achieved through attrition and elimination of open positions. Webster incurred severance and other related charges of approximately $13.1 million in connection with the implementation of over 1,100 OneWebster ideas generated by employees during 2008.
Looking toward 2010, management intends to complete its commitment made in the OneWebster process and initiate a Continuous Improvement Process to generate new ideas for revenue enhancement and cost reduction. This will also require investment in the We in Webster employee engagement program which is an essential part of Websters culture.
Websters future results are likely to be impacted by the results of the implementation of the OneWebster and OneWebster Plus Initiatives, as discussed herein. Generally, the amounts of the anticipated cost savings and revenue enhancements are based to some extent on estimates and assumptions regarding future business performance and expenses. These estimates and assumptions may or may not prove to be accurate in some respects. As more fully described in Item 1A of this Form 10-K for the year ended December 31, 2009, Webster is subject to various risks inherent in its business. These risks may cause the anticipated cost savings and revenue enhancements from the initiative not to be achieved in their entirety, not to be accomplished within the expected time frame, or to result in implementation charges beyond those currently contemplated or some other unanticipated adverse impact. Furthermore, the implementation of cost savings ideas may have unintended impacts on Websters ability to attract and retain business and customers, while revenue enhancement ideas may not be successful in the marketplace or may result in unintended costs. Assumed attrition required to achieve workforce reductions may not come in the right places or at the right times to meet planned goals.
Regional Expansion and Related Activities
By establishing a prominent presence in the heart of Bostons financial district in the fourth quarter of 2009, Webster has taken a significant step toward its vision of being New Englands bank. The regional expansion into Boston will emphasize the totality of Webster that will include a representation of all of its lines of business, initially targeting primarily government, commercial, small business lending, and individual consumer banking through its new downtown banking center there.
Also in the fourth quarter of 2009, the Company also relocated its regional offices into downtown Providence and opened a new banking center in the heart of the financial district. This move has set the stage for significant additional growth for Webster in the Providence MSA, where the Company has already begun growing market share.
Webster intends to increase its share in existing markets, especially those newer to Webster, and work to optimize all of its delivery channels. Webster also plans to nearly double its business lending volume in 2010 and add approximately 150 Webster bankers. Management believes that expansion within its core business banking footprint with specific emphasis on small business and middle market is essential in keeping with Websters goal to be the leading regional commercial bank serving New England.
The Companys growth and increased market share have been achieved through both internal growth and in prior periods through acquisitions. Acquisitions typically involve the payment of a premium over book and market values and commonly result in one-time charges against earnings for integration and similar costs. Cost-savings, especially incident to in-market acquisitions, are achieved and revenue growth opportunities are enhanced through acquisitions. No acquisitions were undertaken during 2009 or 2008. The Company divested its wholly owned insurance premium finance subsidiary in the fourth quarter of 2009, and sold its investment in Webster Insurance and Webster Risk Services in the first and second quarters of 2008, respectively. See Note 3 Sale of Subsidiaries and Branch for additional information regarding these transactions.
Subsidiaries of Webster Financial Corporation
Websters direct subsidiaries as of December 31, 2009, included Webster Bank N.A. and Fleming, Perry & Cox, Inc. Webster also owns all of the outstanding common stock in the following unconsolidated financial vehicles that have issued or may in the future issue trust preferred securities: Webster Capital Trust III, Webster Capital Trust IV, Webster Capital Trust V, Webster Capital Trust VI, Webster Capital Trust VII, Webster Statutory Trust I, Peoples Bancshares Capital Trust II, Eastern Wisconsin Bancshares Capital Trust II and NewMil Statutory Trust I.
Webster Banks direct subsidiaries include Webster Mortgage Investment Corporation, Webster Preferred Capital Corporation, Webster Business Credit Corporation and Center Capital Corporation. Webster Bank is the primary source of retail activity within the consolidated group. Webster Bank provides banking services through 181 banking offices, 501 ATMs, telephone banking and the Internet. Residential mortgage origination activity is conducted through Webster Bank. Webster Mortgage Investment Corporation is a passive investment subsidiary whose primary function is to provide servicing on passive investments, such as residential and commercial mortgage loans transferred from Webster Bank. Webster Preferred Capital Corporation is a real estate investment trust, which holds mortgage assets, principally residential mortgage loans transferred from Webster Bank. Various commercial lending products are provided through Webster Bank and its subsidiaries to clients throughout the United States. WBCC provides asset-based lending services. Center Capital provides equipment financing for end users of equipment. Additionally, Webster Bank has various other subsidiaries that are not significant to the consolidated group.
Webster is subject to strong competition from banks and other financial institutions, including savings and loan associations, finance companies, credit unions, consumer finance companies and insurance companies. Certain of these competitors are larger financial institutions with substantially greater resources, lending limits, larger branch systems and a wider array of commercial banking services than Webster. Competition from both bank and non-bank organizations is expected to continue and intensify as evidenced by a number of investment banks forming new bank holding companies.
The banking industry is experiencing rapid changes in technology. In addition to improving customer services, effective use of technology increases efficiency and enables financial institutions to reduce costs. Technological advances are likely to increase competition by enabling more companies to provide cost effective products and services.
Webster faces substantial competition for deposits and loans throughout its market areas. The primary factors in competing for deposits are interest rates, personalized services, the quality and range of financial services, convenience of office locations, automated services and office hours. Competition for deposits comes primarily
from other commercial banks, savings institutions, credit unions, mutual funds and other investment alternatives. The primary factors in competing for commercial and business loans are interest rates, loan origination fees, the quality and range of lending services and personalized service. Competition for origination of mortgage loans comes primarily from savings institutions, mortgage banking firms, mortgage brokers, other commercial banks and insurance companies.
Supervision and Regulation
Webster, Webster Bank and certain of its non-banking subsidiaries are subject to extensive regulation under federal and state laws. The regulatory framework is intended primarily for the protection of depositors, federal deposit insurance funds and the banking system as a whole and not for the protection of security holders.
Set forth below is a description of the significant elements of the laws and regulations applicable to Webster and its subsidiaries. The description that follows is qualified in its entirety by reference to the full text of the statutes, regulations and policies that are described. Also, such statutes, regulations and policies are continually under review by Congress and state legislatures and federal and state regulatory agencies. A change in statutes, regulations or regulatory policies applicable to Webster and its subsidiaries could have a material effect on the business of the Company.
Webster is a legal entity separate and distinct from Webster Bank and its other subsidiaries. As a bank holding company and a financial holding company, Webster is regulated under the Bank Holding Company Act of 1956, as amended (BHC Act), and is subject to inspection, examination and supervision by the Board of Governors of the Federal Reserve System (Federal Reserve Board). Webster is also under the jurisdiction of the Securities and Exchange Commission (SEC) and is subject to the disclosure and regulatory requirements of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, as administered by the SEC. Webster is listed on the New York Stock Exchange (NYSE) under the trading symbol WBS, and is subject to the rules of the NYSE for listed companies. Webster Bank is organized as a national banking association under the National Bank Act. It is subject to regulation and examination by the Office of the Comptroller of the Currency (OCC). Its deposits are insured by the Federal Deposit Insurance Corporation (FDIC), and it is subject to certain FDIC regulations.
Many of the Companys non-bank subsidiaries also are subject to regulation by the Federal Reserve Board and other federal and state agencies. Webster Bank is also authorized to engage as an underwriter of municipal securities and as such is subject to regulation by the Municipal Securities Rulemaking Board, although such activities have been curtailed for 2009. Other non-bank subsidiaries are subject to both federal and state laws and regulations.
Bank Holding Company Activities
In general, the BHC Act limits the business of bank holding companies to banking, managing or controlling banks and other activities that the Federal Reserve Board has determined to be so closely related to banking as to be a proper incident thereto. As a result of the Gramm-Leach-Bliley Financial Modernization Act of 1999 (GLB Act), which amended the BHC Act, bank holding companies that are financial holding companies may engage in any activity, or acquire and retain the shares of a company engaged in any activity that is either (i) financial in nature or incidental to such financial activity (as determined by the Federal Reserve Board in consultation with the OCC) or (ii) complementary to a financial activity, and that does not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally (as solely determined by the Federal Reserve Board). Activities that are financial in nature include securities underwriting and dealing, insurance underwriting and making merchant banking investments.
If a bank holding company seeks to engage in the broader range of activities that are permitted under the BHC Act for financial holding companies, (i) all of its depository institution subsidiaries must be well capitalized and well managed and (ii) it must file a declaration with the Federal Reserve Board that it elects to be a financial holding company. A depository institution subsidiary is considered to be well capitalized if it satisfies the requirements for this status discussed in the section captioned Capital Adequacy and Prompt Corrective Action, included elsewhere in this item. A depository institution subsidiary is considered well managed if it received a composite rating and management rating of at least satisfactory in its most recent examination.
In order for a financial holding company to commence any new activity permitted by the BHC Act, or to acquire a company engaged in any new activity permitted by the BHC Act, each insured depository institution subsidiary of the financial holding company must have received a rating of at least satisfactory in its most recent examination under the Community Reinvestment Act. See the section captioned Community Reinvestment Act included elsewhere in this item.
The BHC Act generally limits acquisitions by bank holding companies that are not qualified as financial holding companies to commercial banks and companies engaged in activities that the Federal Reserve Board has determined to be so closely related to banking as to be a proper incident thereto. Financial holding companies like Webster are also permitted to acquire companies engaged in activities that are financial in nature and in activities that are incidental and complementary to financial activities without prior Federal Reserve Board approval.
The BHC Act, the federal Bank Merger Act and other federal and state statutes regulate acquisitions of commercial banks. The BHC Act requires the prior approval of the Federal Reserve Board for the direct or indirect acquisition of 5.0% or more of the voting shares of a commercial bank or its parent holding company. Under the Bank Merger Act, the prior approval of the OCC is required for a national bank to merge with another bank or purchase the assets or assume the deposits of another bank. In reviewing applications seeking approval of merger and acquisition transactions, the bank regulatory authorities will consider, among other things, the competitive effect and public benefits of the transactions, the capital position of the combined organization, the applicants performance record under the Community Reinvestment Act (see the section captioned Community Reinvestment Act included elsewhere in this item) and fair housing laws and the effectiveness of the subject organizations in combating money laundering activities.
The principal source of Websters cash revenues is dividends from Webster Bank. The prior approval of the OCC is required if the total of all dividends declared by a national bank in any calendar year would exceed the sum of the banks net profits for that year and its retained net profits for the preceding two calendar years, less any required transfers to surplus. Federal law also prohibits national banks from paying dividends that would be greater than the banks undivided profits after deducting statutory bad debt in excess of the banks allowance for loan losses. Under the foregoing dividend restrictions, Webster Bank did not have the ability to pay dividends at December 31, 2009.
In addition, Webster and Webster Bank are subject to other regulatory policies and requirements relating to the payment of dividends, including requirements to maintain adequate capital above regulatory minimums. The appropriate federal regulatory authority is authorized to determine under certain circumstances relating to the financial condition of a bank holding company or a bank that the payment of dividends would be an unsafe or unsound practice and to prohibit payment thereof. The appropriate federal regulatory authorities have indicated that paying dividends that deplete a banks capital base to an inadequate level would be an unsafe and unsound banking practice and that banking organizations should generally pay dividends only out of current operating earnings.
Federal Reserve System
The FRB regulations require depository institutions to maintain non-interest-earning reserves against their transaction accounts (primarily NOW and regular checking accounts). The FRB regulations generally require that reserves be maintained against aggregate transaction accounts as follows: for that portion of transaction accounts aggregating $44.4 million or less (which may be adjusted by the FRB) the reserve requirement is 3%; and for amounts greater than $44.4 million, 10% (which may be adjusted by the FRB between 8% and 14%), against that portion of total transaction accounts in excess of $44.4 million. The first $10.3 million of otherwise reservable balances (which may be adjusted by the FRB) are exempted from the reserve requirements. The Bank is in compliance with these requirements.
Federal Home Loan Bank System
The Bank is a member of the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank provides a central credit facility primarily for member institutions. Member institutions are required to acquire and hold shares of capital stock in the Federal Home Loan Bank in an amount at least equal to the sum of 0.35% of the aggregate principal amount of its unpaid residential mortgage loans and similar obligations at the beginning of each year and 4.5% of its advances (borrowings) from the Federal Home Loan Bank. The Bank was in compliance with this requirement with an investment in Federal Home Loan Bank stock at December 31, 2009 of $93.2 million. At December 31, 2009, the Bank had approximately $544.7 million in Federal Home Loan Bank advances.
On January 28, 2009, the Federal Home Loan Bank of Boston (FHLBB) notified its members via a letter from its president of its focus on preserving capital in response to ongoing market volatility. The letter outlined that actions taken by the FHLBB included an excess stock repurchase moratorium, an increased retained earnings target, and quarterly dividend payout restrictions, and indicated that members will likely face quarters where there is little to no dividend payout. The FHLBB also indicated they could not indicate when dividends might edge closer to historical levels. During 2009, Webster did not receive dividends from the FHLBB. There has been no indication to date in 2010 from the FHLBB of any change in resuming dividend payouts.
Source of Strength Doctrine
Federal Reserve Board policy requires bank holding companies to act as a source of financial and managerial strength to their subsidiary banks. Under this policy, Webster is expected to commit resources to support Webster Bank, including at times when Webster may not be in a financial position to provide such resources. Any capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary banks. The BHC Act provides that, in the event of a bank holding companys bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to priority of payment.
In addition, under the National Bank Act, if the capital stock of Webster Bank is impaired by losses or otherwise, the OCC is authorized to require payment of the deficiency by assessment upon Webster. If the assessment is not paid within three months, the OCC could order a sale of the Webster Bank stock held by Webster to make good the deficiency.
Capital Adequacy and Prompt Corrective Action
Federal law requires, among other things, that federal bank regulatory authorities take prompt corrective action with respect to banks that do not meet minimum capital requirements. For these purposes, the law establishes five capital categories:
As of December 31, 2009, Webster and Webster Bank exceeded the regulatory requirements for the classification as well capitalized. See Note 15 of Notes to Consolidated Financial Statements for additional information regarding Webster and Webster Banks regulatory capital levels.
Transactions with Affiliates
Under federal law, transactions between depository institutions and their affiliates are governed by Sections 23A and 23B of the Federal Reserve Act (FRA). In a holding company context, at a minimum, the parent holding company of a bank and any companies which are controlled by such parent holding company are affiliates of the bank. Generally, sections 23A and 23B are intended to protect insured depository institutions from suffering losses arising from transactions with non-insured affiliates, by limiting the extent to which a bank or its subsidiaries may engage in covered transactions with any one affiliate and with all affiliates of the bank in the aggregate, and by requiring that such transactions be on terms that are consistent with safe and sound banking practices.
Further, Section 22(h) of the FRA restricts loans to directors, executive officers, and principal stockholders (insiders). Under Section 22(h), loans to insiders and their related interests may not exceed, together with all other outstanding loans to such persons and affiliated entities, the institutions total capital and surplus. Loans to insiders above specified amounts must receive the prior approval of the board of directors. Further, under Section 22(h), loans to directors, executive officers and principal stockholders must be made on terms substantially the same as offered in comparable transactions to other persons, except that such insiders may receive preferential loans made under a benefit or compensation program that is widely available to the banks employees and does not give preference to the insider over the employees. Section 22(g) of the FRA places additional limitations on loans to executive officers.
In accordance with the GLB Act, federal banking regulators adopted rules that limit the ability of banks and other financial institutions to disclose non-public information about consumers to nonaffiliated third parties. These limitations require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to a nonaffiliated third party. The privacy provisions of the
GLB Act affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors. In addition, the affiliate marketing provisions of the Fair Credit Reporting Act require that, in certain situations where consumers information is shared with affiliates for use in marketing, the consumers must be given notice and a chance to opt out of the marketing.
The Federal Deposit Insurance Act (FDIA) provides that, in the event of the liquidation or other resolution of an insured depository institution, the claims of depositors of the institution, including the claims of the FDIC as subrogee of insured depositors, and certain claims for administrative expenses of the FDIC as a receiver, will have priority over other general unsecured claims against the institution. If an insured depository institution fails, insured and uninsured depositors, along with the FDIC, will have priority in payment ahead of unsecured, non-deposit creditors, including the parent bank holding company, with respect to any extensions of credit they have made to such insured depository institution.
Substantially all of the deposits of Webster are insured up to applicable limits by the Deposit Insurance Fund (DIF) of the FDIC and are subject to deposit insurance assessments to maintain the DIF. The FDIC utilizes a risk-based assessment system that imposes insurance premiums based upon a risk matrix that takes into account a banks capital level and supervisory rating (CAMELS rating). The risk matrix utilizes four risk categories which are distinguished by capital levels and supervisory ratings.
In December 2008, the FDIC issued a final rule that raised the then current assessment rates uniformly by 7 basis points for the first quarter of 2009 assessment, which resulted in annualized assessment rates for institutions in the highest risk category (Risk Category 1 institutions) ranging from 12 to 14 basis points (basis points representing cents per $100 of assessable deposits). In February 2009, the FDIC issued final rules to amend the DIF restoration plan, change the risk-based assessment system and set assessment rates for Risk Category 1 institutions beginning in the second quarter of 2009. For Risk Category 1 institutions that have long-term debt issuer ratings, the FDIC determines the initial base assessment rate using a combination of weighted-average CAMELS component ratings, long-term debt issuer ratings (converted to numbers and averaged) and the financial ratios method assessment rate (as defined), each equally weighted. The initial base assessment rates for Risk Category 1 institutions range from 12 to 16 basis points, on an annualized basis. After the effect of potential base-rate adjustments, total base assessment rates range from 7 to 24 basis points. The potential adjustments to a Risk Category 1 institutions initial base assessment rate, include (i) a potential decrease of up to 5 basis points for long-term unsecured debt, including senior and subordinated debt and (ii) a potential increase of up to 8 basis points for secured liabilities in excess of 25% of domestic deposits.
In May 2009, the FDIC issued a final rule which levied a special assessment applicable to all insured depository institutions totaling 5 basis points of each institutions total assets less Tier 1 capital as of June 30, 2009, not to exceed 10 basis points of domestic deposits. The special assessment was part of the FDICs efforts to rebuild the DIF. Deposit insurance expense during 2009 included $8.0 million recognized in the second quarter related to the special assessment.
In November 2009, the FDIC issued a rule that required all insured depository institutions, with limited exceptions, to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. The FDIC also adopted a uniform three-basis point increase in assessment rates effective on January 1, 2011. In December 2009, the Company paid $84.6 million in prepaid risk-based assessments, which included $5.4 million related to the fourth quarter of 2009 that would have otherwise been payable in the first quarter of 2010. This amount is included in deposit insurance expense for 2009. The remaining $79.2 million in pre-paid deposit insurance is included in the accompanying Consolidated Balance Sheet as of December 31, 2009.
FDIC deposit insurance assessment expenses totaled $30.1 million, $4.7 million and $1.5 million for the years ended December 31, 2009, 2008 and 2007, respectively. FDIC insurance expense includes deposit insurance assessments and Financing Corporation (FICO) assessments related to outstanding FICO bonds. The FICO is a mixed-ownership government corporation established by the Competitive Equality Banking Act of 1987 whose sole purpose was to function as a financing vehicle for the now defunct Federal Savings & Loan Insurance Corporation.
Under the FDIA, the FDIC may terminate deposit insurance upon a finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. Websters management is not aware of any practice, condition or violation that might lead to the termination of deposit insurance.
Emergency Economic Stabilization Act of 2008
Among the numerous steps the U.S. government has taken in response to the financial crises affecting the overall banking system and financial markets, was the enactment of the Emergency Economic Stabilization Act of 2008 (EESA) on October 3, 2008. The EESA included a provision for an increase in the amount of deposits insured by the FDIC to $250,000 until December 2009 to strengthen confidence in the banking system (this time period was subsequently extended to December 31, 2013 by the Helping Families Save Their Homes Act of 2009). On October 14, 2008, the FDIC announced a new program, the Temporary Liquidity Guarantee Program (TLGP) that provides unlimited deposit insurance on funds in noninterest-bearing transaction deposit accounts not otherwise covered by the existing deposit insurance limit of $250,000. The TLGP also provides that the FDIC will guarantee qualifying senior unsecured debt issued prior to June 2009 by participating banks and certain qualifying holding companies. Participating institutions are assessed a 10 basis point surcharge on the additional insured deposits and a 50 to 100 basis point assessment on qualifying senior unsecured debt issued under the debt guarantee portion of the program. Webster has elected to participate in both portions of the TLGP and incur the surcharge as a cost of participation.
Troubled Asset Relief Program and Capital Purchase Program
The Troubled Asset Relief Program (TARP) was established as part of the EESA in October 2008. The TARP gave the Treasury authority to deploy up to $700 billion into the financial system with the objective of improving liquidity in the capital markets. On October 24, 2008, the Treasury announced plans to direct $250 billion of the $700 billion authorized into preferred stock investments in banks (the Capital Purchase Program or CPP). The general terms of this preferred stock program are as follows for a participant bank: pay 5% dividends on the Treasurys preferred stock for the first five years and 9% dividends thereafter; cannot increase common dividends for three years while the Treasury is an investor; the Treasury receives warrants entitling the Treasury to buy participating banks common stock equal to 15% of the Treasurys total investment in the participating bank; and participating bank executives must agree to certain compensation restrictions, and restrictions on the amount of executive compensation which is tax deductible and other detailed terms and conditions. In addition to the executive compensation restrictions announced by the Department of Treasury, participants in the CPP are now also subject to the more stringent executive compensation limits enacted as part of the American Recovery and Reinvestment Act of 2009 (ARRA), which was signed into law on February 17, 2009. Among other things, the ARRA more strictly limits the payment of incentive compensation and any severance or golden parachute payments to certain highly compensated employees of CPP participants, expands the scope of employees who are subject to a clawback of bonus and incentive compensation that is based on results that are later found to be materially inaccurate, adds additional corporate governance requirements, and requires the Department of Treasury to perform a retroactive review of compensation to the five highest compensated employees of all CPP participants. See Note 14 Shareholders Equity for additional information related to TARP and the CPP program.
On November 21, 2008, Webster entered into a Purchase Agreement with the Treasury pursuant to which the Company issued and sold to the Treasury (i) 400,000 shares of the Companys Fixed Rate Cumulative Perpetual Preferred Stock, Series B, par value $0.01 per share, having a liquidation preference of $1,000 per share (the Series B Preferred Stock) and (ii) a ten-year warrant to purchase up to 3,282,276 shares of the Companys common stock, par value $0.01 per share (the Common Stock), at an initial exercise price of $18.28 per share (the Warrant), for an aggregate purchase price of $400 million in cash. All of the proceeds from the sale of the Series B Preferred Stock are treated as Tier 1 Capital for regulatory purposes. Additional terms or restrictions to those mentioned above may be imposed by Treasury or Congress at a later date, and these restrictions may apply retroactively. These restrictions may have a material adverse affect on the Companys operations, revenue and financial condition, on the Companys ability to pay dividends, or on Websters ability to attract and retain executive talent.
In January 2010, Webster submitted a formal plan to the U.S. Treasury regarding an orderly repayment of the CPP investment. As noted in the Companys fourth quarter 2009 earnings release, the Companys overall capital strength underpins Websters desire to initiate an orderly and responsible repayment plan.
Sarbanes-Oxley Act of 2002
The stated goals of the Sarbanes-Oxley Act of 2002 (SOX) are to increase corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws.
SOX includes very specific additional disclosure requirements and new corporate governance rules, requires the SEC and securities exchanges to adopt extensive additional disclosure, corporate governance and other related rules and mandates further studies of certain issues by the SEC and the Comptroller General. SOX represents significant federal involvement in matters traditionally left to state regulatory systems, such as the regulation of the accounting profession, and to state corporate law, such as the relationship between a board of directors and management and between a board of directors and its committees.
SOX addresses, among other matters, audit committees; the certification of financial statements and internal controls by the Chief Executive Officer and Chief Financial Officer; the forfeiture of bonuses or other incentive-based compensation and profits from the sale of an issuers securities by directors and senior officers in the twelve month period following initial publication of any financial statements that later require restatement; a prohibition on insider trading during pension plan black out periods; disclosure of off-balance sheet transactions; a prohibition on certain loans to directors and officers; expedited filing requirements for Forms 4; disclosure of a code of ethics and filing of a Form 8-K for significant changes or waivers of such code; real time filing of periodic reports; the formation of a public accounting oversight board; auditor independence; and provides for various increased criminal penalties for violations of securities laws. The SEC has enacted rules to implement various provisions of SOX.
Community Reinvestment Act and Fair Lending Laws
Webster Bank has a responsibility under the Community Reinvestment Act of 1977 (CRA) to help meet the credit needs of its communities, including low- and moderate-income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institutions discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. In connection with its examination, the OCC assesses Webster Banks record of compliance with the CRA. In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit discrimination in lending practices on the basis of characteristics specified in those statutes. Webster Banks failure to comply with the provisions of the CRA could, at a minimum, result in regulatory restrictions on its activities and the activities of Webster. Webster Banks failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act could result in enforcement actions against it by the OCC as well as other federal regulatory agencies and the Department of Justice. The Banks latest FDIC CRA rating was satisfactory.
USA PATRIOT Act
Under Title III of the USA PATRIOT Act, all financial institutions are required to take certain measures to identify their customers, prevent money laundering, monitor customer transactions and report suspicious activity to U.S. law enforcement agencies. Financial institutions also are required to respond to requests for information from federal banking regulatory authorities and law enforcement agencies. Information sharing among financial institutions for the above purposes is encouraged by an exemption granted to complying financial institutions from the privacy provisions of GLBA and other privacy laws. Financial institutions that hold correspondent accounts for foreign banks or provide private banking services to foreign individuals are required to take measures to avoid dealing with certain foreign individuals or entities, including foreign banks with profiles that raise money laundering concerns, and are prohibited from dealing with foreign shell banks and persons from jurisdictions of particular concern. The primary federal banking regulators and the Secretary of the Treasury have adopted regulations to implement several of these provisions. All financial institutions also are required to establish internal anti-money laundering programs. The effectiveness of a financial institution in combating money laundering activities is a factor to be considered in any application submitted by the financial institution under the Bank Merger Act or the BHCA. Webster has in place a Bank Secrecy Act and USA PATRIOT Act compliance program, and engages in very few transactions of any kind with foreign financial institutions or foreign persons.
Office of Foreign Assets Control Regulation
The United States has imposed economic sanctions that affect transactions with designated foreign countries, nationals and others. These are typically known as the OFAC rules based on their administration by the U.S. Treasury Department Office of Foreign Assets Control (OFAC). The OFAC-administered sanctions targeting countries take many different forms. Generally, however, they contain one or more of the following elements: i) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on U.S. persons engaging in financial transactions relating to making investments in, or providing investment-related advice or assistance to, a sanctioned country; and ii) a blocking of assets in which the government or specially designated nationals of the sanctioned country have an interest, by prohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons). Blocked assets (e.g., property and bank deposits) cannot be paid out, withdrawn, set off or transferred in any manner without a license from OFAC. Failure to comply with these sanctions could have serious legal and reputational consequences.
From time to time, various legislative and regulatory initiatives are introduced in Congress and state legislatures, as well as by regulatory agencies. Such initiatives may include proposals to expand or contract the powers of bank holding companies and/or depository institutions or proposals to substantially change the financial institution regulatory system. Such legislation could change banking statutes and the operating environment of the Company in substantial and unpredictable ways. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions. The Company cannot predict whether any such legislation will be enacted, and, if enacted, the effect that it, or any implementing regulations, would have on the financial condition or results of operations of the Company. A change in statutes, regulations or regulatory policies applicable to Webster or any of its subsidiaries could have a material effect on the business of the Company.
At December 31, 2009, Webster had 2,778 full-time equivalent employees, including 2,728 full-time and 214 part-time and other employees. None of the employees were represented by a collective bargaining group. Webster maintains a comprehensive employee benefit program providing, among other benefits, group medical
and dental insurance, life insurance, disability insurance, and an employee 401(k) investment plan. Management considers relations with its employees to be good. See Note 20 of Notes to Consolidated Financial Statements contained elsewhere within this report for additional information on certain benefit programs.
Webster makes available free of charge on its websites (www.wbst.com or www.websteronline.com) its Annual Report on Form 10-K, its quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934 as soon as practicable after it electronically files such material with, or furnishes it to, the Securities and Exchange Commission. Information on Websters website is not incorporated by reference into this report.
The information required by the SECs Securities Act Industry Guide 3 Statistical Disclosure by Bank Holding Companies is located on the pages noted below.
Websters financial condition and results of operations are subject to various risks inherent in the Companys business. The material risks and uncertainties that management believes affect the Company are described below. If any of the events or circumstances described in the following risks actually occur, Websters business, financial condition or results of operations could suffer. You should consider all of the following risks together with all of the other information in this Annual Report on Form 10-K.
Difficult market conditions have adversely affected the industry in which Webster operates.
Dramatic declines in the housing market over the past two years, with falling home prices and increasing foreclosures, unemployment and underemployment, have negatively impacted the credit performance of mortgage loans and resulted in significant write-downs of asset values by financial institutions, including government-sponsored entities as well as major commercial and investment banks. These write-downs, initially of mortgage-backed securities but spreading to credit default swaps and other derivative and cash securities, in turn, have caused many financial institutions to seek additional capital, to merge with larger and stronger institutions and, in some cases, to fail. Reflecting concern about the stability of the financial markets generally and the strength of counterparties, many lenders and institutional investors have reduced or ceased providing funding to borrowers, including to other financial institutions. This market turmoil and tightening of credit have led to an increased level of commercial and consumer delinquencies, lack of consumer confidence, increased market volatility and widespread reduction of business activity generally. The resulting economic pressure on consumers and lack of confidence in the financial markets has adversely affected Websters business, financial condition and results of operations. A worsening of these conditions would likely exacerbate the adverse effects of these difficult market conditions on Webster and others in the financial institution industry. In particular, Webster may face the following risks in connection with these events:
Webster is subject to extensive government regulation and supervision, which may interfere with the Companys ability to conduct its business and may negatively impact its financial results.
Webster, primarily through Webster Bank and certain non-bank subsidiaries, is subject to extensive federal and state regulation and supervision. Banking regulations are primarily intended to protect depositors funds, federal deposit insurance funds and the banking system as a whole, not shareholders. These regulations affect Websters lending practices, capital structure, investment practices, dividend policy and growth, among other things. Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes. Changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could affect Webster in substantial and unpredictable ways. Such changes could subject Webster to additional costs, limit the types of financial services and products Webster may offer, and/or increase the ability of non-banks to offer competing financial services and products, among other things. Failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies, civil money penalties and/or reputation damage, which could have a material adverse effect on
Websters business, financial condition and results of operations. While Webster has policies and procedures designed to prevent any such violations, there can be no assurance that such violations will not occur. See the section captioned Supervision and Regulation in Item 1 of this report for further information.
Websters participation in the U.S. Treasurys Capital Purchase Program restricts the Companys ability to increase dividends on its common stock, undertake stock repurchase programs and compensate key executives.
In November 2008, the U.S. Treasury invested in $400 million in preferred stock of the Company pursuant to the Capital Purchase Program. The terms of the Capital Purchase Program require Webster to pay preferred cumulative dividends to the Treasury and restrict Websters ability to increase dividends on its common stock, redeem the Treasurys investment, undertake stock repurchase programs and pay executive compensation. More stringent restrictions, primarily on executive compensation, were imposed by Congress in February 2009 as part of ARRA, and these restrictions apply retroactively. Congress may impose additional restrictions in the future which may also apply retroactively. These restrictions may have a material adverse affect on Websters operations, revenue and financial condition, on the ability to pay dividends, or on Websters ability to attract and retain executive talent.
If all or a significant portion of the unrealized losses in Websters portfolio of investment securities were determined to be other-than-temporarily impaired, Webster would recognize a material charge to its earnings and its capital ratios would be adversely impacted.
As of December 31, 2009, there were $1.8 million of after-tax net unrealized losses associated with Websters portfolio of investment securities available for sale compared to $71.5 million in 2008, a substantial decrease. Generally, the fair value of such securities is based upon market values supplied by third-party sources. Market values for the securities in Websters portfolio declined moderately during 2009 as liquidity and pricing, generally in capital markets, was disrupted. When the fair value of a security declines, management must assess whether that decline is other-than-temporary. When management reviews whether a decline in fair value is other-than-temporary, it considers numerous factors, many of which involve significant judgment. During 2009, rating agencies imposed an increasing number of downgrades and credit watches on the securities in Websters investment portfolio, which were reflected in market values. More generally, market conditions continue to be volatile, and no assurance can be provided that the amount of the unrealized losses will not increase.
To the extent that any portion of the unrealized losses in Websters portfolio of investment securities is determined to be other-than-temporarily impaired, Webster will recognize a charge to its earnings in the quarter during which such determination is made and its capital ratios will be adversely impacted. In 2009, Webster recognized $18.5 million in after-tax charges to earnings as a result of other-than-temporary impairment determinations. If any such charge is deemed significant, a rating agency might downgrade Websters credit rating or put them on a credit watch. A downgrade or a significant reduction in Websters capital ratios might adversely impact its ability to access the capital markets or might increase its cost of capital. Even if Webster does not determine that the unrealized losses associated with the investment portfolio require an impairment charge, increases in such unrealized losses adversely impact the tangible common equity ratio, which may adversely impact credit rating agency and investor sentiment. Such negative perception also may adversely impact Websters ability to access the capital markets or might increase Websters cost of capital. See Note 4 of Notes to Consolidated Financial Statements for further information.
Websters allowance for loan losses may be insufficient.
Websters business is subject to periodic fluctuations based on national and local economic conditions. These fluctuations are not predictable, cannot be controlled and may have a material adverse impact on the Companys operations and financial condition. For example, recent declines in housing activity including declines in building permits, housing starts and home prices may make it more difficult for our borrowers to sell their homes or
refinance their debt. Sales may also slow, which could strain the resources of real estate developers and builders. The current economic uncertainty will more than likely affect employment levels and could impact the ability of Websters borrowers to service their debt. Bank regulatory agencies also periodically review Websters allowance for credit losses and may require an increase in the provision for credit losses or the recognition of further loan charge-offs, based on judgments different than those of management. In addition, if charge-offs in future periods exceed the allowance for credit losses, Webster will need additional provisions to increase the allowance for credit losses. Any increases in the allowance for credit losses will result in a decrease in net income and, possibly, capital, and may have a material adverse effect on Websters financial condition and results of operations. Webster may suffer higher loan losses as a result of these factors and the resulting impact on its borrowers.
Websters stock price can be volatile.
Stock price volatility may negatively impact the price at which Websters common stock may be sold and may also negatively impact the timing of any sale. Websters stock price can fluctuate widely in response to a variety of factors including, among other things:
General market fluctuations, industry factors and general economic and political conditions and events, such as economic slowdowns or recessions, interest rate changes, credit loss trends or currency fluctuations could also cause Websters stock price to decrease regardless of the Companys operating results.
The Company operates in a highly competitive industry and market area. If Webster fails to compete effectively, the Companys financial condition and results of operations may be materially adversely affected.
Webster faces substantial competition in all areas of its operations from a variety of different competitors, many of which are larger and may have more financial resources. Such competitors primarily include national, regional, and community banks within the various markets in which Webster operates. Webster also faces competition from many other types of financial institutions, including, without limitation, savings and loans, credit unions, finance companies, brokerage firms, insurance companies, factoring companies and other financial intermediaries. The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. Banks, securities firms and insurance companies can merge under the umbrella of a financial holding company, which can offer virtually any type of financial service, including banking, securities, underwriting, insurance (both agency and underwriting) and
merchant banking. Also, technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. Many competitors have fewer regulatory constraints and may have lower cost structures. Additionally, due to their size, many competitors may be able to achieve economies of scale and, as a result, may offer a broader range of products and services than Webster, as well as better pricing for those products and services.
The ability of Webster to compete successfully depends on a number of factors, including, among other things:
Failure to perform in any of these areas could significantly weaken the Companys competitive position, which could adversely affect the growth and profitability, which, in turn, could have a material adverse effect on the Companys financial condition and results of operations.
Webster may not be able to attract and retain skilled people.
Websters success depends, in large part, on its ability to attract and retain key people. Competition for the best people in most activities engaged in by Webster can be intense and the Company may not be able to hire people or to retain them. Currently, Webster does not have employment agreements with any of its executive officers. The unexpected loss of services of one or more of Websters key personnel could have a material adverse impact on the business because of their skills, knowledge of the market, years of industry experience and the difficulty of promptly finding qualified replacement personnel.
If the goodwill that the Company has recorded in connection with its acquisitions becomes further impaired, it could have a negative impact on the Companys profitability.
Applicable accounting standards require that the purchase method of accounting be used for all business combinations. Under purchase accounting, if the purchase price of an acquired company exceeds the fair value of the acquired companys net assets, the excess is carried on the acquirers balance sheet as goodwill. At December 31, 2009, the Company had approximately $529.9 million of goodwill on its balance sheet related to its retail banking reporting unit and HSA Bank reporting units. Companies must evaluate goodwill for impairment at least annually. If the Companys stock price continues trading below its book value and tangible book value, the Company would continue performing quarterly evaluations of the carrying value of goodwill. Write-downs of the amount of any impairment, if necessary, are to be charged to the results of operations in the period in which the impairment occurs. There can be no assurance that future evaluations of goodwill will not result in findings of impairment and related write-downs, which may have a material adverse effect on Websters financial conditions and results of operations. See Note 7 of Notes to Consolidated Financial Statements for further information.
Webster continually encounters technological change. The failure to understand and adapt to these changes could negatively impact the Companys business.
The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology can increase efficiency and enable financial institutions to better serve customers and to reduce costs. However, some new technologies needed to compete effectively result in incremental operating costs. Websters future success depends, in part, upon its ability to address the needs of its customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in operations. Many of Websters competitors, because of their larger size and available capital, have substantially greater resources to invest in technological improvements. Webster may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to its customers. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact on Websters business and, in turn, its financial condition and results of operations.
Websters controls and procedures may fail or be circumvented, which may result in a material adverse effect on the Companys business.
Management regularly reviews and updates Websters internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of the controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on Websters business, results of operations and financial condition.
New lines of business or new products and services may subject Webster to additional risks. A failure to successfully manage these risks may have a materially adverse effect on the Companys business.
From time to time, Webster may implement new lines of business, offer new products and services within existing line of business or shift focus on its asset mix. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In developing and marketing new lines of business and/or new products and services and/or shifting focus of asset mix, Webster may invest significant time and resources. Initial timetables for the introduction and development of new lines of business and/or new products or services may not be achieved and price and profitability targets may not prove feasible. External factors, such as compliance with regulations, competitive alternatives, and shifting market preferences, may also impact the successful implementation of a new line of business or a new product or service. Furthermore, any new line of business and/or new product or service could have a significant impact on the effectiveness of Websters system of internal controls. Failure to successfully manage these risks in the development and implementation of new lines of business or new products or services could have a material adverse effect on Websters business, results of operations and financial condition.
Customer information may be obtained and used fraudulently, which may negatively impact Websters reputation and customer base, cause increased regulatory scrutiny and expose Webster to litigation.
Risk of theft of customer information resulting from security breaches by third parties exposes the Company to reputation risk and potential monetary loss. The Company has exposure to fraudulent use of its customers personal information resulting from its general business operations and through customer use of financial instruments such as debit cards. While Webster has policies and procedures designed to prevent or limit the effect of this risk, there can be no assurance that any such security breaches will not occur or, if they do occur, that they will be adequately addressed. The occurrence of any security breaches could damage Websters reputation, result in a loss of customer business, subject Webster to additional regulatory scrutiny, or expose Webster to civil litigation and possible financial liability, any of which could have a material adverse effect on Websters financial condition and results of operations.
Changes in interest rates and spreads could have an impact on earnings and results of operations which could have a negative impact on the value of Websters stock.
Websters consolidated earnings and financial condition are dependent to a large degree upon net interest income, which is the difference between interest earned from loans and investments and interest paid on deposits and borrowings. The narrowing of interest rate spreads, could adversely affect Websters earnings and financial condition. The Company cannot predict with certainty or control changes in interest rates. Regional and local economic conditions and the policies of regulatory authorities, including monetary policies of the Federal Reserve Board, affect interest income and interest expense. While the Company has ongoing policies and procedures designed to manage the risks associated with changes in market interest rates, changes in interest rates still may have an adverse effect on Websters profitability. For example, high interest rates could also affect the amount of loans that Webster can originate, because higher rates could cause customers to apply for fewer mortgages, or cause depositors to shift funds from accounts that have a comparatively lower cost, to accounts with a higher cost or experience customer attrition due to competitor pricing. If the cost of interest-bearing deposits increases at a rate greater than the yields on interest-earning assets increase, net interest income will be negatively affected. Changes in the asset and liability mix may also affect net interest income. Similarly, lower interest rates cause higher yielding assets to prepay and floating or adjustable rate assets to reset to lower rates. If the Company is not able to reduce its funding costs sufficiently, due to either competitive factors or the maturity schedule of existing liabilities, then the Companys net interest margin will decline.
Webster may not pay dividends if it is not able to receive dividends from its subsidiary, Webster Bank.
Cash dividends from Webster Bank and its existing liquid assets are the principal sources of funds for paying cash dividends on Websters common stock. Unless the Company receives dividends from Webster Bank or chooses to use its liquid assets, the Company may not be able to pay dividends. Webster Bank's ability to pay the Company dividends is subject to its ability to earn net income and to meet certain regulatory requirements. Under the foregoing dividend restrictions, Webster Bank did not have the ability to pay dividends at December 31, 2009. At December 31, 2009, Webster had approximately $500 million in liquid assets at the holding company level which is sufficient to pay ten years of dividends on its preferred shares issued pursuant to the CPP, convertible preferred shares and common shares and other obligations, if any.
Webster has no unresolved comments from the SEC staff.
At December 31, 2009, Webster Bank had 181 banking offices located in Connecticut, Massachusetts, Rhode Island and New York as follows:
Lease expiration dates range from 1 to 78 years with renewal options of 2 to 35 years.
Subsidiaries maintain the following offices: Webster Financial Advisors, headquartered in Hartford, Connecticut, has offices in Stamford, New Haven, Waterbury and Providence, Rhode Island. Center Capital is headquartered in Farmington, Connecticut. WBCC is headquartered in New York, New York with offices in South Easton, Massachusetts; and Hartford, Connecticut.
The total net book value of premises and equipment owned at December 31, 2009 was $178.4 million. See Note 8 to Consolidated Financial Statements elsewhere in this report for additional information.
There are no material pending legal proceedings, other than ordinary routine litigation incident to the registrants business, to which Webster or any of its subsidiaries is a party or of which any of their property is subject.
The common shares of Webster trade on the New York Stock Exchange under the symbol WBS.
The following table sets forth for each quarter of 2009 and 2008 the intra-day high and low sales prices per share of common stock as reported by the NYSE and the cash dividend declared per share. On January 29, 2010, the closing market price of Webster common stock was $15.47. On January 23, 2010, Websters Board of Directors announced its quarterly dividend of $.01 per share.
Webster had 9,146 holders of record of common stock and 78,409,425 shares outstanding on January 29, 2010. The number of shareholders of record was determined by BNY Mellon Shareowner Services, the Companys transfer agent and registrar.
A primary source of liquidity for Webster Financial Corporation is dividend payments from Webster Bank (the Bank). The Banks ability to make dividend payments to Webster is governed by OCC regulations. Without specific OCC approval, and subject to the Bank meeting applicable regulatory capital requirements before and after payment of dividends, the total of all dividends declared by the Bank is limited to net profits for the current year to date as of the declaration date plus net retained profits from the preceding two years less dividends declared in such years. In addition, the OCC has the discretion to prohibit any otherwise permitted capital distribution on general safety and soundness grounds.
In connection with the U.S. Treasurys investment in the Company under the Capital Purchase Program, for a period of three years, the consent of the U.S. Treasury will be required for any increase in the Companys common stock dividend, (or, if shorter, until the U.S. Treasury no longer holds shares of the Series B Preferred Stock). The payment of dividends is subject to various additional restrictions, none of which is expected to limit any dividend policy that the Board of Directors may in the future decide to adopt. Payment of dividends to Webster from Webster Bank is subject to certain regulatory and other restrictions. Under OCC regulations, Webster Bank may pay dividends to Webster without prior regulatory approval so long as it meets its applicable regulatory capital requirements before and after payment of such dividends and its total dividends declared do not exceed its net profits for the current year to the date of declaration plus net retained profits from the preceding two years less dividends declared in such years. At December 31, 2009, Webster Bank was in compliance with all applicable minimum capital requirements and did not have the ability to pay dividends to Webster.
If the capital of Webster is diminished by depreciation in the value of its property or by losses, or otherwise, to an amount less than the aggregate amount of the capital represented by the issued and outstanding stock of all classes having a preference upon the distribution of assets, no dividends may be paid out of net profits until the deficiency in the amount of capital represented by the issued and outstanding stock of all classes having a preference upon the distribution of assets has been repaired. See Supervision and Regulation section contained elsewhere within this report for additional information on dividends.
Recent Sale of Unregistered Securities; Use of Proceeds from Registered Securities
Except as disclosed in Websters Current Reports on Form 8-K, no unregistered securities were sold by Webster during the year ended December 31, 2009. Registered securities were exchanged as part of an employee and director stock compensation plans.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The following table provides information with respect to any purchase of shares of Webster common stock made by or on behalf of Webster or any affiliated purchaser for the quarter ended December 31, 2009. Management may not engage in share repurchases as part of a publicly announced plan or program pursuant to its participation in the CPP. See page 13 Troubled Asset Relief Program and Capital Purchase Program.
Stock-Based Compensation Plans
Information regarding stock-based compensation awards outstanding and available for future grants as of December 31, 2009, represents stock-based compensation plans approved by shareholders and is presented in the table below. There are no plans that have not been approved by shareholders. Additional information is presented in Note 21, Stock-Based Compensation Plans, in the Notes to Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data, within this report.
The performance graph compares Websters cumulative shareholder return on its common stock over the last five fiscal years to the cumulative total return of the Standard & Poors 500 Index (S&P 500 Index), the SNL All Bank and Thrift Index and the Keefe, Bruyette & Woods Regional Banking Index (Keefe Bruyette Index). Webster has determined, however, that the SNL All Bank and Thrift Index, the industry index used in previous years, is not the best indicator of shareholder return and will replace it with the Keefe Bruyette Index for this purpose going forward. The Keefe Bruyette Index was chosen as the industry index because Webster believes it provides a better comparison and more appropriate benchmark against which to measure stock performance. Please note that the SNL All Bank and Thrift Index is also represented on the following graph, because applicable regulations require that both the new and old index be shown if the graph shows a different index from that used in the preceding year. Webster will not include the SNL All Bank and Thrift Index in next years performance graph.
Total shareholder return is measured by dividing total dividends (assuming dividend reinvestment) for the measurement period plus share price change for a period by the share price at the beginning of the measurement period. Websters cumulative shareholder return over a five-year period is based on an initial investment of $100 on December 31, 2004.
Comparison of Five Year Cumulative Total Return Among
Webster, S&P 500 Index, Keefe Bruyette Index and SNL All Bank & Thrift Index
Sources: SNL Financial LC, Bloomberg L.P.
The following discussion should be read in conjunction with the Consolidated Financial Statements of Webster Financial Corporation and the Notes thereto included elsewhere in this report (collectively, the Consolidated Financial Statements).
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the Act). Forward-looking statements can be identified by words such as believes, anticipates, expects, intends, targeted, continue, remain, will, should, may, plans, estimates and similar references to future periods, however such words are not the exclusive means of identifying such statements. Examples of forward-looking statements include, but are not limited to: (i) projections of revenues, expenses, income or loss, earnings or loss per share, and other financial items; (ii) statements of plans, objectives and expectations of Webster or its management or Board of Directors; (iii) statements of future economic performance; and (iv) statements of assumptions underlying such statements. Forward-looking statements are based on Websters current expectations and assumptions regarding its business, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Websters actual results may differ materially from those contemplated by the forward-looking statements, which are neither statements of historical fact nor guarantees or assurances of future performance. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to: (1) local, regional, national and international economic conditions; (2) government intervention in the U.S. financial system; (3) changes in the level of non-performing assets and charge-offs; (4) inflation, interest rate, securities market and monetary fluctuations, and managements estimates and projections of such fluctuations; (5) the timely development and acceptance of new products and services and perceived overall value of these products and services by users; (6) changes in managements estimate of the adequacy of the allowance for loan losses; (7) the risks associated with the continued diversification of assets and adverse changes to credit quality; (8) technological changes; (9) the Companys ability to increase market share and control expenses; (10) changes in laws, regulations and policies (including tax, banking, securities and insurance laws, regulations and policies); (11) changes in applicable accounting policies and practice; (12) legal and regulatory developments including the resolution of legal proceedings or regulatory or other governmental inquiries and the results of regulatory examinations or reviews; (13) the Companys success at managing the risks involved in the foregoing items; and (14) the other factors that are described in this Annual Report on Form 10-K under the heading Risk Factors. Any forward-looking statement made by the Company in the Companys Annual Report on Form 10-K speaks only as of the date on which it is made. Factors or events that could cause the Companys actual results to differ may emerge from time to time, and it is not possible for the Company to predict all of them. The Company undertakes no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.
Results of Operations
For the year ended December 31, 2009, Websters net loss available to common shareholders was $85.3 million compared to a net loss of $333.9 million for the year ended December 31, 2008. Net loss per diluted share was $2.14 for the year ended December 31, 2009 compared to a net loss per diluted share of $6.43 for 2008. The primary contributors to the change in net loss from 2008 to 2009 are outlined below.
The following factors, among others, favorably impacted net loss available to common shareholders in 2009 when compared to 2008:
The following factors, among others, unfavorably impacted net loss available to common shareholders in 2009 when compared to 2008:
The loss from continuing operations was $75.9 million for the year ended December 31, 2009 and compared to a loss of $317.9 million for the year ended December 31, 2008. In addition to the items outlined above, in 2009, the Company experienced a $17.4 million increase in FDIC deposit insurance assessments and a $9.2 million increase in charges associated with foreclosed and repossessed assets, when compared to 2008.
Income from discontinued operations, net of taxes totaled $302,000 for the year ended December 31, 2009 from contingent consideration within the respective sales contract for Webster Insurance. A $3.1 million loss from discontinued operations was recognized in 2008 and was related to losses recognized on the sales of Webster Insurance and Webster Risk Services.
Net interest income decreased 2.21% from 2008 to $494.6 million for the year ended December 31, 2009. Average total interest earning assets increased by $437 million in 2009 compared to 2008 while average yields declined by 90 basis points, and average total interest bearing liabilities increased by only $214 million in 2009 compared to 2008 while average costs declined by 76 basis points, respectively.
Non-interest income for the year ended December 31, 2009 increased $215.2 million to $187.1 million when compared to the net loss reported for the year ended December 31, 2008. The increase in non-interest income is due primarily to the $190.8 million decrease in other-than-temporary impairment charges and the $24.3 million gain on the exchange of trust preferred securities for common stock in 2009, offset by a $7.7 million increase in net losses on the sale of investment securities.
Non-interest expenses decreased $167.8 million to $507.4 for the year ended December 31, 2009 when compared to the year ended December 31, 2008. The decrease is primarily due to the $198.4 million goodwill impairment charge taken in 2008 offset by the increase in FDIC deposit insurance assessments and an increase in write-downs and expenses associated with foreclosed and repossessed assets.
For the year ended December 31, 2008, Websters net loss available to common shareholders was $333.9 million compared to net income of $96.8 million for the comparable year ended December 31, 2007. Net loss per diluted share was $6.42 for the year ended December 31, 2008 compared to net earnings per diluted share of $1.76 for 2007. The decrease in earnings per diluted share is directly related to the $219.3 million charge for other-than-temporary impairment, the $198.4 million charge for impairment of goodwill and the $118.6 million increase in the provision for credit losses. Loss from continuing operations was $317.9 million for the year ended December 31, 2008 compared to income from continuing operations of $111.6 million for the comparable year ended December 31, 2007. In addition to the items previously described, Webster experienced a $7.8 million increase in net losses on the sale of investment securities offset by a $113.9 million reduction in the income tax expense. Loss from discontinued operations, net of taxes totaled $3.1 million for the year ended December 31, 2008 compared to the loss from discontinued operations of $13.9 million for 2007. The $10.8 million decrease in the loss from discontinued operations is due to the sale of Webster Insurance and Webster Risk Services on February 1, 2008 and April 22, 2008, respectively.
Warburg Pincus Transaction
During 2009, Webster strengthened its capital position through an agreement with Warburg Pincus (Warburg), a global private equity firm, pursuant to which Warburg agreed to invest $115 million in Webster. An initial amount of $40.2 million was invested on July 27, 2009 and the remaining $74.8 million was invested on October 15, 2009. For more information regarding Warburgs investment in Webster and the securities issued, see Note 14 of Notes to Consolidated Financial Statements for further information.
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 13Long-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, 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.
On December 14, 15 and 16, 2009, the Company entered into agreements with certain holders of the Series A Preferred Stock pursuant to which the holders agreed to exchange each share of the Series A Preferred Stock for
(i) 36.8046 shares of Common Stock plus (ii) a premium number of stock shares. An aggregate 27,461 shares of Series A Preferred Stock were exchanged for 1.94 million shares of the Companys common stock, par value $0.01 per share. The exchange was accounted for as an induced conversion resulting in the de-recognition of the $27.5 million carrying amount of Series A Preferred Stock tendered, elimination of $0.9 million of original issuance costs, recognition of the $26.4 million excess of the fair value of the common stock issued over par, net of issuance costs, as an increase to APIC, and the recognition of the $11.6 million excess of the fair value of consideration provided over parity as a reduction to retained earnings and income available to common shareholders and an increase to APIC.
Selected financial highlights are presented in the following table.
Table 1: Three-year average balance sheet and net interest margin. Average balances are daily averages and yields are calculated on a fully tax equivalent basis.
Net Interest Income
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 below is based upon reported net interest income.
Table 2: Net interest income rate/volume analysis (not presented on a tax-equivalent basis).
Net interest income, the difference between interest earned on interest-earning assets and interest expense incurred on deposits and borrowings, totaled $494.6 million for the year ended December 31, 2009, compared to $505.8 million for the year ended December 31, 2008, a decrease of $11.2 million. Average interest-earning assets grew by 2.5% to $16.2 billion at December 31, 2009 from $15.8 billion at December 31, 2008 while average interest-bearing liabilities also grew 1.3% to $15.5 billion at December 31, 2009 from $15.3 billion at December 31, 2008. Despite the increase in growth in interest-earning assets to interest-bearing liabilities, the net interest margin declined by 15 basis points to 3.13% for the year ended December 31, 2009 from 3.28% for the year ended December 31, 2008. The yield on interest-earning assets declined by 90 basis points for the year ended December 31, 2009 while the cost of interest-bearing liabilities declined 76 basis points for the year ended December 31, 2009.
The decline in yields in certain asset classes within the loan portfolio reflects the effects that the 400 basis point reductions made by the Federal Reserve during 2008 have had in 2009 on the floating rate home equity lines, commercial real estate (CRE) and commercial and industrial (C&I) interest bearing assets. At December 31, 2009 approximately 71.2% of Websters CRE portfolio and 91.5% of its C&I portfolio are floating rate assets, while 94.4% of the equipment finance portfolio is fixed rate. The decline in yields is also impacted by the reduction in interest earned due to an increase in non-accruing loans. Websters total non-performing assets increased to $402.0 million at December 31, 2009 in comparison with $263.2 million at December 31, 2008, with C&I, commercial real estate, and 1-4 family residential representing $128.9 million of the $138.8 million increase. The majority of the increase is a result of commercial real estate loans along with 1-4 family residential loans that reflect the continuing challenge of the residential housing market as well as the deterioration of economic conditions of the market in general.
Since net interest income is affected by changes in interest rates, by loan and deposit pricing strategies, competitive conditions, the volume and mix of interest-earning assets and interest-bearing liabilities as well as the level of non-performing assets, 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 Websters interest rate risk position.
Interest income decreased $123.9 million, or 14.3%, to $745.3 million for the year ended December 31, 2009 as compared to 2008. The decrease in the average yield of 90 basis points was partially offset by an increase in average interest earning assets of $436.9 million. The average loan portfolio, excluding loans held for sale, decreased by $1.0 billion for the year ended December 31, 2009, or 7.9%, compared to 2008. Average investment securities increased by $1.3 billion for the year ended December 31, 2009, or 43.4%, compared to 2008.
The 90 basis point decrease in the average yield earned on interest-earning assets for the year ended December 31, 2009 to 4.68% compared to 5.58% for 2008 is a direct result of actions taken by the Federal Reserve in 2008 to lower the federal funds rate by 400 basis points. The federal funds rate remained at 0.25% throughout 2009 but fell by 184 basis points on average between 2008 and 2009. The loan portfolio yield decreased 101 basis points to 4.59% for the year ended December 31, 2009 and comprised 72.2% of average interest-earning assets at December 31, 2009 compared to the loan portfolio yield of 5.60% and 80.6% of average interest-earning assets for the year ended December 31, 2008. Additionally, the yield on investment securities was 5.18%, a 38 basis point decrease over 2008.
Interest expense for the year ended December 31, 2009 decreased $112.8 million, or 31.0%, compared to 2008. The cost of interest-bearing liabilities was 1.61% for the year ended December 31, 2009, a decrease of 76 basis points compared to 2.37% for 2008. The decrease was primarily due to declines in the cost of deposits to 1.38% from 2.08% a year ago, and an increase in average deposits of $1.1 billion compared to 2008 and a 60 basis point decline in the cost of borrowings to 2.85% from 3.45% a year ago as a result of the repayment of $838.6 million in average other borrowings for the year ended December 31, 2009.
Provision for Credit Losses
The provision for credit losses was $303.0 million for the year ended December 31, 2009, an increase of $116.7 million compared to $186.3 million for the year ended December 31, 2008. The increase in the provision is primarily due to increased charge-offs and increased reserve coverage levels given the increase in non-performing loans as well as the general deteriorating economic conditions affecting all of the Companys loan portfolios. For the year ended December 31, 2009, total net charge-offs were $196.4 million compared to $138.1 million in 2008. See Tables 18 through 24 for information on the allowance for credit losses, net charge-offs and non-performing assets.
Management performs a quarterly review of the loan portfolio and unfunded commitments to determine the adequacy of the allowance for credit losses. Several factors influence the amount of the provision, including loan growth, portfolio composition, credit performance changes in the levels of non-performing loans, net charge-offs and the general economic environment. At December 31, 2009, the allowance for credit losses totaled $351.3 million or 3.18% of total loans compared to $245.8 million or 2.02% at December 31, 2008. See the Allowance for Loan Losses Methodology section later in Managements Discussion and Analysis for further details.
Table 3: Non-interest income comparison of 2009 to 2008.
Total non-interest income was $187.1 million for the year ended December 31, 2009, an increase of $215.2 million, or 767%, from the comparable period in 2008. The increase for the year ended December 31, 2009 is primarily attributable to the $190.8 million reduction in other-than-temporary impairment charges, a $24.3 million gain on the exchange of trust preferred securities for common stock, a $3.6 million net fair value adjustment to the warrants issued in connection with the Warburg Pincus investment, a $6.0 million gain on the early extinguishment of $22.5 million of Websters subordinated notes, offset by a $7.7 million increase in net losses on the sale of investment securities.
Deposit Service Fees. Deposit service fees totaled $119.4 million for the year ended December 31, 2009, down $711,000 from the comparable period in 2008 due to reduced customer overdraft fees and ATM usage.
Loan-Related Fees. Loan-related fees were $24.9 million for the year ended December 31, 2009, a decrease of $4.2 million from the comparable period in 2008 due to a lower volume of prepayment penalties and loan origination volumes for 2009.
Wealth and Investment Services. Wealth and investment services income was $24.0 million for the year ended December 31, 2009, down $4.1 million from the comparable period in 2008, primarily a slow recovery of asset values during 2009 lower levels of new sales due to market conditions.
Mortgage Banking Activities. Mortgage banking activities were $6.9 million for the year ended December 31, 2009, up $5.7 million from the comparable period in 2008 due to increased mortgage lending activity when compared to results from the year ago period.
Sale of Investments. Net losses from the sale of investment securities were approximately $13.8 million for the year ended December 31, 2009, an increase of $7.7 million when compared to the loss of $6.1 million recorded a year ago. Losses on the sale of investment securities are primarily due to managements intent to reduce the concentration and exposure to other financial service entities.
Other. Other non-interest income was $7.8 million for the year ended December 31, 2009 compared to $6.7 million a year ago.
Table 4: Non-interest expense comparison of 2009 to 2008.
Total non-interest expenses were $507.4 million for the year ended December 31, 2009 compared to $675.2 million for the comparable period in 2008. The $167.8 million decrease in non-interest expenses is primarily due to the $198.4 million goodwill impairment charge taken in 2008 offset by a $17.4 million increase in FDIC deposit insurance assessments and a $9.2 million increase in foreclosed and repossessed asset expenses and write-downs. The following provides additional discussion on the various components of non-interest expense.
Compensation and benefits. Compensation and benefits were $237.1 million for the year ended December 31, 2009, a decrease of $2.6 million when compared to the $239.7 million for the year ended December 31, 2008. The decrease in compensation and benefits is due to the reduction in workforce from the OneWebster and OneWebster Plus initiatives partially offset by higher medical claims.
Occupancy. Occupancy expenses were $55.5 million for the year ended December 31, 2009 an increase of $2.5 million when compared to the $53.0 million for the year ended December 31, 2008. The increase in occupancy is related to the commencement of operations in the Boston flagship office and new Providence location, higher rental expense, increased utilities and increased maintenance.
Foreclosed and repossessed property. Foreclosed and repossessed asset expenses were $7.1 million for the year ended December 31, 2009 compared to $4.6 million for the year ended December 31, 2008. Foreclosed and repossessed asset write-downs were $11.1 million for the year ended December 31, 2009 compared to $4.3 million for the year ended December 31, 2008. The combined $9.2 million increase in write-downs and expenses for the foreclosed and repossessed assets is due to the increase in foreclosure activity resulting in higher property holding costs as well as declining asset values primarily in repossessed equipment, given an excess of supply and limited demand in the market that resulted in the write-downs to realizable value.
FDIC deposit insurance assessment. The FDIC deposit insurance assessment for the year ended December 31, 2009 was $22.1 million as compared to $4.7 million for the year ended December 31, 2008. The $17.4 million increase is due to the utilization of FDIC premium credits during fiscal 2008 and higher assessment rates effective in 2009. An $8.0 million special FDIC assessment based upon 5 basis points of Websters assets less Tier 1 Capital was paid on September 30, 2009 in connection with the FDICs final rule dated May 22, 2009.
Table 5: Severance and Other Costs for the years ended December 31,
Severance and other costs. Severance and other costs were $12.3 million for the year ended December 31, 2009 compared to $16.2 million for the year ended December 31, 2008. The $3.9 million decrease is primarily related to $11.5 million of non-recurring expenses associated with the OneWebster and OneWebster Plus initiatives and related severance charges offset by $3.5 million in facilities related charges for office consolidation and lease terminations and $4.1 million in fraud related expense that had no customer impact and excludes any consideration of recovery.
For the year ended December 31, 2009, income from discontinued operations was $302,000, an increase of $3.4 million from the $3.1 million loss from discontinued operations recognized for the year ended December 31, 2008. The $3.4 million increase in income from discontinued operations is related to the sale of Webster Insurance and Webster Risk Services in 2008. Activity for the year ended December 31, 2009 represents the completion of earn-out contracts associated with the 2008 revenues.
During 2009, Webster recognized an income tax benefit of $52.7 million applicable to its $128.6 million pre-tax loss applicable to continuing operations, reflecting a 41.0% effective tax-benefit rate. In 2008, Webster recognized a tax benefit of $65.8 million applicable to the $383.7 million pre-tax loss applicable to continuing operations that year, reflecting a 17.2% effective tax-benefit rate.
Websters 2009 tax benefit was impacted by certain losses characterized as capital in nature for U.S. corporation income tax purposes, for which a deferred tax asset valuation allowance was recognized, decreasing the tax benefit by $4.4 million. Websters 2009 tax benefit was reduced by another $1.9 million as a result of restrictions imposed on the tax-deductibility of executive compensation due to its participation in the U.S. Treasurys Capital Purchase Program. Partially offsetting the effects of the items noted above is the non-taxable, $3.6 million fair-value adjustment applicable to warrants included in Websters 2009 non-interest income, the tax expense on which would otherwise have been $1.2 million.
Websters 2008 tax benefit was impacted significantly by certain components of its loss that resulted in no tax benefit, that otherwise would have increased the benefit by $80 million. Those loss items resulting in no tax benefit pertained to substantially all of the $198 million goodwill impairment (tax benefit of $69 million otherwise) and certain losses characterized as capital for U.S. tax purposes (tax benefit of $11 million otherwise).
For more information on Websters income taxes, including its deferred tax assets and valuation allowance, see Note 9 of Notes to Consolidated Financial Statements included elsewhere within this report.
Comparison of 2008 and 2007 Years
Websters net loss available to common shareholders for the year ended December 31, 2008 was $333.9 million or $6.42 per diluted common share, compared to net income of $96.8 million or $1.76 per diluted common share for the year ended December 31, 2007. Loss from continuing operations was $317.9 million or $6.36 per diluted common share for the year ended December 31, 2008, compared to income from continuing operations of $111.6 million or $2.01 per diluted common share in 2007, a decrease of 384.9%.
The year over year decrease in results from continuing operations for 2008 as compared to 2007 is primarily attributable to the increase in the loss on write-down of investments to fair value of $215.7 million, the $198.4 million impairment of goodwill, a $118.6 million increase in the provision for credit losses and a $7.8 million increase in net losses on sales of investment securities offset by a $113.9 million reduction in the income tax expense. Excluding the net impact of these items, pre-tax income from continuing operations would have been $158.0 million and pre-tax income from continuing operations per common share would have been $3.04.
Net interest income of $505.8 million for the year ended December 31, 2008 decreased 0.47% when compared to 2007 due to a decrease in the net interest margin of 12 basis points when compared to the prior year. The decline year over year was primarily due to reductions in the Federal Reserve rates as well as an increase in non-performing assets and lower yields on assets tied to prime and LIBOR. Average interest bearing liabilities increased $0.5 billion, or 3.23%, with increases in average borrowings of $0.9 billion partially offset by decreases in average deposits of $0.4 billion. Average earning assets increased $0.5 billion, or 3.23% when compared to 2007, which includes the December 2008 receipt and subsequent investment of $400 million pursuant to the Capital Purchase Program funding under TARP.
Non-interest income of $(28.1) million decreased by $230.4 million, or 113.9%, in 2008 compared to 2007. The decrease in non-interest income was primarily due to the $215.7 million increase in loss on write-down of investments to fair value, the $7.8 million increase in net losses on sales of investment securities and the $8.1 million decrease in income from mortgage banking activities due to the decision to exit the National Wholesale origination channel, partially offset by a $5.5 million increase in deposit service fees. The decrease in non-interest income was also impacted by a $2.8 million decline in loan fees and income from wealth and investment services in 2008 when compared to the results for 2007.
Non-interest expenses of $675.2 million increased $192.1 million, or 39.8%, in 2008 compared to 2007. The increase is primarily due to the $198.4 million goodwill impairment charge, partially offset by $4.9 million lower compensation expense.
Net Interest Income
Net interest income, the difference between interest earned on interest-earning assets and interest expense incurred on deposits and borrowings, totaled $505.8 million for the year ended December 31, 2008, compared to $508.2 million for the year ended December 31, 2007, a decrease of $2.4 million. Average interest-earning assets grew by 3.23% to $15.8 billion at December 31, 2008 from $15.3 billion at December 31, 2007 while average interest-bearing liabilities also grew 3.23% to $15.3 billion at December 31, 2008 from $14.8 billion at December 31, 2007. Despite the offsetting growth in interest-earning assets to interest-bearing liabilities, the net interest margin declined by 12 basis points to 3.28% for the year ended December 31, 2008 from 3.40% for the year ended December 31, 2007. The yield on interest-earning assets declined by 102 basis points for the year ended December 31, 2008 while the cost of interest-bearing liabilities declined 91 basis points for the year ended December 31, 2008.
Interest income decreased $126.3 million, or 12.7%, to $869.3 million for the year ended December 31, 2008 as compared to 2007. The decrease in the average yield of 102 basis points was partially offset by an increase in average interest earning assets of $492.4 million. The average loan portfolio, excluding loans held for sale, increased by $310.0 million for the year ended December 31, 2008, or 2.5%, compared to 2007. Average investment securities increased by $538.9 million for the year ended December 31, 2008, or 22.4%, compared to 2007. In addition, higher yielding commercial and consumer loans partially replaced reductions in residential loans.
The 102 basis point decrease in the average yield earned on interest-earning assets for the year ended December 31, 2008 to 5.58% compared to 6.60% for 2007 is a direct result of actions taken by the federal government to reduce the fed fund rates by 400 basis points during the year ended December 31, 2008. The loan portfolio yield decreased 116 basis points to 5.60% for the year ended December 31, 2008 and comprised 80.6% of average interest-earning assets at December 31, 2008 compared to the loan portfolio yield of 6.76% and 81.2% of average interest-earning assets for the year ended December 31, 2007. Additionally, the yield on investment securities was 5.56%, a 23 basis point decrease over 2007.
Interest expense for the year ended December 31, 2008 decreased $123.9 million, or 25.4%, compared to 2007. The decrease was primarily due to competitive deposit pricing, a decline in average deposits of $445.8 million for the year ended December 31, 2008 and the 400 basis points in rate reductions made by the Federal Reserve, offset by a $925.5 million increase in average total borrowings when compared to 2007.
The cost of interest-bearing liabilities was 2.37% for the year ended December 31, 2008, a decrease of 91 basis points compared to 3.28% for 2007. Deposit costs for the year ended December 31, 2008 decreased to 2.08% from 2.90% in 2007, a decrease of 82 basis points. Total borrowing costs for the year ended December 31, 2008 decreased 189 basis points to 3.45% from 5.34% for 2007.
Provision for Credit Losses
The provision for credit losses was $186.3 million for the year ended December 31, 2008, an increase of $118.5 million compared to $67.8 million for the year ended December 31, 2007. The increase in the provision is primarily due to increased charge-offs and increased reserve coverage levels given the increase in non-performing loans as well as the general deteriorating economic conditions affecting all of the Companys loan portfolios. For the year ended December 31, 2008, total net charge-offs were $138.1 million compared to $25.2 million in 2007. See Tables 18 through 24 for information on the allowance for credit losses, net charge-offs and non-performing assets.
Management performs a quarterly review of the loan portfolio and unfunded commitments to determine the adequacy of the allowance for credit losses. Several factors influence the amount of the provision, primarily loan growth and portfolio mix, performance, net charge-offs and the general economic environment. At December 31, 2008, the allowance for credit losses totaled $245.8 million or 2.02% of total loans compared to $197.6 million or 1.58% at December 31, 2007. See the Allowance for Credit Losses Methodology section later in Managements Discussion and Analysis for further details.
Table 6: Non-interest income comparison of 2008 to 2007.
NM - Not meaningful
Non-interest revenue which represents the recurring component of non-interest income decreased $14.1 million, or 6.9%, when compared to 2007. The decrease from the prior year is primarily attributable to the $8.1 million decrease in mortgage banking activities, directly related to the closure of National Wholesale mortgage lending, a $7.8 million decrease in gains on sale of investment securities, a $1.8 million and $1.0 million decrease in loan related fees and wealth and investment services, respectively, offset by an increase in deposit service fees of $5.5 million. See below for further discussion of various components of non-interest income.
Deposit Service Fees. Deposit service fees increased $5.5 million, for the year ended December 31, 2008 as compared to 2007. The increase was primarily due to the implementation of a new tiered consumer fee structure during 2008, increased ATM surcharges and increased debit card usage.
Loan Related Fees. Loan related fees decreased by $1.8 million, or 5.7%, for the year ended December 31, 2008 as compared to 2007. The decrease was primarily due to a decrease in loan servicing fee income which is the direct result of fewer loans originated for sale.
Wealth and Investment Services. Wealth and investment service fees decreased $1.0 million or 3.5% for the year ended December 31, 2008 as compared to 2007. The decrease is due to a decline in the value of assets under management due to adverse market conditions resulting in a reduction in management fees earned.
Table 7: Non-interest expenses comparison of 2008 to 2007.
Total non-interest expense for the year ended December 31, 2008 was $675.2 million, an increase of a $192.1 million or 39.7% compared to 2007. The increase in non-interest expense for the year ended December 31, 2008 is primarily a result of a $198.4 million impairment charge for the goodwill related to commercial banking, consumer finance and other lending business segments, partially offset by the 2007 one time expense of $8.9 million premium for the redemption of Webster Capital Trust I and II. In addition, the amortization of intangible assets decreased by $4.4 million primarily due to core deposit intangibles from several past acquisitions becoming fully amortized during the year. Further changes in various components of non-interest expense are discussed below.
Compensation and Benefits. Total compensation and benefits decreased by $4.9 million for the year ended December 31, 2008 or 2.0% compared to 2007. The decrease in compensation and benefits is related to workforce reductions from the OneWebster initiative, reduced incentive compensation as well as a decline in benefit expenses.
Occupancy. Total occupancy expense increased by $3.7 million or 7.4% for the year ended December 31, 2008 compared to 2007. The increase in occupancy is primarily expenses related to the de novo branch expansion program, higher rent expense and increased utilities. The Company intends to offset future de novo expansion expenses with consolidation within its existing branch network.
Furniture and Equipment. Total furniture and equipment expense increased by $1.4 million or 2.3% for the year ended December 31, 2008 compared to 2007. The increase is primarily due to higher depreciation on data processing equipment, increases in equipment maintenance contracts and service contract costs.
Foreclosed and Repossessed Property Expenses. Total foreclosed and repossessed property expenses increased $6.9 million or 344.9% for the year ended December 31, 2008 compared to 2007. The increase is directly related to the $22.5 million increase in foreclosed and repossessed property, reflective of higher levels of delinquency and non-performing assets in 2008.
FDIC Deposit Insurance Assessment. Total FDIC deposit insurance assessment increased by $3.2 million or 209.1% due to the expiration of Websters remaining credit that had previously been offset against premium assessments.
Severance and other costs. Charges totaling $16.2 million were recorded in 2008. Included in this charge was $13.1 million of severance and other OneWebster implementation costs. Additional severance of approximately $1.0 million was recorded for early retirement and other executive changes. A charge of $1.8 million was recognized to reduce the carrying value of a building and office complex currently being marketed for sale to market value and classified as assets held for disposition in accordance with generally accepted accounting principles. See the following table for a breakout of the costs.
Table 8: Severance and Other Costs.
Other Expenses. Other expenses decreased $4.2 million, or 6.8%, compared to 2007 due in part to OneWebster expense reduction initiatives.
The results of operations of Webster Insurance and Webster Risk Services are reported as discontinued operations. Loss from discontinued operations, net of tax, totaled $3.1 million for the year ended December 31, 2008 compared to the loss from discontinued operations of $13.9 million for 2007.
During 2008, Webster recognized an income tax benefit of $65.8 million applicable to its loss from continuing operations. As a result of the pre-tax loss and tax benefit in 2008, effective-tax-rate and other comparative measures are not meaningful for these purposes. In 2007, Webster recognized tax expense of $48.1 million applicable to continuing operations and its effective tax rate was 30.2%.
Websters 2008 tax benefit was impacted significantly by certain components of its loss that resulted in no tax benefit, that otherwise would have increased the benefit by $80 million. Those loss items resulting in no tax benefit pertained to substantially all of the $198 million goodwill impairment (tax benefit of $69 million otherwise) and certain losses characterized as capital for U.S. tax purposes (tax benefit of $11 million otherwise).
The other significant item, when comparing 2008 to 2007, relates to a higher level of tax-exempt interest income in 2008 that resulted in an increased tax benefit of more than $2.7 million when compared to 2007.
For more information on Websters income taxes, including its deferred tax assets and valuation allowance, see Note 9 of Notes to Consolidated Financial Statements included elsewhere within this report.
Business Segment Results
Websters operations are divided into four business segments that represent its core businessesCommercial Banking, Retail Banking, Consumer Finance and Other. These segments reflect how executive management responsibilities are assigned by the chief executive officer for each of the core businesses, 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 Companys Treasury unit is included in Corporate and Reconciling category along with the results of discontinued operations and the amounts required to reconcile profitability metrics to
GAAP reported amounts. As of January 1, 2009, executive management realigned its business segment balances transferring the equipment finance, wealth management and insurance premium finance operating units from the Other reporting segment to the Commercial Banking reporting segment to reflect the realignment of responsibilities. In addition, certain support functions were realigned within the corporate function. The 2008 and 2007 balances have been reclassified for comparability to the 2009 presentation. See Note 22 of Notes to Consolidated Financial Statements contained elsewhere within this report for further information.
Websters business segments results are intended to reflect each segment as if it were a stand-alone business. The following tables present the results for Websters business segments for the years ended December 31, 2009, 2008 and 2007 and incorporates the allocation of the increased provision for loan losses, other-than-temporary impairment charges and income tax benefit to each of Websters business segments.
Table 9: Business Segment Performance Summary of net (loss) income for the years ended December 31,
Webster uses an internal profitability reporting system to generate information by operating segment, which is based on a series of management estimates and allocations regarding funds transfer pricing, the provision for credit losses, non-interest expense and income taxes. These estimates and allocations, certain of which are subjective in nature, are continually being reviewed and refined. Changes in estimates and allocations that affect the reported results of any operating segment do not affect the consolidated financial position or results of operations of Webster as a whole.
The Company uses a matched maturity funding concept, also known as coterminous funds transfer pricing (FTP), to allocate interest income and interest expense to each business while also transferring the primary interest rate risk exposures to the Treasury group which is reflected in Corporate and Reconciling items. The allocation process considers the specific interest rate risk and liquidity risk of financial instruments and other assets and liabilities in each line of business. The matched maturity funding concept basically considers the origination date and the earlier of the maturity date or the repricing date of a financial instrument to assign an FTP rates for loans and deposits originated each day. Loans are assigned an FTP rate for funds used and deposits are assigned an FTP rate for funds provided. From a governance perspective, this process is executed by the Companys Financial Planning and Analysis division and the process is overseen by the Companys Asset Liability Committee.
The Company allocates the provision for credit losses (PCL) based upon expected loss (EL). EL differs from the PCL in that EL is a management tool based on the expected loss in the portfolio over the next twelve months, whereas the PCL is determined in accordance with U.S. generally accepted accounting principles (the PCL is the amount necessary to maintain the allowance for loan losses at a level reflecting the probable credit losses inherent in the loan portfolio at a point in time). EL is estimated using assumptions for exposure, probability of default (PD) and loss given default (LGD) for various credit products, risk ratings, collateral and industries. Exposure is the sum of the outstanding balance plus assumptions regarding additional potential draw-downs based on outstanding commitments. EL is calculated on an instrument level basis using assumptions which are reviewed on an annual basis. The EL for an individual loan is calculated by multiplying the principal loan
exposure by the PD and LGD percentages. The difference between the sum of the PCL for each line of business determined using the expected loss methodology and the consolidated provision is included in other reconciling items.
Webster allocates a majority of non-interest expenses to each business segment using a full-absorption costing process. Direct and indirect costs are analyzed and pooled by process and assigned to the appropriate business segment and corporate overhead costs are allocated to the business segments. Income tax expense is allocated to each business segment based on the effective income tax rate for the period shown.
The Chief Operating Decision Maker (CODM) uses full profitability measurement reports which are prepared for each operating segment, and these reports reflect EL and FTP. The differences between these report-based measures are reconciled to GAAP amounts in the reconciling amounts category. These segment results are used as a basis for determining operating segment incentives, capital allocations, and product changes. The reports are reviewed on a monthly and quarterly basis and compare actual to planned results on a direct contribution basis, which is pretax. The operating segments that are generating revenue and revenue opportunities that exceed costs required to generate business and leverage fixed costs are allocated additional resources. The CODM typically has reduced resources to segments that are underperforming.
The Commercial Banking segment includes middle market, asset-based lending, commercial real estate, equipment finance and wealth management. As of January 1, 2009, management realigned its business segment balances for Websters equipment finance, wealth management and insurance premium finance operating units, which had previously been reported as a component of the Other reporting segment. Webster sold its insurance premium financing subsidiary on November 2, 2009.
Table 10: Commercial Banking Results for the years ended December 31,
Net interest income increased $6.9 million or 4.9% in 2009 compared to 2008. The increase is due to the Commercial Banks focus on improving risk adjusted spreads in its various portfolios. Provisions for loan losses increased $22.4 million or 86.8% in 2009 compared to 2008, primarily due to downward risk rating migration resulting in quarter internal allocation of provision expense.
Net interest income increased $1.4 million or 1.0% in 2008 compared to 2007. Provisions for loan losses increased $2.4 million or 10.3% in 2008 compared to 2007 due to increases in non-performing loans in the commercial loan portfolio.
Non interest income decreased $1.1 million or 3.1% in 2009 compared to 2008 and non-interest expense increased $8.1 million or 8.2% primarily due to increases in loan workout and foreclosure costs.
Non-interest expense increased $16.7 million or 20.5% in 2008 compared to 2007, primarily attributable to increased charges for corporate technology, administration and other overhead costs. In 2008, there was a goodwill impairment charge of $49.0 million for the commercial segment. At December 31, 2009 and 2008, there were no balances for goodwill in the commercial segment.
Included in the Retail Banking segment is retail, business and professional banking, and investment services.
Table 11: Retail Banking Results for the years ended December 31,
The net loss for the year ended December 31, 2009 was $7.5 million, a decrease of $54.0 million from the comparable period of 2008. The decline in the Retail Banking Segments 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) increase in FDIC premiums. With a loan to deposit ratio of only 8.6%, the Retail Banking Segments contribution is driven largely by deposit balances which fund other business segments. Net interest income decreased $46.4 million or 21.7% driven by a decline in revenue earned on the Retail Banking deposit portfolio. The cost of retail deposits at the end of 2009 was 1.11%, a decline of 78 basis points from the end of 2008. The internal earnings credit, or FTP, associated with Websters wholesale funding costs dropped by 102 basis points during the same time period, which resulted in a 15% decrease in the margin on deposits. Wholesale funding costs dropped significantly as the Federal Reserve reduced short-term interest rates in late 2008 and the first part of 2009. Based upon Websters FTP methodology, the reduction in market interest rates also reduced the spread on the full range of deposit products including checking and savings accounts that are now priced at or near historic minimums. This internal FTP methodology will negatively impact the near-term operating contribution of this business segment as long as this unprecedented low interest rate environment persists. These results are near-term and do not reflect the long-term value of the liquidity provided by Websters retail deposit base which would be more evident in a higher interest rate environment.
At December 31, 2009 retail deposits grew by $509.5 million over the prior year-end, an increase of 5.3%. The growth was concentrated in the core deposit categories of Demand, MMDA and Savings. CD balances declined as customers shifted deposits into products with more liquidity as rates declined. Loan balances declined by $58.3 million due reduced credit demand and an increase in loan payoffs and charge-offs. The PCL increased by $4.7 million based on an increase in EL factors on the Business & Professional Banking loan portfolio. The
decrease in non-interest income of $6.6 million was driven by a decline in deposit overdraft charges and investment service fees. Total non-interest expense for 2009 increased $11.2 million over 2008 due to a $15.7 million increase in FDIC insurance costs that were partially offset by cost savings generated from the One Webster initiative.
Consumer Finance includes residential mortgage and consumer lending, as well as mortgage banking activities.
Table 12: Consumer Finance Results for the years ended December 31,