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Webster Financial 10-Q 2007

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Graphic
  7. Graphic
Form 10-Q
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


FORM 10-Q

 


 

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

For the quarterly period ended June 30, 2007.

or

 

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

Commission File Number: 001-31486

 


LOGO

WEBSTER FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

 


 

Delaware   06-1187536

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

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

(203) 465-4364

(Registrant’s telephone number, including area code)

 

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

 


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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  x    Accelerated filer  ¨    Non-accelerated filer    ¨

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

The number of shares of common stock outstanding as of July 31, 2007 was 54,454,841.

 



Table of Contents

Webster Financial Corporation and Subsidiaries

INDEX

 

          Page No.

PART I – FINANCIAL INFORMATION

  
    Item 1.    Interim Financial Statements (unaudited)   
   Consolidated Statements of Condition at June 30, 2007 and December 31, 2006    3
   Consolidated Statements of Income for the three and six months ended June 30, 2007 and 2006    4
   Consolidated Statements of Shareholders’ Equity for the six months ended June 30, 2007 and 2006    5
   Consolidated Statements of Cash Flows for the six months ended June 30, 2007 and 2006    6
   Notes to Consolidated Interim Financial Statements    8
    Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations    29
    Item 3.    Quantitative and Qualitative Disclosures about Market Risk    45
    Item 4.    Controls and Procedures    45

PART II – OTHER INFORMATION

  
    Item 1.    Legal Proceedings    45
    Item 1A.    Risk Factors    45
    Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds    45
    Item 3.    Defaults upon Senior Securities    46
    Item 4.    Submission of Matters to a Vote of Security Holders    46
    Item 5.    Other Information    46
    Item 6.    Exhibits    47

SIGNATURE

   48

EXHIBIT INDEX

   49

 

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Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1. INTERIM FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF CONDITION (unaudited)

 

(In thousands, except share data)

  

June 30,

2007

    December 31,
2006
 

Assets:

    

Cash and due from depository institutions

   $ 293,223     $ 311,888  

Short-term investments

     8,222       175,648  

Securities:

    

Trading, at fair value

     5,935       4,842  

Available for sale, at fair value

     411,309       503,918  

Held-to-maturity (fair value of $1,969,484 and $1,434,543)

     2,046,891       1,453,973  

Loans held for sale

     372,891       354,798  

Loans, net

     12,295,298       12,775,772  

Goodwill

     770,489       770,001  

Cash surrender value of life insurance

     264,100       259,318  

Premises and equipment

     194,412       195,909  

Accrued interest receivable

     85,078       90,565  

Other intangible assets

     47,933       55,011  

Deferred tax asset, net

     35,709       33,262  

Prepaid expenses and other assets

     115,766       109,837  
                

Total assets

   $ 16,947,256     $ 17,094,742  
                

Liabilities and Shareholders’ Equity:

    

Deposits

   $ 12,819,061     $ 12,458,396  

Federal Home Loan Bank advances

     531,117       1,074,933  

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

     899,852       893,206  

Long-term debt

     656,455       621,936  

Reserve for unfunded credit commitments

     7,776       7,275  

Accrued expenses and other liabilities

     185,767       155,285  
                

Total liabilities

     15,100,028       15,211,031  
                

Preferred stock of subsidiary corporation

     9,577       9,577  

Shareholders’ equity:

    

Common stock, $.01 par value;

    

Authorized - 200,000,000 shares

    

Issued - 56,582,089 shares and 56,388,707 shares

     566       564  

Paid-in capital

     737,300       726,886  

Retained earnings

     1,189,713       1,150,008  

Less: Treasury stock, at cost; 1,938,822 shares at June 30, 2007

     (85,015 )     —    

Accumulated other comprehensive loss, net

     (4,913 )     (3,324 )
                

Total shareholders’ equity

     1,837,651       1,874,134  
                

Total liabilities and shareholders’ equity

   $ 16,947,256     $ 17,094,742  
                

See accompanying Notes to Consolidated Interim Financial Statements.

 

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Table of Contents

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

 

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

(In thousands, except per share data)

   2007    2006    2007    2006

Interest Income:

           

Loans

   $ 210,337    $ 207,097    $ 419,501    $ 402,671

Securities and short-term investments

     32,563      39,134      65,843      80,729

Loans held for sale

     7,419      3,317      13,668      6,656
                           

Total interest income

     250,319      249,548      499,012      490,056
                           

Interest Expense:

           

Deposits

     89,683      72,593      177,313      134,947

Federal Home Loan Bank advances and other borrowings

     21,271      37,937      42,059      74,263

Long-term debt

     9,012      12,213      21,206      23,882
                           

Total interest expense

     119,966      122,743      240,578      233,092
                           

Net interest income

     130,353      126,805      258,434      256,964

Provision for credit losses

     4,250      3,000      7,250      5,000
                           

Net interest income after provision for credit losses

     126,103      123,805      251,184      251,964
                           

Noninterest Income:

           

Deposit service fees

     28,758      24,150      54,112      46,019

Insurance revenue

     9,141      9,988      19,262      20,712

Loan related fees

     7,901      9,162      15,841      16,986

Wealth and investment services

     7,637      6,930      14,515      13,284

Mortgage banking activities

     3,962      2,538      6,191      5,811

Increase in cash surrender value of life insurance

     2,586      2,314      5,120      4,685

Net gain on securities transactions

     503      702      1,044      1,714

Gain on Webster Capital Trust I and II securities

     2,130      —        2,130      —  

Other income

     1,367      1,284      3,191      3,059
                           

Total noninterest income

     63,985      57,068      121,406      112,270
                           

Noninterest Expenses:

           

Compensation and benefits

     66,888      64,585      135,279      129,588

Occupancy

     13,200      11,824      26,583      24,006

Furniture and equipment

     15,389      13,962      30,358      27,557

Intangible assets amortization

     3,344      3,544      6,817      7,921

Marketing

     4,209      4,292      8,420      7,916

Professional services

     3,432      3,464      8,234      7,008

Debt redemption premium

     8,940      —        8,940      —  

Severance and other costs

     5,291      —        9,813      —  

Other expenses

     17,398      15,647      34,927      32,493
                           

Total noninterest expenses

     138,091      117,318      269,371      236,489
                           

Income before income taxes

     51,997      63,555      103,219      127,745

Income taxes

     16,530      20,412      32,716      40,750
                           

Net Income

   $ 35,467    $ 43,143    $ 70,503    $ 86,995
                           

Basic earnings per share

   $ 0.64    $ 0.82    $ 1.26    $ 1.65

Diluted earnings per share

     0.63      0.81      1.25      1.63

Average shares outstanding:

           

Basic

     55,677      52,637      55,894      52,864

Diluted

     56,243      53,252      56,497      53,468

See accompanying Notes to Consolidated Interim Financial Statements.

 

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Table of Contents

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (unaudited)

 

(In thousands, except share and per share data)

  

Number of

Common
Shares
Issued

   Common
Stock
   Paid-in
Capital
    Retained
Earnings
    Treasury
Stock
   

Accumulated

Other
Comprehensive
Income (Loss)

    Total  

Six months ended June 30, 2006:

                

Balance, December 31, 2005

   54,117,218    $ 541    $ 619,644     $ 1,075,984     $ (21,065 )   $ (27,878 )   $ 1,647,226  

Opening balance adjustment (see note 18)

   —        —        —         (2,729 )     —         —         (2,729 )
                                                    

Balance, December 31, 2005 (as adjusted)

   54,117,218      541      619,644       1,073,255       (21,065 )     (27,878 )     1,644,497  

Comprehensive income:

                

Net income

   —        —        —         86,995       —         —         86,995  

Other comprehensive income (loss), net of taxes

                

Net unrealized loss on securities available for sale

   —        —        —         —         —         (14,834 )     (14,834 )

Amortization of unrealized loss on securities transferred to held to maturity

   —        —        —         —         —         340       340  

Amortization of deferred hedging gain

   —        —        —         —         —         (84 )     (84 )
                                                    

Other comprehensive loss

                   (14,578 )
                                                    

Comprehensive income

                   72,417  

Dividends paid: $.52 per common share

   —        —        —         (27,694 )     —         —         (27,694 )

Exercise of stock options

   —        —        (1,274 )     —         2,747       —         1,473  

Excess tax benefit from stock options exercised

   —        —        412       —         —         —         412  

Repurchase of 1,145,247 shares

   —        —        —         —         (53,542 )     —         (53,542 )

Stock-based compensation expense

   —        —        2,318       —         —         —         2,318  

Restricted stock grants and expense

   4,806      —        910       —         942       —         1,852  

Employee Stock Purchase Plan

   10,479      —        492       —         —         —         492  
                                                    

Balance at June 30, 2006

   54,132,503    $ 541    $ 622,502     $ 1,132,556     $ (70,918 )   $ (42,456 )   $ 1,642,225  
                                                    

Six months ended June 30, 2007:

                

Balance, December 31, 2006

   56,388,707    $ 564    $ 726,886     $ 1,152,737     $ —       $ (3,324 )   $ 1,876,863  

Opening balance adjustment (see note 18)

   —        —        —         (2,729 )     —         —         (2,729 )
                                                    

Balance, December 31, 2006 (as adjusted)

   56,388,707      564      726,886       1,150,008       —         (3,324 )     1,874,134  

Comprehensive income:

                

Net income

   —        —        —         70,503       —         —         70,503  

Other comprehensive income (loss), net of taxes

                

Deferred gain on derivatives sold

   —        —        —         —         —         2,636       2,636  

Net unrealized loss on securities available for sale

   —        —        —         —         —         (4,574 )     (4,574 )

Amortization of deferred hedging gain

   —        —        —         —         —         (85 )     (85 )

Amortization of unrealized loss on securities transferred to held to maturity

   —        —        —         —         —         200       200  

Amortization of net actuarial loss and prior service cost

   —        —        —         —         —         234       234  
                                                    

Other comprehensive loss

                   (1,589 )
                                                    

Comprehensive income

                   68,914  

Dividends paid: $.57 per common share

   —        —        —         (32,198 )     —         —         (32,198 )

Exercise of stock options

   189,206      2      5,276       —         —         —         5,278  

Excess tax benefit from stock options exercised

   —        —        986       —         —         —         986  

Repurchase of 1,973,753 shares

   —        —        —         —         (87,032 )     —         (87,032 )

Stock-based compensation expense

   —        —        1,674       —         —         —         1,674  

Restricted stock grants and expense

   4,176      —        2,373       —         537       —         2,910  

Cumulative effect of change in accounting for uncertainties in income taxes

   —        —        —         1,400       —         —         1,400  

Contingent consideration in a business combination

   —        —        105       —         1,480       —         1,585  
                                                    

Balance at June 30, 2007

   56,582,089    $ 566    $ 737,300     $ 1,189,713     $ (85,015 )   $ (4,913 )   $ 1,837,651  
                                                    

See accompanying Notes to Consolidated Interim Financial Statements.

 

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Table of Contents

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

 

     Six months ended June 30,  

(In thousands)

   2007     2006  

Operating Activities:

    

Net income

   $ 70,503     $ 86,995  

Adjustments to reconcile net income to net cash provided by operating activities:

    

Provision for credit losses

     7,250       5,000  

Provision for deferred taxes

    

Depreciation and amortization

     25,754       18,631  

Amortization of intangible assets

     6,817       7,921  

Debt redemption premium

     8,940       —    

Gain on Webster Capital Trust I and II securities

     (2,130 )     —    

Stock-based compensation

     4,584       2,318  

Net gain on sale of foreclosed properties

     (35 )     (36 )

Net gain on sale of securities

     (1,128 )     (1,714 )

Net gain on sale of loans and loan servicing

     (6,191 )     (5,811 )

Net loss (gain) on trading securities

     84       (154 )

Increase in trading securities

     (1,177 )     (287 )

Increase in cash surrender value of life insurance

     (5,120 )     (4,685 )

Loans originated for sale

     (1,632,814 )     (774,301 )

Proceeds from sale of loans originated for sale

     1,524,588       772,791  

Decrease in interest receivable

     5,487       60  

(Increase) decrease in prepaid expenses and other assets

     (2,112 )     17,594  

Net increase in accrued expenses and other liabilities

     38,377       3,202  

Proceeds from surrender of life insurance contracts

     338       —    
                

Net cash provided by operating activities

     42,015       127,524  
                

Investing Activities:

    

Purchases of securities, available for sale

     (240,581 )     (37,710 )

Proceeds from maturities and principal payments of securities available for sale

     296,975       195,632  

Proceeds from sales of securities, available for sale

     29,807       58,653  

Purchases of held-to-maturity securities

     (57,702 )     (9,818 )

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

     97,380       64,341  

Net decrease (increase) in short-term investments

     167,426       (23,364 )

Net increase in loans

     (80,775 )     (438,320 )

Proceeds from sale of foreclosed properties

     1,714       4,260  

Net purchases of premises and equipment

     (15,092 )     (20,317 )
                

Net cash provided by (used in) investing activities

     199,152       (206,643 )
                

Financing Activities:

    

Net increase in deposits

     360,665       585,320  

Proceeds from FHLB advances

     11,714,916       32,330,921  

Repayment of FHLB advances

     (12,256,687 )     (32,734,200 )

Increase in securities sold under agreements to repurchase and other short-term borrowings

     7,066       8,001  

Long-term debt issued

     199,344       —    

Repayment of long-term debt

     (172,170 )     —    

Cash dividends to common shareholders

     (32,198 )     (27,694 )

Exercise of stock options

     5,278       1,473  

Excess tax benefit from stock options exercised

     986       412  

Contribution to stock purchased by the Employee Stock Purchase Plan

     —         492  

Common stock repurchased

     (87,032 )     (53,542 )
                

Net cash (used in) provided by financing activities

     (259,832 )     111,183  
                

(Decrease) increase in cash and cash equivalents

     (18,665 )     32,064  

Cash and cash equivalents at beginning of period

     311,888       293,706  
                

Cash and cash equivalents at end of period

   $ 293,223     $ 325,770  
                

See accompanying Notes to Consolidated Interim Financial Statements.

 

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CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited), continued

 

     Six months ended June 30,

(In thousands)

   2007    2006

Supplemental Disclosures:

     

Income taxes paid

   $ 31,239    $ 19,924

Interest paid

     241,021      231,151

Supplemental Schedule of Noncash Investing and Financing Activities:

     

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

   $ 632,897    $ —  

Residential construction loans held-for-sale transferred to Residential construction loan portfolio

     96,324      —  

Transfer of loans to foreclosed properties

     4,894      801

Contingent consideration in a business combination

     1,585      —  

See accompanying Notes to Consolidated Interim Financial Statements.

 

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WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to the Consolidated Interim Financial Statements

(Unaudited)

NOTE 1: Basis of Presentation and Principles of Consolidation

The Consolidated Interim Financial Statements include the accounts of Webster Financial Corporation (“Webster” or the “Company”) and its subsidiaries. The Consolidated Interim Financial Statements and Notes thereto have been prepared in conformity with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. All significant inter-company transactions have been eliminated in consolidation. Amounts in prior period financial statements are reclassified whenever necessary to conform to current period presentations. The results of operations for the three or six months ended June 30, 2007 are not necessarily indicative of the results which may be expected for the year as a whole.

The preparation of the Consolidated Interim Financial Statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, as of the date of the Consolidated Interim Financial Statements, and the reported amounts of revenues and expenses for the periods presented. Actual results could differ from those estimates. Material estimates that are susceptible to near-term changes include the determination of the allowance for credit losses and the valuation allowance for the deferred tax asset. These Consolidated Interim Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto included in Webster’s Annual Report on Form 10-K for the year ended December 31, 2006.

NOTE 2: Sale Transactions

On March 30, 2007, Webster announced the sale of certain branches of its People’s Mortgage Corporation (PMC) subsidiary. The branch offices in Severna Park and Rockville, Maryland, and Hamden Connecticut were sold to 1st Mariner Mortgage, a division of 1st Mariner Bank of Baltimore, Maryland. In connection with this sale, Webster recorded a pre-tax charge of $2.3 million in its first quarter 2007 results. The expenses relate primarily to severance, lease termination and other transaction costs. On April 30, 2007, Webster sold a PMC branch office located in Andover, Massachusetts to 1st Mariner Mortgage. PMC is a subsidiary of Webster Bank, National Association (“Webster Bank”).

 

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NOTE 3: Securities

A summary of trading, available for sale and held to maturity securities follows:

 

     June 30, 2007    December 31, 2006

(In thousands)

   Amortized
Cost
   Unrealized    

Estimated

Fair Value

  

Amortized

Cost

   Unrealized    

Estimated

Fair Value

      Gains    Losses           Gains    Losses    

Trading:

                     

Municipal bonds and notes

           $ 5,935            $ 4,842
                             

Available for Sale:

                     

U.S Government Agency bonds

   $ —      —      —         —      $ 104,774    —      (46 )     104,728

Corporate bonds and notes

     184,061    2,387    (573 )     185,875      197,596    4,191    (515 )     201,272

Equity securities

     172,944    4,748    (1,001 )     176,691      189,555    8,424    (61 )     197,918

Mortgage-backed securities

     49,918    —      (1,175 )     48,743      —      —      —         —  
                                                 

Total available for sale

   $ 406,923    7,135    (2,749 )     411,309    $ 491,925    12,615    (622 )     503,918
                                                 

Held to maturity:

                     

Municipal bonds and notes

   $ 491,224    4,587    (4,929 )     490,882    $ 444,755    10,170    (786 )     454,139

Mortgage-backed securities

     1,555,667    299    (77,364 )     1,478,602      1,009,218    547    (29,361 )     980,404
                                                 

Total held to maturity

   $ 2,046,891    4,886    (82,293 )     1,969,484    $ 1,453,973    10,717    (30,147 )     1,434,543
                                                 

As of June 30, 2007, the fair value of equity securities consisted of FHLB stock of $69.3 million, FRB stock of $41.7 million, common stock of $45.0 million and preferred stock of $20.7 million. The fair value of equity securities at December 31, 2006 consisted of FHLB stock of $96.0 million, FRB stock of $41.7 million, common stock of $40.2 million and preferred stock of $20.0 million. During the six months ended June 30, 2007, Webster purchased $50.6 million of agency mortgage backed securities as part of its ongoing Community Reinvestment Act program that are classified as available for sale.

The following table identifies temporarily impaired investment securities as of June 30, 2007 segregated by length of time the securities have been in a continuous unrealized loss position.

 

     Less Than Twelve Months     Twelve Months or Longer     Total  

(In thousands)

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

Available for Sale:

               

Corporate bonds and notes

   $ 38,810    (345 )   10,798    (228 )   49,608    (573 )

Equity securities

     19,289    (938 )   283    (63 )   19,572    (1,001 )

Mortgage-backed securities

     48,743    (1,175 )   —      —       48,743    (1,175 )
                                   

Total available for sale

   $ 106,842    (2,458 )   11,081    (291 )   117,923    (2,749 )
                                   

Held to maturity:

               

Municipal bonds and notes

   $ 220,970    (4,617 )   20,094    (312 )   241,064    (4,929 )

Mortgage-backed securities

     897,851    (47,476 )   560,279    (29,888 )   1,458,130    (77,364 )
                                   

Total held to maturity

   $ 1,118,821    (52,093 )   580,373    (30,200 )   1,699,194    (82,293 )
                                   

Total securities

   $ 1,225,663    (54,551 )   591,454    (30,491 )   1,817,117    (85,042 )
                                   

 

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The following table identifies temporarily impaired investment securities as of December 31, 2006 segregated by length of time the securities had been in a continuous unrealized loss position.

 

     Less Than Twelve Months     Twelve Months or Longer     Total  

(In thousands)

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

Available for Sale:

               

U.S. Government agency Bonds

   $ 104,728    $ (46 )   $ —      $ —       $ 104,728    $ (46 )

Corporate bonds and notes

     14,615      (187 )     15,307      (328 )     29,922      (515 )

Equity securities

     1,733      (61 )     —        —         1,733      (61 )
                                             

Total available for sale

   $ 121,076    $ (294 )   $ 15,307    $ (328 )   $ 136,383    $ (622 )
                                             

Held to maturity:

               

Municipal bonds and notes

   $ 56,478    $ (324 )   $ 25,815    $ (462 )   $ 82,293    $ (786 )

Mortgage-backed securities

     295,797      (8,161 )     616,885      (21,200 )     912,682      (29,361 )
                                             

Total held to maturity

   $ 352,275    $ (8,485 )   $ 642,700    $ (21,662 )   $ 994,975    $ (30,147 )
                                             

Total securities

   $ 473,351    $ (8,779 )   $ 658,007    $ (21,990 )   $ 1,131,358    $ (30,769 )
                                             

Unrealized losses on fixed income securities result from the cost basis of securities being greater than current market value. This will generally occur as a result of an increase in interest rates since the time of purchase, a structural change in an investment or from deterioration in credit quality of the issuer. Management has and will continue to evaluate impairments, whether caused by adverse interest rate or credit movements, to determine if they are other-than-temporary.

In accordance with applicable accounting literature, Webster must demonstrate an ability and intent to hold temporarily impaired securities until full recovery of their cost basis. Management uses both internal and external information sources to arrive at the most informed decision. This quantitative and qualitative assessment begins with a review of general market conditions and changes to market conditions, credit, investment performance and structure since the prior review period. The ability to hold temporarily impaired securities will involve a number of factors, including: forecasted recovery period based on average life; whether its return provides satisfactory carry relative to funding sources; Webster’s capital, earnings and cash flow positions; and compliance with various debt covenants, among other things. As of June 30, 2007, Webster had the ability and intent to hold all temporarily impaired securities to full recovery, which may be until maturity.

Estimating the recovery period for equity securities will include analyst forecasts, earnings assumptions and other company specific financial performance metrics. In addition, this assessment will incorporate general market data, industry and sector cycles and related trends to determine a reasonable recovery period.

In November 2006, Webster announced its intention to securitize $1.0 billion of residential mortgage loans and hold the resulting securities in its held-to-maturity securities portfolio, primarily for collateral purposes. As of December 31, 2006, $371.1 million of these loans had been securitized; an additional $633.0 million in loans were securitized in January 2007. A separate mortgage servicing asset was not recognized in these transactions. The held-to-maturity securities were recorded at an amortized cost equal to the carrying amount of the securitized loans.

Management’s evaluation of securities impairment losses at June 30, 2007 began with recognition that market yields still reflect the impact of 17 separate interest rate increases totaling 425 basis points by the Federal Reserve from June 2004 through June 2006. Through June 30, 2007, the Federal Reserve’s Open Market Committee has held the federal funds rate target at 5.25%.

 

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Three available for sale corporate securities totaling $10.8 million at June 30, 2007, with an unrealized loss of $0.2 million, were impaired for twelve consecutive months or longer due to higher interest rates subsequent to their purchase. The Company invests in corporate securities that are unrated, below investment grade and investment grade. Securities that are unrated or below investment grade have undergone an internal credit review. As a result of the credit review of the issuers, management has determined that there has been no deterioration in credit quality subsequent to the purchase or last review period. These securities are performing as projected. Management does not consider these investments to be other-than temporarily impaired based on its credit reviews and Webster’s ability and intent to hold these investments to full recovery of the cost basis.

Fifty-one held to maturity municipal securities totaling $20.1 million at June 30, 2007, with an unrealized loss of $0.3 million, were impaired for twelve consecutive months or longer due to higher interest rates subsequent to their purchase. Most of these bonds are insured AAA rated general obligation bonds with stable ratings. There were no significant credit downgrades since the last review period. These securities are currently performing as anticipated. Management does not consider these investments to be other-than-temporarily impaired. Webster has the ability and intent to hold these investments to full recovery of the cost basis.

At June 30, 2007, Webster had $580.4 million in held to maturity securities (including the municipal securities described above) with an unrealized loss of $30.2 million for twelve months or longer. These securities have had varying levels of unrealized loss due to higher interest rates subsequent to their purchase. Approximately 99 percent of that unrealized loss, or $29.9 million, was concentrated in 22 mortgage-backed securities held to maturity totaling $560.3 million in fair value. These securities carry AAA ratings or Agency-implied AAA credit ratings and are currently performing as expected. Management does not consider these investments to be other-than-temporarily impaired and Webster has the ability and intent to hold these investments to full recovery of the cost basis. Management expects that recovery of these temporarily impaired securities will occur over the weighted-average estimated remaining life of these securities.

There were no impairment write-downs of securities during the six months ended June 30, 2007 and 2006, respectively.

NOTE 4: Loans Held for Sale

Loans held for sale had a total carrying value of $372.9 million and $354.8 million at June 30, 2007 and December 31, 2006, respectively. The composition of loans held for sale at June 30, 2007 and December 31, 2006 follows:

 

     June 30, 2007    December 31, 2006

(Dollars in thousands)

   Amount    %    Amount    %

Residential mortgage loans:

           

1-4 family units

   $ 370,978    99.5    $ 261,896    73.8

Construction

     1,837    0.5      91,547    25.8
                       

Total residential mortgage loans

     372,815    100.0      353,443    99.6
                       

Consumer loans:

           

Home equity credit loans

     76    —        961    0.3

Home equity lines of credit

     —      —        394    0.1
                       

Total consumer loans

     76    —        1,355    0.4
                       

Total loans held for sale

   $ 372,891    100.0    $ 354,798    100.0
                       

At June 30, 2007 and December 31, 2006, residential mortgage origination commitments totaled $293.6 million and $305.1 million, respectively. Residential commitments outstanding at June 30, 2007 consisted of adjustable rate and fixed rate mortgages of $11.1 million and $282.5 million, respectively, at rates ranging from 5.375% to 10.15%. Residential commitments outstanding at December 31, 2006 consisted of adjustable rate and fixed rate mortgages of $17.5 million and $287.6 million, respectively, at rates ranging from 5.50% to 8.25%. Commitments to originate loans generally expire within 60 days. At June 30, 2007 and December 31, 2006, Webster also had outstanding commitments to sell residential mortgage loans of $573.1 million and $652.4 million, respectively. See Note 15 for a further discussion of loan origination and sale commitments.

 

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During the three months ended June 30, 2007, a lower of cost or market adjustment of $1.2 million was recorded on the construction loans held-for-sale portfolio. This adjustment was charged to noninterest income (mortgage banking activities). Subsequent to the write-down, $96.3 million of construction loans that were not under contract were transferred from the held-for-sale portfolio to the residential mortgage portfolio. Construction loans totaling $1.8 million remained in the held-for-sale portfolio at June 30, 2007 and will be sold and delivered in the third quarter. During the first quarter of 2007, the Company recorded a $700,000 write-down in value on one loan in Florida that had been classified as held-for-sale.

NOTE 5: Loans, Net

A summary of loans, net follows:

 

     June 30, 2007    December 31, 2006

(Dollars in thousands)

   Amount     %    Amount     %

Residential mortgage loans:

         

1-4 family units

   $ 3,465,141     27.9    $ 4,193,160     32.4

Construction

     271,172     2.2      231,474     1.8
                         

Total residential mortgage loans

     3,736,313     30.1      4,424,634     34.2
                         

Commercial loans:

         

Commercial non-mortgage

     1,780,024     14.3      1,730,554     13.4

Asset-based lending

     816,785     6.6      765,895     5.9

Equipment financing

     958,037     7.7      889,825     6.9
                         

Total commercial loans

     3,554,846     28.6      3,386,274     26.2
                         

Commercial real estate:

         

Commercial real estate

     1,550,871     12.5      1,426,529     11.0

Commercial construction

     387,785     3.1      478,068     3.7
                         

Total commercial real estate

     1,938,656     15.6      1,904,597     14.7
                         

Consumer loans:

         

Home equity credit loans and lines of credit

     3,177,222     25.5      3,173,142     24.6

Other consumer loans

     33,235     0.2      34,844     0.3
                         

Total consumer loans

     3,210,457     25.7      3,207,986     24.9
                         

Total loans

     12,440,272     100.0      12,923,491     100.0

Less: allowance for loan losses

     (144,974 )        (147,719 )  
                     

Loans, net

   $ 12,295,298        $ 12,775,772    
                     

At June 30, 2007, total loans included $18.5 million of net premiums and $48.1 million of net deferred costs, compared with $24.3 million of net premiums and $44.6 million of net deferred costs at December 31, 2006. The unadvanced portions of closed loans totaled $570.3 million and $512.9 million at June 30, 2007 and December 31, 2006, respectively.

At June 30, 2007, Webster had $342.6 million in construction loans within its portfolio of which $151.8 million were originated by its National Wholesale Construction Lending (“NCL”) operation using mortgage brokers approved by Webster. At June 30, 2007 and December 31, 2006, the amount of unused credit on construction loans was $124.3 million and $131.8 million, respectively.

At June 30, 2007 and December 31, 2006, unused portions of home equity credit lines extended were $2.2 billion and $2.0 billion, respectively. Unused commercial lines of credit, letters of credit, standby letters of credit, equipment financing commitments and outstanding commercial loan commitments totaled $2.6 billion at June 30, 2007 and $3.2 billion at December 31, 2006. Other consumer loan commitments totaled $50.5 million and $65.3 million at June 30, 2007 and December 31, 2006, respectively.

 

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Webster is a party to financial instruments with off-balance sheet risk to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit and commitments to sell residential first mortgage loans and commercial loans. These instruments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the Consolidated Statements of Condition.

Future loan commitments represent residential and commercial mortgage loan commitments, commercial loan and equipment financing commitments, letters of credit and commercial and home equity unused credit lines. The interest rates for these loans are generally established shortly before closing. The interest rates on home equity lines of credit adjust with changes in the prime rate.

A majority of the outstanding letters of credit are performance stand-by letters of credit within the scope of Financial Accounting Standards Board (“FASB”) Interpretation No. (“FIN”) 45. These are irrevocable undertakings by Webster, as guarantor, to make payments in the event a specified third party fails to perform under a nonfinancial contractual obligation. Most of the performance stand-by letters of credit arise in connection with lending relationships and have a term of one year or less.

The risk involved in issuing stand-by letters of credit is essentially the same as the credit risk involved in extending loan facilities to customers, and they are subject to the same credit origination, portfolio maintenance and management procedures in effect to monitor other credit and off-balance sheet products. At June 30, 2007, Webster’s stand-by letters of credit totaled $168.6 million. At June 30, 2007, the fair value of stand-by letters of credit is considered insignificant to the unaudited interim financial statements.

 

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NOTE 6: Allowance for Credit Losses

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

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

 

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

(In thousands)

   2007     2006     2007     2006  

Balance at beginning of period

   $ 152,660     $ 155,957     $ 154,994     $ 155,632  

Provisions charged to operations

     4,250       3,000       7,250       5,000  
                                

Subtotal

     156,910       158,957       162,244       160,632  
                                

Charge-offs

     (5,496 )     (3,079 )     (12,363 )     (5,145 )

Recoveries

     1,336       593       2,869       984  
                                

Net charge-offs

     (4,160 )     (2,486 )     (9,494 )     (4,161 )
                                

Balance at end of period

   $ 152,750     $ 156,471     $ 152,750     $ 156,471  
                                

Net loan charge-offs as a percentage of average total loans (1)

     0.14 %     0.08 %     0.15 %     0.07 %

 

     June 30,  

(In thousands)

   2007     2006  

Components:

    

Allowance for loan losses

   $ 144,974     $ 147,401  

Reserve for unfunded credit commitments

     7,776       9,070  
                

Allowance for credit losses

   $ 152,750     $ 156,471  
                

Allowance for loan losses as a percentage of total loans

     1.17 %     1.16 %

Allowance for credit losses as a percentage of total loans

     1.23       1.23  

(1) Net loan charge-offs as a percentage of average loans is calculated by annualizing the charge off amounts for the three and six month periods and dividing the result by average total loans for the respective periods.

 

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NOTE 7: Goodwill and Other Intangible Assets

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

 

(In thousands)

   June 30,
2007
   December 31,
2006

Balances not subject to amortization:

     

Goodwill

   $ 770,489    $ 770,001

Balances subject to amortization:

     

Core deposit intangibles

     42,510      49,170

Other identified intangibles

     5,423      5,841
             

Total goodwill and other intangible assets

   $ 818,422    $ 825,012
             

Changes in the carrying amount of goodwill for the six months ended June 30, 2007 are as follows:

 

(In thousands)

   Retail
Banking
   Commercial
Banking
   Total

Balance at December 31, 2006

   $ 733,659    $ 36,342    $ 770,001

Purchase price adjustments

     488      —        488
                    

Balance at June 30, 2007

   $ 734,147    $ 36,342    $ 770,489
                    

The addition to goodwill is principally due to a final year earn-out of contingent consideration related to a prior business combination, partially offset by an adjustment due to the resolution of various acquisition related tax liabilities.

Amortization of intangible assets for the six months ended June 30, 2007, totaled $6.8 million. Estimated annual amortization expense of current intangible assets with finite useful lives, absent any impairment or change in estimated useful lives, is summarized below.

 

(In thousands)

    

For years ending December 31,

  

2007 (full year)

   $ 11,005

2008

     6,542

2009

     6,358

2010

     6,287

2011

     6,287

Thereafter

     18,272

 

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NOTE 8: Income Taxes

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at June 30, 2007 and December 31, 2006 are summarized below. Temporary differences result from the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Due to uncertainties of realization, a valuation allowance has been established for the full amount of the net state deferred tax asset applicable to Connecticut, and for substantially all Massachusetts and Rhode Island net state deferred tax assets.

 

(In thousands)

   June 30,
2007
    December 31,
2006
 

Deferred tax assets:

    

Allowance for credit losses

   $ 58,919     $ 59,876  

Net operating loss and tax credit carry forwards

     30,498       27,239  

Compensation and employee benefit plans

     20,782       20,969  

Intangible assets

     2,737       3,750  

Deductible acquisition costs

     685       1,993  

Accrued liability for unrecognized tax benefits

     2,335       —    

Other

     5,375       5,612  
                

Total deferred tax assets

     121,331       119,439  

Less: valuation allowance

     (34,777 )     (30,850 )
                

Deferred tax assets, net of valuation allowance

     86,554       88,589  
                

Deferred tax liabilities:

    

Deferred loan costs

     19,650       17,878  

Premises and equipment

     3,144       6,229  

Equipment financing leases

     12,715       11,303  

Purchase accounting and fair-value adjustments

     8,569       10,474  

Net unrealized gains on securities available for sale

     1,748       4,782  

Mortgage servicing rights

     1,839       2,079  

Other

     3,180       2,582  
                

Total deferred tax liabilities

     50,845       55,327  
                

Deferred tax asset

   $ 35,709     $ 33,262  
                

Management believes it is more likely than not that Webster will realize its net deferred tax assets, based upon its recent historical and anticipated future levels of pre-tax income. There can be no absolute assurance, however, that any specific level of future income will be generated.

 

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On January 1, 2007, Webster adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” FIN 48 also prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. In addition, FIN 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The provisions of FIN 48 are to be applied to all tax positions upon initial adoption of this standard. Tax positions must meet the more-likely-than-not recognition threshold at the effective date in order for the related tax benefits to be recognized or continue to be recognized upon adoption of FIN 48. As a result of the adoption of FIN 48, Webster recognized a $1.4 million decrease in the liability for unrecognized tax benefits, which was accounted for as an addition to the January 1, 2007, balance of retained earnings. After the impact of recognizing the decrease in the liability noted above, Webster’s net unrecognized tax benefits totaled $5.9 million. Of that amount, $3.9 million, if recognized, would affect the effective tax rate, and the remainder would reduce goodwill. Webster recognizes accrued interest and penalties related to unrecognized tax benefits, where applicable, in income tax expense. As of the adoption date, Webster had net accrued interest expense related to unrecognized tax benefits of $639,000. At June 30, 2007, Webster had net accrued interest expense related to unrecognized tax benefits of $701,000.

Currently, the Company is under examination from various taxing authorities. It is reasonably possible that at least some of these examinations will conclude in the next 12 months and result in a change in our unrecognized tax benefits. However, quantification of an estimated range of the change in the Company’s unrecognized tax benefits cannot be made at this time.

Webster and its subsidiaries file Federal and various state and local income tax returns. With few exceptions, Webster is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years prior to 2002.

 

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NOTE 9: Deposits

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

 

     June 30, 2007     December 31, 2006  

(In thousands)

   Amount    Percentage
of Total
    Amount    Percentage
of Total
 

Demand

   $ 1,544,695    12.1 %   $ 1,588,783    12.8 %

NOW

     1,421,806    11.1       1,385,131    11.1  

Money market

     1,916,097    15.0       1,908,496    15.3  

Savings

     2,194,215    17.1       1,985,201    15.9  

Health savings accounts (“HSA”)

     375,895    2.9       286,647    2.3  

Retail certificates of deposit

     4,965,140    38.7       4,831,478    38.8  

Brokered deposit

     401,213    3.1       472,660    3.8  
                          

Total

   $ 12,819,061    100.0 %   $ 12,458,396    100.0 %
                          

Interest expense on deposits is summarized as follows:

 

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

(In thousands)

   2007    2006    2007    2006

NOW

   $ 1,764    $ 1,285    $ 3,419    $ 2,501

Money market

     17,057      14,038      34,523      26,103

Savings

     8,827      5,314      16,098      10,320

HSA

     2,740      1,852      5,110      3,373

Retail certificates of deposit

     54,702      30,287      108,762      58,906

Brokered deposit

     4,593      19,817      9,401      33,744
                           

Total

   $ 89,683    $ 72,593    $ 177,313    $ 134,947
                           

 

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NOTE 10: Federal Home Loan Bank Advances

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

 

     June 30, 2007    December 31, 2006

(In thousands)

   Total
Outstanding
    Callable    Total
Outstanding
    Callable

Fixed Rate:

         

4.09 % to 5.27 % due in 2007

   $ 102,000     $ —      $ 650,309     $ 10,000

2.67 % to 5.93 % due in 2008

     190,476       67,000      188,973       67,000

4.98 % to 5.96 % due in 2009

     142,616       123,000      138,000       123,000

4.95 % to 8.44 % due in 2010

     35,211       35,000      35,246       35,000

6.60 % to 6.60 % due in 2011

     1,071       —        1,191       —  

5.22 % to 5.49 % due in 2013

     49,000       49,000      49,000       49,000

6.00 % to 6.00 % due in 2015

     28       —        29       —  

0.00 % to 5.66 % due in 2017 to 2027

     1,548       —        1,264       —  
                             
     521,950       274,000      1,064,012       284,000

Unamortized premiums

     10,337       —        12,560       —  

Hedge accounting adjustments

     (1,170 )     —        (1,639 )     —  
                             

Total advances

   $ 531,117     $ 274,000    $ 1,074,933     $ 284,000
                             

Webster Bank had additional borrowing capacity of approximately $1.5 billion from the FHLB at June 30, 2007 and $1.6 billion at December 31, 2006. Advances are secured by a blanket security agreement against certain qualifying assets, principally residential mortgage loans. At June 30, 2007 and December 31, 2006, Webster Bank had unencumbered investment securities available to secure additional borrowings. If these securities had been used to secure FHLB advances, borrowing capacity at June 30, 2007 and December 31, 2006 would have been increased by an additional $356.5 million and $849.0 million, respectively. At June 30, 2007 Webster Bank was in compliance with the FHLB collateral requirements.

 

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NOTE 11: Securities Sold Under Agreements to Repurchase and Other Short-term Debt

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

 

(In thousands)

   June 30,
2007
    December 31,
2006
 

Securities sold under agreements to repurchase

   $ 770,932     $ 786,374  

Federal funds purchased

     106,445       81,110  

Treasury tax and loan

     8,286       21,097  

Other

     10,028       45  
                
     895,691       888,626  

Unamortized premiums

     6,220       7,329  

Hedge accounting adjustments

     (2,059 )     (2,749 )
                

Total

   $ 899,852     $ 893,206  
                

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

 

(Dollars in thousands)

   June 30,
2007
    December 31,
2006
 

Quarter end balance

   $ 284,906     $ 300,348  

Quarter average balance

     273,762       334,277  

Highest month end balance during quarter

     284,906       333,025  

Weighted-average maturity (in months)

     0.10       1.33  

Weighted-average interest rate at end of period

     3.47 %     3.46 %

 

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NOTE 12: Shareholders’ Equity

A total of 1,973,753 shares of common stock were repurchased during the first six months of 2007 at an average cost of $44.09 per common share. Of the shares repurchased, 1,000,902 shares were repurchased as part of the July 2003, 2.3 million share stock buyback program, which at June 30, 2007 was complete. On June 5, 2007 the Company announced that its Board of Directors authorized the repurchase of up to 5 percent of the Company’s common stock or approximately 2.8 million of its 55.8 million shares outstanding at that time. Of the shares repurchased during the first six months of 2007, 968,300 shares were repurchased as part of this new program. Management intends to continue to repurchase shares of common stock for the foreseeable future given the attainment of higher tangible capital levels during 2006. The tangible capital ratio at June 30, 2007 was 6.32% compared to 6.46% at December 31, 2006 and 5.48% at June 30, 2006. A total of 1,145,247 shares of common stock were repurchased during the first six months of 2006 at an average cost of $46.75 per common share. Of the shares repurchased, 1,126,881 shares were repurchased as part of the July 2003 stock buyback program.

Webster does occasionally repurchase its common securities on the open market to fund equity compensation plans for its employees. Additionally, Webster repurchases its shares from employees who surrender a portion of their shares received through the Company’s stock based compensation plans to cover their associated minimum income tax liabilities. During the six months ended June 30, 2007 and 2006, Webster repurchased 4,551 and 18,366 shares, respectively, outside of the publicly announced repurchase programs.

Accumulated other comprehensive loss is comprised of the following components:

 

(In thousands)

   June 30,
2007
    December 31,
2006
 

Unrealized gain on available for sale securities (net of tax)

   $ 2,637     $ 7,211  

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

     (1,652 )     (1,852 )

Underfunded pension and other postretirement benefit plans (net of tax):

    

Net actuarial loss

     (9,594 )     (9,674 )

Prior service cost

     123       (31 )

Deferred gain on hedge accounting transactions

     3,573       1,022  
                

Total

   $ (4,913 )   $ (3,324 )
                

 

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NOTE 13: Regulatory Matters

Capital guidelines issued by the Federal Reserve Board and the Office of the Comptroller of Currency of the United States (“OCC”) require Webster and its banking subsidiary to maintain certain minimum ratios, as set forth below. At June 30, 2007, Webster and Webster Bank, were deemed to be “well capitalized” under the regulations of the Federal Reserve Board and the OCC, respectively, and in compliance with the applicable capital requirements.

The following table provides information on the capital ratios:

 

     Actual     Capital Requirements     Well Capitalized  

(In thousands)

   Amount    Ratio     Amount    Ratio     Amount    Ratio  

At June 30, 2007

               
Webster Financial Corporation                

Total risk-based capital

   $ 1,680,481    12.0 %   $ 1,121,510    8.0 %   $ 1,401,887    10.0 %

Tier 1 capital

     1,326,042    9.5       560,755    4.0       841,132    6.0  

Tier 1 leverage capital ratio

     1,326,042    8.3       640,439    4.0       800,549    5.0  
Webster Bank, N.A.                

Total risk-based capital

   $ 1,573,938    11.4 %   $ 1,109,492    8.0 %   $ 1,386,864    10.0 %

Tier 1 capital

     1,221,188    8.8       554,746    4.0       832,119    6.0  

Tier 1 leverage capital ratio

     1,221,188    7.7       634,519    4.0       793,148    5.0  

At December 31, 2006

               
Webster Financial Corporation                

Total risk-based capital

   $ 1,623,014    11.4 %   $ 1,135,305    8.0 %   $ 1,419,132    10.0 %

Tier 1 capital

     1,264,256    8.9       567,653    4.0       851,479    6.0  

Tier 1 leverage capital ratio

     1,264,256    7.4       681,379    4.0       851,724    5.0  
Webster Bank, N.A.                

Total risk-based capital

   $ 1,575,200    11.3 %   $ 1,119,939    8.0 %   $ 1,399,924    10.0 %

Tier 1 capital

     1,220,205    8.7       559,970    4.0       839,954    6.0  

Tier 1 leverage capital ratio

     1,220,205    7.2       673,692    4.0       842,115    5.0  

 

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NOTE 14: Business Segments

Retail Banking and Commercial Banking have been identified as reportable operating segments. The balance of Webster’s activity is reflected in Other. The methodologies and organizational hierarchies that define the business segments are periodically reviewed and revised. The following table presents the operating results and total assets for Webster’s reportable segments.

Three months ended June 30, 2007

 

(In thousands)

   Retail
Banking
   Commercial
Banking
   Other    

Consolidated

Total

Net interest income

   $ 100,312    $ 35,177    $ (5,136 )   $ 130,353

Provision for credit losses

     3,982      6,643      (6,375 )     4,250
                            

Net interest income after provision

     96,330      28,534      1,239       126,103

Noninterest income

     51,605      6,484      5,896       63,985

Noninterest expense

     109,026      18,274      10,791       138,091
                            

Income (loss) before income taxes

     38,909      16,744      (3,656 )     51,997

Income tax expense (benefit)

     12,367      5,322      (1,159 )     16,530
                            

Net income (loss)

   $ 26,542    $ 11,422    $ (2,497 )   $ 35,467
                            

Total assets at period end

   $ 9,473,590    $ 4,470,576    $ 3,003,090     $ 16,947,256

Three months ended June 30, 2006

          

(In thousands)

   Retail
Banking
   Commercial
Banking
   Other    

Consolidated

Total

Net interest income

   $ 99,104    $ 33,941    $ (6,240 )   $ 126,805

Provision for credit losses

     2,845      6,294      (6,139 )     3,000
                            

Net interest income after provision

     96,259      27,647      (101 )     123,805

Noninterest income

     46,875      7,681      2,512       57,068

Noninterest expense

     92,528      16,663      8,127       117,318
                            

Income (loss) before income taxes

     50,606      18,665      (5,716 )     63,555

Income tax expense (benefit)

     16,247      5,990      (1,825 )     20,412
                            

Net income (loss)

   $ 34,359    $ 12,675    $ (3,891 )   $ 43,143
                            

Total assets at period end

   $ 10,229,695    $ 4,139,158    $ 3,649,090     $ 18,017,943

 

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Six months ended June 30, 2007

 

(In thousands)

   Retail
Banking
   Commercial
Banking
   Other     Consolidated
Total

Net interest income

   $ 199,869    $ 69,245    $ (10,680 )   $ 258,434

Provision for credit losses

     7,778      13,524      (14,052 )     7,250
                            

Net interest income after provision

     192,091      55,721      3,372       251,184

Noninterest income

     98,331      13,021      10,054       121,406

Noninterest expense

     216,060      35,994      17,317       269,371
                            

Income (loss) before income taxes

     74,362      32,748      (3,891 )     103,219

Income tax expense (benefit)

     23,570      10,380      (1,234 )     32,716
                            

Net income (loss)

   $ 50,792    $ 22,368    $ (2,657 )   $ 70,503
                            

Total assets at period end

   $ 9,473,590    $ 4,470,576    $ 3,003,090     $ 16,947,256

Six months ended June 30, 2006

          

(In thousands)

   Retail
Banking
   Commercial
Banking
   Other     Consolidated
Total

Net interest income

   $ 196,170    $ 65,951    $ (5,157 )   $ 256,964

Provision for credit losses

     6,100      12,512      (13,612 )     5,000
                            

Net interest income after provision

     190,070      53,439      8,455       251,964

Noninterest income

     91,932      14,194      6,144       112,270

Noninterest expense

     183,118      32,119      21,252       236,489
                            

Income (loss) before income taxes

     98,884      35,514      (6,653 )     127,745

Income tax expense (benefit)

     31,543      11,329      (2,122 )     40,750
                            

Net income (loss)

   $ 67,341    $ 24,185    $ (4,531 )   $ 86,995
                            

Total assets at period end

   $ 10,229,695    $ 4,139,158    $ 3,649,090     $ 18,017,943

Retail Banking includes deposit activities, distribution network costs, business and professional banking, consumer finance, wealth management and insurance. For the six months ended June 30, 2007, the increase in noninterest income is primarily due to deposit services fees reflecting an increased contribution from HSA Bank, a division of Webster Bank, and growth in NSF and Debit Card fees, as well as investment service fee income due to business growth. The increase in noninterest expense is primarily attributable to increases in retail distribution costs associated with the acquisition of NewMil, HSA Bank expenses, write-off of software development costs due to the cancellation of a technology project, new revenue generating personnel, the ongoing build out of the compliance function, costs related to closing the remaining operations of People’s Mortgage Corporation and severance-related charges from ongoing line of business restructuring.

Commercial Banking includes middle market, commercial real estate, asset-based lending, equipment financing, insurance premium financing and cash management. Net income decreased $1.8 million for the six months ended June 30, 2007 when compared to the comparable period in 2006. The decreases are attributable to increases in noninterest expense, primarily due to higher compensation and benefits costs attributable to new revenue generating personnel, and increases in overhead costs. Offsetting the decreases in net income are increases in net interest income due to loan growth.

Other includes indirect expenses allocated to segments. These expenses include administration, finance, technology, processing operations and other support functions. Other also includes the Treasury unit, which is responsible for managing the wholesale investment portfolio and funding needs and expenses not allocated to the business lines, the residual impact of methodology allocations such as the provision for credit losses and funds transfer pricing.

 

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Management uses certain methodologies to allocate income and expenses to the business lines. Funds transfer pricing assigns interest income and interest expense to each line of business on a matched maturity funding concept based on each business’ assets and liabilities. The provision for credit losses is allocated to business lines on an “expected loss” basis. Expected loss is an estimate of the average loss rate that individual credits will experience over an economic cycle, based on historical loss experiences and the grading assigned each loan. This economic cycle methodology differs from that used to determine our consolidated provision for credit losses, which is based on an evaluation of the adequacy of the allowance for credit losses considering the risk characteristics in the portfolio at a point in time. The difference between the sum of the provisions for each line of business determined using the expected loss methodology and the consolidated provision is included in Other. Taxes are allocated to each segment generally based on the effective rate for the period shown.

NOTE 15: Derivative Financial Instruments

At June 30, 2007, there were outstanding interest rate swaps with a total notional amount of $552.5 million which are used to hedge FHLB advances, repurchase agreements and long-term debt (subordinated notes and senior notes). The swaps are used to transform the debt from fixed rate to floating rate and qualify for fair value hedge accounting under SFAS No. 133. Of the total, $202.5 million of the interest rate swaps mature in 2008, $200.0 million in 2013 and $150.0 million in 2014, with an equal amount of the hedged debt also maturing on these dates. At December 31, 2006, there were outstanding interest rate swaps with a notional amount of $752.5 million.

Webster transacts certain derivative products with its customer base, primarily interest rate swaps and, to a lesser extent, interest rate caps. These customer derivatives are offset with matching derivatives with other counterparties in order to minimize risk. Exposure with respect to these derivatives is largely limited to nonperformance by either the customer or the other counterparty. The notional amount of customer derivatives and the related counterparty derivatives each totaled $284.1 million at June 30, 2007 and $274.5 million at December 31, 2006. The customer derivatives and the related counterparty derivatives are marked to market and any difference is reflected in noninterest income.

The fair values and notional amounts of derivatives at June 30, 2007 and December 31, 2006 are summarized below:

 

     June 30, 2007     December 31, 2006  

(In thousands)

   Notional
Amount
    Estimated Fair Value    

Notional

Amount

    Estimated Fair Value  
     Gain    (Loss)       Gain     (Loss)  

Asset and liability management positions

             

Interest rate swaps:

             

Receive fixed/pay floating

   $ 552,526     $ —      $ (22,476 )   $ 752,526     $ —       $ (15,711 )

Customer related positions

             

Interest rate swaps:

             

Receive fixed/pay floating

     (238,227 )     220      (4,570 )     (221,913 )     1,406       (2,774 )

Receive floating/pay fixed

     238,222       5,955      —         221,908       3,286       (383 )
                                               

Total interest rate swaps position

       6,175      —           4,692       (3,157 )
                                   

Counterparty offset

       —        —           —         24  
                                   

Total interest rate swaps position, net

       6,175      (4,570 )       4,692       (3,133 )
                                   

Interest rate caps:

             

Written Options

     (45,864 )     —        (103 )     (52,615 )     —         (92 )

Purchased options

     45,864       103      —         52,615       92       —    
                                               

Total interest rate cap position

       103      (103 )       92       (92 )

Counterparty offset

       —        —           (24 )     —    
                                   

Total interest rate cap position, net

       103      (103 )       68       (92 )
                                   

Total customer related positions

       6,278      (4,673 )       4,760       (3,225 )
                                   

Total derivative positions

     $ 6,278    $ (27,149 )     $ 4,760     $ (18,936 )
                                   

 

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Certain derivative instruments, primarily forward sales of mortgage backed securities (“MBS”), are utilized by Webster Bank in its efforts to manage risk of loss associated with its mortgage loan commitments and mortgage loans held for sale. Prior to closing and funding a single-family residential mortgage loan, an interest-rate locked commitment is generally extended to the borrower. During the period from commitment date to closing date, Webster Bank is subject to the risk that market rates of interest may change. If market rates rise, investors generally will pay less to purchase such loans resulting in a reduction in the gain on sale of the loans or, possibly, a loss. In an effort to mitigate such risk, forward delivery sales commitments, under which Webster agrees to deliver whole mortgage loans to various investors or issue MBS, are established. At June 30, 2007, outstanding rate locks totaled approximately $293.6 million and the outstanding commitments to sell residential mortgage loans totaled $573.1 million. Forward sales, which include mandatory forward commitments of approximately $532.5 million and best efforts forward commitments of approximately $40.6 million at June 30, 2007, establish the price to be received upon the sale of the related mortgage loan, thereby mitigating certain interest rate risk. Webster Bank will still have certain execution risk, that is, risk related to its ability to close and deliver to its investors the mortgage loans it has committed to sell.

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

NOTE 16: Pension and Other Benefits

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

 

(In thousands)    Pension Benefits     Other Benefits

Three months ended June 30,

   2007     2006     2007    2006

Service cost

   $ 1,386     2,225     $ —      —  

Interest cost

     1,666     1,530       88    60

Expected return on plan assets

     (2,302 )   (1,854 )     —      —  

Transition obligation

     —       (6 )     —      —  

Amortization of prior service cost

     40     43       12    18

Amortization of the net loss

     65     468       —      22
                         

Net periodic benefit cost

   $ 855     2,406     $ 100    100
                         

 

(In thousands)    Pension Benefits     Other Benefits

Six months ended June 30,

   2007     2006     2007    2006

Service cost

   $ 3,655     4,450     $ —      —  

Interest cost

     3,228     3,060       176    120

Expected return on plan assets

     (4,388 )   (3,708 )     —      —  

Transition obligation

     —       (13 )     —      —  

Amortization of prior service cost

     56     86       24    36

Amortization of the net loss

     154     931       —      44
                         

Net periodic benefit cost

   $ 2,705     4,806     $ 200    200
                         

In December 2006, Webster announced that both the Webster Pension Plan and the supplemental pension plan will be frozen as of December 31, 2007. Employees will no longer accrue additional qualified or supplemental retirement income after December 31, 2007. Furthermore, employees hired after December 31, 2006 will not be eligible to enter either plan. At the same time, Webster announced enhancements to its 401(k) qualified and supplemental retirement savings plans. The enhancements will take effect April 1, 2007 for employees hired after December 31, 2006 and January 1, 2008 for all other employees.

 

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An updated estimate of 2007 pension expense was performed by the Plan’s actuaries and resulted in a decrease in net periodic benefit costs of $1.0 million for the first six months and $2.0 million for the full year 2007. Contributions will be made as deemed appropriate by management in conjunction with the Plan’s actuaries. The Company currently estimates there will be no contributions to the Webster Bank Pension Plan in 2007.

Webster assumed the obligations of the FIRSTFED pension plan. The plan was not merged into the Webster Bank Pension Plan, but instead will continue to be included in the multiple-employer plan administered by Pentegra (the “Fund”). The Fund does not segregate the assets or liabilities of its participating employers in the on-going administration of this plan and accordingly, disclosure of FIRSTFED accumulated vested and nonvested benefits is not possible. Webster has made $1.0 million in contributions in the first six months and estimates it will make approximately $2.6 million in total contributions during calendar year 2007.

On July 23, 2007, the Company’s Board Of Directors approved the merger of NewMil’s Pension Plan into Webster’s Pension Plan and the merger of the NewMil Bank Savings and Protection Plan (the “NewMil 401(k)Plan”) into Webster’s 401(k) Plan, effective as of August 1, 2007.

NOTE 17: Other Comprehensive Income

The following table summarizes the components of other comprehensive income:

 

     Three Months ended June 30,  
     2007     2006  

(In thousands)

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

Other comprehensive income (loss):

            

Deferred gain on derivatives sold

   $ 3,731     $ (1,306 )   $ 2,425     $ —       $ —       $ —    

Net unrealized loss on securities available for sale

     (6,576 )     2,622       (3,954 )     (8,870 )     3,105       (5,765 )

Amortization of deferred hedging gain

     (65 )     23       (42 )     (64 )     22       (42 )

Amortization of unrealized loss on securities transferred to held to maturity

     86       (30 )     56       246       (86 )     160  

Amortization of net actuarial loss and prior service cost

     180       (63 )     117       —         —         —    
                                                

Total other comprehensive loss

   $ (2,644 )   $ 1,246     $ (1,398 )   $ (8,688 )   $ 3,041     $ (5,647 )
                                                
     Six Months ended June 30,  
     2007     2006  

(In thousands)

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

Other comprehensive income (loss):

            

Deferred gain on derivatives sold

   $ 4,055     $ (1,419 )   $ 2,636     $ —       $ —       $ —    

Net unrealized loss on securities available for sale

     (7,607 )     3,033       (4,574 )     (22,822 )     7,988       (14,834 )

Amortization of deferred hedging gain

     (131 )     46       (85 )     (129 )     45       (84 )

Amortization of unrealized loss on securities transferred to held to maturity

     308       (108 )     200       523       (183 )     340  

Amortization of net actuarial loss and prior service cost

     360       (126 )     234       —         —         —    
                                                

Total other comprehensive loss

   $ (3,015 )   $ 1,426     $ (1,589 )   $ (22,428 )   $ 7,850     $ (14,578 )
                                                

 

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NOTE 18: Accounting Adjustment

During the second quarter of 2007, management identified an error related to an unintentional over-accrual of insurance revenues between 2002 and 2005, caused by the accrual of direct bill revenues at a rate greater than ultimate collections. The effect was not material in any one period and resulted in a cumulative over-accrual of approximately $4.2 million or $2.7 million after-tax. Management evaluated the financial statement impact of this error and recorded a cumulative decrease to opening retained earnings of $2.7 million, as well as a $4.2 million reduction in other assets for the over-accrual and a $1.5 million decrease in other liabilities for the related tax effect. The adjustment had no effect on the consolidated statements of income for any of the periods presented herein.

NOTE 19: Recent Accounting Pronouncements

On June 14, 2007, the EITF reached a final consensus on Issue No. 06-11, Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards. This consensus was ratified by the FASB on June 27, 2007. This Issue states that tax benefits received on dividends paid to employees associated with their unvested stock compensation awards should be recorded in additional-paid-in-capital (APIC) for awards expected to vest. Currently, such dividends are a permanent tax deduction reducing the annual effective income tax rate. This Issue also requires that such tax benefits be reclassified between APIC and income tax expense in subsequent periods for any changes in forfeiture estimates. Tax benefits for dividends recorded to APIC would be available to absorb future stock compensation tax deficiencies. This Issue is to be applied prospectively to dividends declared in fiscal years beginning after December 15, 2007. Retrospective application of this Issue is prohibited. This Issue will not have a material effect on Webster’s financial statements.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS 157”), which is effective for fiscal years beginning after November 15, 2007 and for interim periods within those years. This statement defines fair value, establishes a framework for measuring fair value and expands the related disclosure requirements. The Company is currently evaluating the potential impact of adopting SFAS 157.

In February 2007, the FASB issued SFAS No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB No. 115” to permit measurement of recognized financial assets and liabilities at fair value (the “fair value option”). Unrealized gains and losses on items for which the fair value option has been taken are reported in earnings at each subsequent reporting date. Upfront costs and fees related to items reported under the fair value option are recognized in earnings as incurred and not deferred. SFAS 159 is effective for fiscal years beginning after November 15, 2007. Because SFAS 159 permits management to determine which, if any, financial assets and liabilities to measure at fair value, Webster’s management is currently evaluating what, if any, impact the adoption of SFAS 159 will have on Webster’s consolidated financial position, results of operations or cash flows.

 

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

Forward Looking Statements

This report contains forward looking statements within the meaning of the Securities Exchange Act of 1934, as amended. Actual results could differ materially from management expectations, projections and estimates. Factors that could cause future results to vary from current management expectations include, but are not limited to, general economic conditions, legislative and regulatory changes, monetary and fiscal policies of the federal government, changes in tax policies, rates and regulations of federal, state and local tax authorities, changes in interest rates, deposit flows, the cost of funds, demand for loan products, demand for financial services, competition, changes in the quality or composition of Webster’s loan and investment portfolios, changes in accounting principles, policies or guidelines, and other economic, competitive, governmental and technological factors affecting Webster’s operations, markets, products, services and prices. Some of these and other factors are discussed in Webster’s annual and quarterly reports previously filed with the Securities and Exchange Commission. Such developments, or any combination thereof, could have an adverse impact on Webster’s financial position and results of operations. Except as required by law, Webster does not undertake to update any such forward looking statements.

Description of Business

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 June 30, 2007 had assets of $16.9 billion and shareholders’ equity of $1.8 billion. Webster’s principal assets are all of the outstanding capital stock of Webster Bank, National Association (“Webster Bank”), and Webster Insurance, Inc. (“Webster Insurance”). Webster, through its various non-banking financial services subsidiaries, delivers financial services to individuals, families and businesses throughout southern New England and eastern New York State, and equipment financing, asset-based lending, mortgage origination and insurance premium financing throughout the United States. Webster Bank provides commercial banking, retail banking, health savings accounts (“HSAs”), consumer financing, mortgage banking, trust and investment services through 177 banking offices, 337 ATMs, and its Internet website (www.websteronline.com). Webster is a bank holding company and is registered with the Board of Governors of the Federal Reserve System (“Federal Reserve”) under the Bank Holding Company Act. As such the Federal Reserve is Webster’s primary regulator, and Webster is subject to extensive regulation, supervision and examination by the Federal Reserve. Webster Bank is regulated by the Office of the Comptroller of the Currency. Webster’s common stock is traded on the New York Stock Exchange under the symbol of “WBS.” Webster’s financial reports can be accessed through its website within 24 hours of filing with the SEC.

Critical Accounting Policies

The Company’s significant accounting policies are described in Note 1 to the consolidated financial statements included in the 2006 Annual Report on Form 10-K. The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and to disclose contingent assets and liabilities. Actual results could differ from those estimates. Management has identified accounting for the allowance for credit losses, valuation of goodwill/other intangible assets and analysis for impairment, deferred income taxes and pension and other post retirement benefits as the Company’s most critical accounting policies and estimates in that they are important to the portrayal of our financial condition and results, and they require management’s most subjective and complex judgment as a result of the need to make estimates about the effect of matters that are inherently uncertain. These accounting policies, including the nature of the estimates and types of assumptions used, are described throughout this Management’s Discussion and Analysis and the December 31, 2006 Management’s Discussion and Analysis included in the Annual Report on Form 10-K.

 

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RESULTS OF OPERATIONS

Summary

Webster’s net income was $35.5 million for the three months ended June 30, 2007, compared to $43.1 million for the three months ended June 30, 2006, a decrease of 17.6%. Net income per diluted share was $0.63 for the three months ended June 30, 2007 compared to $0.81 for the comparable period in 2006. For the six months ended June 30, 2007, Webster’s net income was $70.5 million compared to $87.0 million for the comparable period in 2006, a decrease of 19.0%. Net income per diluted share was $1.25 for the six months ended June 30, 2007 compared to $1.63 for the comparable period in 2006. The year-over-year decrease is attributable to $8.9 million ($5.8 million net of taxes) in redemption premiums and unamortized issuance costs related to the redemption of Webster Capital Trust I and II securities, closing costs of $2.3 million ($1.5 million, net of taxes) related to the remaining operations of PMC, severance related charges from ongoing restructuring in insurance and other lines of business of $4.1 million ($2.7 million, net of taxes), the write-off of software development costs of $3.4 million ($2.2 million, net of taxes) and $1.6 million ($1.1 million, net of taxes) related to the write down in value of various residential construction loans classified as held for sale, partially offset by a $2.1 million ($1.4 million net of taxes) gain on positions in Webster Capital Trust I and II securities positions that were held by Webster. The year-over-year comparisons are also impacted by the interest rate environment, and the effect that rising short-term interest rates and a flattening of the yield curve had on our net interest margin. The effect of these market conditions has been partially offset by the growth in the loan portfolio, particularly in higher yielding commercial and consumer loans.

In addition to the actions regarding PMC and residential construction lending discussed above, during the first quarter of 2007, Webster terminated the mezzanine lending operations of Webster Bank’s subsidiary, Webster Growth Capital.

During the second quarter management completed its strategic review of the Company, which began in the fourth quarter of 2006, and the organizational review, which was announced on February 28, 2007. The previously announced strategic review looked at the bank and all lines of business to focus on core competencies, identify operational efficiencies and position Webster to realize its vision of becoming New England’s bank. This process encompassed evaluating the contribution, growth potential, fit and alignment of each segment and line of business with the Company’s goals and mission. The strategic review resulted in, as the Company had previously announced at the end of the first quarter of 2007, the decision to close Peoples Mortgage Company; terminate mezzanine lending operations (Webster Growth Capital); discontinue construction lending outside of its primary New England market area (National Construction Lending); restructure its insurance operations; and outsource the back office operations of Webster Investment Services.

Additionally, the Company has determined additional strategic review outcomes, including a decision to focus on in-market and contiguous franchise growth, and that future lending relationships outside the Northeast will be direct. Regarding mortgage banking, the focus will be on the New England and Mid-Atlantic states with reduced national presence. Regarding insurance, the Company announced it is exploring strategic alternatives that may result in the sale of Webster Insurance. As part of that process, the Company is seeking to include a relationship to continue selling insurance products. With respect to HSA Bank, the Company announced it is evaluating strategic alliances as well as additional investment in HSA Bank to continue capturing a high market share in the fast-growing health savings account deposit segment.

The Company also announced specific actions it intends to open four new branch locations in second half of 2007 (New Rochelle, NY: Longmeadow and East Longmeadow, MA; Woodbridge, CT), and six to eight new locations in 2008. The Company will optimize the existing franchise by combining certain offices into stronger locations and using efficiency gained to fund investment in de novo.

The Company also detailed a facilities strategy to consolidate back office operations into one location and a regional hub approach to consolidate facilities in certain cities.

 

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The stated goal of the organizational review was to implement a structure that would result in a more efficient and effective organization. The organization review resulted in the creation of: an Office of the Chief Executive Officer: an Executive Management Committee; a new position – the Chief Administrative Officer, who is responsible for all shared services functions; restructuring and streamlining of governance committees and layers of management; and a restructured approach to risk management that distinctly addresses credit, operating and interest rate risk.

Selected financial highlights are presented in the following table.

 

    

At or for the

three months ended June 30,

   

At or for the

six months ended June 30,

 

(In thousands, except per share data)

   2007     2006     2007     2006  

Earnings and Per Share Data

        

Net interest income

   $ 130,353     $ 126,805     $ 258,434     $ 256,964  

Total noninterest income

     63,985       57,068       121,406       112,270  

Total noninterest expense

     138,091       117,318       269,371       236,489  

Net income

     35,467       43,143       70,503       86,995  

Net income per diluted common share

   $ 0.63     $ 0.81     $ 1.25     $ 1.63  

Dividends declared per common share

     0.30       0.27       0.57       0.52  

Book value per common share

     33.63       31.22       33.63       31.22  

Tangible book value per common share

     18.96       18.31       18.96       18.31  

Diluted shares (average)

     56,243       53,252       56,497       53,468  

Selected Ratios

        

Return on average assets

     0.84 %     0.96 %     0.84 %     0.98 %

Return on average shareholders’ equity

     7.49       10.35       7.44       10.46  

Net interest margin

     3.47       3.13       3.44       3.18  

Efficiency ratio (a)

     71.06       63.80       70.92       64.05  

Tangible capital ratio

     6.32       5.47       6.32       5.47  

(a) Noninterest expense as a percentage of net interest income plus noninterest income.

 

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Net Interest Income

Net interest income, which is the difference between interest earned on loans, investments and other interest earning assets and interest paid on deposits and borrowings, totaled $130.4 million for the three months ended June 30, 2007, compared to $126.8 million for the comparable period in 2006, an increase of $3.6 million or 2.8%. For the six months ended June 30, 2006 net interest income totaled $258.4 million compared to $257.0 million for the comparable period in 2006, an increase of $1.4 million or 0.5%. In the second quarter of 2006, the timing of FHLB dividends was changed and resulted in Webster not recording any dividend income on its investment. The approximate dividend would have been $1.8 million for the three months ended June 30, 2006. The dividend for the three months ended June 30, 2007 was $1.3 million.

The increase in net interest income is largely due to Webster’s balance sheet repositioning actions as proceeds from the sale of securities were used to pay down high cost borrowings. For the three months ending June 30, 2007, the yield on interest earning assets increased 51 basis points while the cost of interest bearing liabilities rose 20 basis points. For the six months ending June 30, 2007, the yield on interest earning assets rose 57 basis points while the cost of interest bearing liabilities rose 36 basis points. As a result, the net interest margin for the three months ended June 30, 2007 was 3.47%, an increase of 34 basis points from the comparable period in 2006. For the six months ended June 30, 2007, the net interest margin was 3.44%, an increase of 26 basis points from the comparable period in 2006.

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

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

 

    

Three months ended June 30,
2007 vs. 2006

Increase (decrease) due to

   

Six months ended June 30,

2007 vs. 2006

Increase (decrease) due to

 

(In thousands)

   Rate     Volume     Total     Rate     Volume     Total  

Interest on interest-earning assets:

            

Loans

   $ 8,473     (5,233 )   3,240     $ 21,156     (4,326 )   16,830  

Loans held for sale

     245     3,857     4,102       540     6,472     7,012  

Securities and short-term investments

     8,542     (14,760 )   (6,218 )     17,479     (31,841 )   (14,362 )
                                        

Total interest income

     17,260     (16,136 )   1,124