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Webster Financial 10-Q 2008

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 September 30, 2008.

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.  þ  Yes    ¨  No

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

 

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

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

The number of shares of common stock outstanding as of October 31, 2008 was 52,722,602.

 

 

 


Table of Contents

INDEX

 

     Page No.

PART I – FINANCIAL INFORMATION

  
   Item 1.   

Interim Financial Statements (unaudited)

  
     

Consolidated Balance Sheets at September 30, 2008 and December 31, 2007

   3
     

Consolidated Statements of Operations for the three and nine months ended September 30, 2008 and 2007

   4
     

Consolidated Statements of Shareholders’ Equity and Comprehensive Income for the three and nine months ended September 30, 2008 and 2007

   5
     

Consolidated Statements of Cash Flows for the nine months ended September 30, 2008 and 2007

   6
     

Notes to Consolidated Interim Financial Statements

   8
   Item 2.   

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

   30
   Item 3.   

Quantitative and Qualitative Disclosures about Market Risk

   52
   Item 4.   

Controls and Procedures

   52

PART II - OTHER INFORMATION

  
   Item 1.   

Legal Proceedings

   53
   Item 1A.   

Risk Factors

   53
   Item 2.   

Unregistered Sales of Equity Securities and Use of Proceeds

   54
   Item 3.   

Defaults upon Senior Securities

   54
   Item 4.   

Submission of Matters to a Vote of Security Holders

   54
   Item 5.   

Other Information

   54
   Item 6.   

Exhibits

   55

SIGNATURES

   56

EXHIBIT INDEX

   57

 

2


Table of Contents
ITEM 1. INTERIM FINANCIAL STATEMENTS

WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (unaudited)

 

(In thousands, except share and per share data)

   September 30,
2008
    December 31,
2007
 

Assets:

    

Cash and due from depository institutions

   $ 221,195     $ 306,654  

Short-term investments

     6,449       5,112  

Investment securities:

    

Trading, at fair value

     1,197       2,340  

Available for sale, at fair value

     824,118       639,364  

Held-to-maturity (fair value of $1,963,731 and $2,094,566)

     2,031,665       2,107,227  

Other securities

     134,874       110,962  
                

Total investment securities

     2,991,854       2,859,893  

Loans held for sale

     3,247       221,568  

Loans, net

     12,677,220       12,287,857  

Goodwill

     718,525       728,038  

Cash surrender value of life insurance

     277,176       269,366  

Premises and equipment

     188,443       193,063  

Accrued interest receivable

     75,830       80,432  

Assets held for disposition

     900       51,603  

Other intangible assets, net

     35,501       39,977  

Deferred tax assets, net

     127,628       58,126  

Unsettled trades

     68,996       2,308  

Prepaid expenses and other assets

     123,073       97,963  
                

Total assets

   $ 17,516,037     $ 17,201,960  
                

Liabilities and Shareholders’ Equity:

    

Deposits

   $ 11,832,375     $ 12,354,158  

Federal Home Loan Bank advances

     1,355,931       1,052,228  

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

     1,688,728       1,238,012  

Long-term debt

     657,004       650,643  

Liabilities held for disposition

     —         9,261  

Accrued expenses and other liabilities

     155,853       151,449  
                

Total liabilities

     15,689,891       15,455,751  
                

Preferred stock of subsidiary corporation

     9,577       9,577  

Shareholders’ equity:

    

Preferred stock, $0.01 par value; Authorized - 3,000,000 shares; Issued and outstanding - 225,000 shares at September 30, 2008

     225,000       —    

Common stock, $0.01 par value; Authorized - 200,000,000 shares; Issued - 56,603,497 shares and 56,594,469 shares

     566       566  

Paid in capital

     725,195       734,604  

Retained earnings

     1,109,114       1,183,621  

Less: Treasury stock, at cost; 3,892,841 and 4,119,374 shares

     (157,125 )     (166,263 )

Accumulated other comprehensive loss, net

     (86,181 )     (15,896 )
                

Total shareholders’ equity

     1,816,569       1,736,632  
                

Total liabilities and shareholders’ equity

   $ 17,516,037     $ 17,201,960  
                

See accompanying Notes to Consolidated Interim Financial Statements.

 

3


Table of Contents

WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

 

     Three months ended September 30,    Nine months ended September 30,  

(In thousands, except per share data)

   2008     2007    2008     2007  

Interest Income:

         

Loans

   $ 175,363     $ 212,847    $ 542,421     $ 632,348  

Investments

     39,210       34,163      116,657       100,006  

Loans held for sale

     54       4,616      1,546       18,284  
                               

Total interest income

     214,627       251,626      660,624       750,638  
                               

Interest Expense:

         

Deposits

     57,731       94,484      193,028       271,797  

Borrowings

     27,715       30,083      87,873       93,348  
                               

Total interest expense

     85,446       124,567      280,901       365,145  
                               

Net interest income

     129,181       127,059      379,723       385,493  

Provision for credit losses

     45,500       15,250      86,300       22,500  
                               

Net interest income after provision for credit losses

     83,681       111,809      293,423       362,993  
                               

Non-Interest Income:

         

Deposit service fees

     31,738       29,956      90,114       84,068  

Loan related fees

     7,171       7,661      21,920       23,502  

Wealth and investment services

     7,070       7,142      21,660       21,657  

Mortgage banking activities

     50       1,849      894       8,040  

Increase in cash surrender value of life insurance

     2,606       2,629      7,810       7,749  

Net (loss) gain on investment securities

     (50 )     482      199       1,526  

Loss on write-down of investments to fair value

     (33,507 )     —        (89,684 )     —    

Loss on sale of FNMA/FHLMC preferred stock

     (2,060 )     —        (2,060 )     —    

Gain on Webster Capital Trust I and II securities

     —         —        —         2,130  

Visa share redemption

     —         —        1,625       —    

Other income

     2,731       1,688      5,369       5,591  
                               

Total non-interest income

     15,749       51,407      57,847       154,263  
                               

Non-interest Expenses:

         

Compensation and benefits

     61,314       61,171      187,623       183,605  

Occupancy

     12,827       11,932      39,637       36,557  

Furniture and equipment

     14,892       14,846      45,686       44,418  

Intangible assets amortization

     1,464       2,027      4,476       8,493  

Marketing

     2,478       4,123      11,061       12,486  

Outside services

     3,798       3,625      11,657       11,317  

Debt redemption premium

     —         —        —         8,940  

Goodwill impairment

     1,013       —        9,513       —    

Severance and other costs

     1,535       452      10,253       10,265  

Foreclosed and repossessed property expenses

     3,464       231      5,529       376  

Other expenses

     14,759       15,146      45,943       47,189  
                               

Total non-interest expenses

     117,544       113,553      371,378       363,646  
                               

(Loss) income from continuing operations before income tax (benefit) expense

     (18,114 )     49,663      (20,108 )     153,610  

Income tax (benefit) provision

     (1,878 )     15,088      (1,860 )     48,083  
                               

(Loss) income from continuing operations

     (16,236 )     34,575      (18,248 )     105,527  

(Loss) income from discontinued operations, net of tax

     (518 )     393      (3,081 )     (56 )
                               

Net (loss) income

     (16,754 )     34,968      (21,329 )     105,471  

Preferred stock dividends

     4,994       —        4,994       —    
                               

Net (loss) income applicable to common shareholders

   $ (21,748 )   $ 34,968    $ (26,323 )   $ 105,471  
                               

Net (loss) income per common share:

         

Basic

         

(Loss) income from continuing operations

   $ (0.41 )   $ 0.64    $ (0.45 )   $ 1.91  

Net (loss) income applicable to common shareholders

     (0.42 )     0.65      (0.51 )     1.91  

Diluted

         

(Loss) income from continuing operations

     (0.41 )     0.64      (0.45 )     1.89  

Net (loss) income applicable to common shareholders

     (0.42 )     0.64      (0.51 )     1.89  

See accompanying Notes to Consolidated Interim Financial Statements.

 

4


Table of Contents

WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (unaudited)

 

     Nine months ended September 30, 2007  
           Paid-in
Capital
   Retained
Earnings
    Treasury
Stock
    Accumulated
Other
Comprehensive
(Loss) Income
    Total  
     Preferred
Stock
   Common Stock            

(In thousands, except share and per share data)

      Shares    Amount            

Balance, December 31, 2006

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

Comprehensive income:

                    

Net income

     —      —        —        —        105,471       —         —         105,471  

Other comprehensive income (loss), net of taxes:

                    

Deferred gain on derivatives sold

     —      —        —        —        —         —         2,571       2,571  

Net unrealized loss on securities available for sale, net of taxes

     —      —        —        —        —         —         (10,069 )     (10,069 )

Amortization of unrealized loss on securities transferred to held-to-maturity, net of taxes

     —      —        —        —        —         —         339       339  

Amortization of net actuarial loss and prior service costs

     —      —        —        —        —         —         350       350  

Amortization of deferred hedging gain

     —      —        —        —        —         —         (126 )     (126 )
                                                          

Other comprehensive loss

                       (6,935 )
                                                          

Comprehensive income

                       98,536  

Dividends paid on common stock of $.87 per share

     —      —        —        —        (48,515 )     —         —         (48,515 )

Exercise of stock options, including excess tax benefits

     —      191,471      2      6,171      —         953       —         7,126  

Repurchase of 1,973,753 common shares

     —      —        —        —        —         (136,046 )     —         (136,046 )

Stock-based compensation expense

     —      —        —        2,684      —         —         —         2,684  

Restricted stock grants and expense

     —      4,176      —        3,687      —         452       —         4,139  

Cumulative impact 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, September 30, 2007

   $ —      56,584,354    $ 566    $ 739,533    $ 1,208,364     $ (133,161 )   $ (10,259 )   $ 1,805,043  
                                                          

 

     Nine months ended September 30, 2008  
           Paid-in
Capital
    Retained
Earnings
    Treasury
Stock
    Accumulated
Other
Comprehensive
(Loss) Income
    Total  
     Preferred
Stock
   Common Stock           

(In thousands, except share and per share data)

      Shares    Amount           

Balance, December 31, 2007

   $ —      56,594,469    $ 566    $ 734,604     $ 1,183,621     $ (166,263 )   $ (15,896 )   $ 1,736,632  

Comprehensive income (loss):

                   

Net loss

     —      —        —        —         (21,329 )     —         —         (21,329 )

Other comprehensive income (loss), net of taxes:

                   

Net unrealized loss on securities available for sale, net of taxes

     —      —        —        —         —         —         (71,251 )     (71,251 )

Amortization of unrealized loss on securities transferred to held to maturity

     —      —        —        —         —         —         266       266  

Net actuarial loss and prior service cost for pension and other postretirement benefits

     —      —        —        —         —         —         35       35  

Unrealized gain on cash flow hedge

     —      —        —        —         —         —         990       990  

Amortization of deferred hedging gain

     —      —        —        —         —         —         (325 )     (325 )
                                                           

Other comprehensive loss

                      (70,285 )
                                                           

Comprehensive loss

                      (91,614 )

Dividends paid on common stock of $.90 per share

     —      —        —        —         (47,260 )     —         —         (47,260 )

Dividends paid on preferred stock $22.19 per share

     —      —        —        —         (4,994 )     —         —         (4,994 )

Exercise of stock options, including excess tax benefits

     —      4,695      —        (228 )     —         760       —         532  

Repurchase of 13,142 common shares

     —      —        —        —         —         (382 )       (382 )

Stock-based compensation expense

     —      —        —        1,989       —         —         —         1,989  

Restricted stock grants and expense

     —      4,333      —        (3,772 )     —         8,760       —         4,988  

Issuance of convertible preferred stock, net of issuance costs

     225,000    —        —        (7,398 )     —         —         —         217,602  

EITF 06-4 Adoption

     —      —        —        —         (924 )     —         —         (924 )
                                                           

Balance, September 30, 2008

   $ 225,000    56,603,497    $ 566    $ 725,195     $ 1,109,114     $ (157,125 )   $ (86,181 )   $ 1,816,569  
                                                           

See accompanying Notes to Consolidated Interim Financial Statements

 

5


Table of Contents

WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

 

     Nine months ended September 30,  

(In thousands)

   2008     2007  

Operating Activities:

    

Net (loss ) income

   $ (21,329 )   $ 105,471  

Loss from discontinued operations, net of tax

     (3,081 )     (56 )
                

(Loss) income from continuing operations

     (18,248 )     105,527  

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

    

Provision for credit losses

     86,300       22,500  

Depreciation and amortization

     38,065       39,495  

Amortization of intangible assets

     4,476       8,493  

Gain on Webster Capital Trust I and II securities

     —         (2,130 )

Debt redemption premium

     —         8,940  

Stock-based compensation

     6,978       6,823  

Excess tax benefits from stock-based compensation

     (1 )     (613 )

Net loss (gain) on sale of foreclosed properties

     2,424       (40 )

Loss on write-down of investments to fair value

     89,684       —    

Impairment of goodwill

     9,513       —    

Net loss (gain) on sale of securities

     2,014       (1,728 )

Net gain on sale of loans and loan servicing

     (894 )     (8,040 )

Net (gain) loss on trading securities

     (153 )     202  

Decrease in trading securities

     1,296       4,005  

Increase in cash surrender value of life insurance

     (7,810 )     (7,749 )

Loans originated for sale

     (182,639 )     (2,257,050 )

Proceeds from sale of loans originated for sale

     401,854       2,311,905  

Decrease in interest receivable

     4,602       3,911  

Net (increase) decrease in prepaid expenses and other assets

     (17,528 )     681  

Net (decrease) increase in accrued expenses and other liabilities

     (10,574 )     43,216  

Proceeds from surrender of life insurance contracts

     —         340  
                

Net cash provided by operating activities

     409,359       278,688  
                

Investing Activities:

    

Purchases of securities, available for sale

     (428,279 )     (301,456 )

Proceeds from maturities and principal payments of securities available for sale

     15,114       296,847  

Proceeds from sales of securities, available for sale

     15,659       37,663  

Purchases of held-to-maturity securities

     (88,582 )     (61,871 )

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

     163,929       97,380  

Purchases of other securities

     (23,912 )     —    

Net (increase) decrease in short-term investments

     (1,337 )     95,378  

Net increase in loans

     (499,038 )     (76,834 )

Proceeds from sale of foreclosed properties

     10,173       2,081  

Net purchases of premises and equipment

     (22,671 )     (26,489 )
                

Net cash (used for) provided by investing activities

     (858,944 )     62,699  
                

Financing Activities:

    

Net (decrease) increase in deposits

     (580,283 )     95,597  

Proceeds from FHLB advances

     77,132,552       12,537,426  

Repayment of FHLB advances

     (76,826,409 )     (12,981,433 )

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

     451,506       101,662  

Net proceeds from issuance of preferred stock

     217,602       —    

Issuance of long term debt

     —         199,344  

Payments on long term debt

     —         (163,453 )

Cash dividends to common shareholders

     (47,260 )     (48,515 )

Cash dividends paid to preferred shareholders

     (4,994 )     —    

Exercise of stock options

     532       6,132  

Excess tax benefits from stock-based compensation

     1       613  

Common stock repurchased

     (382 )     (136,046 )
                

Net cash provided by (used for) financing activities

     342,865       (388,673 )
                

See accompanying Notes to Consolidated Interim Financial Statements.

 

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Table of Contents

WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited), continued

 

     Nine months ended September 30,  

(In thousands)

   2008     2007  

Cash Flows from Discontinued Operations:

    

Operating activities

   $ (2,659 )   $ 327  

Proceeds from sale of discontinued operations

     23,920       —    
                

Net cash provided by discontinued operations

     21,261       327  
                

Net change in cash and cash equivalents

     (85,459 )     (46,959 )

Cash and cash equivalents at beginning of period

     306,654       311,888  
                

Cash and cash equivalents at end of period

   $ 221,195     $ 264,929  
                

Supplemental disclosures of cash flow information:

    

Interest paid

   $ 282,406     $ 373,081  

Income taxes paid

     25,478       36,874  

Noncash investing and financing activities:

    

Transfer of loans and leases, net to foreclosed properties

   $ 27,191     $ 7,981  

Issuance of loan to finance sale of subsidiary

     18,000       —    

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

     900       —    

Unsettled trade to sell securities

     10,496       —    

Unsettled trade to acquire brokered deposit

     58,500       —    

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  

Contingent consideration in a business combination

     —         1,585  

Sale transactions:

    

Fair value of noncash assets sold

   $ 40,833     $ —    

Fair value of liabilities extinguished

     7,117       —    

See accompanying Notes to Consolidated Interim Financial Statements.

 

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WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Interim Financial Statements

(Unaudited)

NOTE 1: Summary of Significant Accounting Policies and Other Matters

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 nine months ended September 30, 2008 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 goodwill impairment, other-than-temporary impairment on securities, 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, 2007.

Recent Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board (FASB) issued revised Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations, (SFAS No. 141(R)). SFAS No. 141(R) retains the fundamental requirements of SFAS No. 141 that the acquisition method of accounting (formerly the purchase method) be used for all business combinations; that an acquirer be identified for each business combination; and that intangible assets be identified and recognized separately from goodwill. SFAS No. 141(R) requires the acquiring entity in a business combination to recognize the assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions. Additionally, SFAS No. 141(R) changes the requirements for recognizing assets acquired and liabilities assumed arising from contingencies and recognizing and measuring contingent consideration. SFAS No. 141(R) also enhances the disclosure requirements for business combinations. SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008 and may not be applied before that date.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 51 (SFAS No. 160). SFAS No. 160 amends Accounting Research Bulletin No. 51, Consolidated Financial Statements to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Among other things, SFAS No. 160 clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements and requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. SFAS No. 160 also amends SFAS No. 128, Earnings per Share, so that earnings per share calculations in consolidated financial statements will continue to be based on amounts attributable to the parent. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008 and is applied prospectively as of the beginning of the fiscal year in which it is initially applied, except for the presentation and disclosure requirements which are to be applied retrospectively for all periods presented. SFAS No. 160 is not expected to have a material impact on Webster’s financial condition or results of operations.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133 (SFAS No. 161). SFAS No. 161 requires enhanced disclosures about how and why an entity uses derivative instruments, how derivative instruments and related items are accounted for under SFAS No. 133 and how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. The new standard is effective for Webster on January 1, 2009. Webster is currently evaluating the impact of adopting SFAS No. 161 on the Consolidated Interim Financial Statements.

 

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In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles (SFAS No. 162). SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). The guidance provided by SFAS No. 162 did not have an effect on the Consolidated Interim Financial Statements.

On October 10, 2008, the FASB issued FSP FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active. The FSP clarifies the application of FASB Statement No. 157, Fair Value Measurements, in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. The FSP is effective immediately, and includes prior period financial statements that have not yet been issued, and therefore Webster is subject to the provisions of the FSP effective September 30, 2008. The adoption of the FSP did not have a material impact on Webster’s financial results or fair value determinations. See Notes 3 and 11 for additional information regarding the application of this FSP.

On October 14, 2008, the SEC’s Office of the Chief Accountant (OCA), clarified its views on the application of other-than-temporary impairment guidance in FAS 115, Accounting for Certain Investments in Debt and Equity Securities, to certain perpetual preferred securities. The OCA concluded that it would not object to a registrant applying an other-than-temporary impairment model to investment in perpetual preferred securities that possess significant debt-like characteristics that is similar to the impairment model applied to debt securities, provided there has been no evidence of deterioration in credit of the issuer. An entity is permitted to apply the OCA’s views in its financial statement included in filings subsequent to the date of the letter. At September 30, 2008, based on the OCA guidance, Webster did not record an other-than-temporary impairment for its investments in investment-grade perpetual preferred securities that had no evidence of credit deterioration and that it has the intent and ability to hold to market recovery.

Recent Economic Developments

There have been historic disruptions in the financial system during the past year and many lenders and financial institutions have reduced or ceased to provide funding to borrowers, including other lending institutions. The availability of credit, confidence in the entire financial sector, and volatility in financial markets has been adversely affected. The Federal Reserve Bank has been providing vast amounts of liquidity into the banking system to compensate for weaknesses in short-term borrowing markets and other capital markets. Federal regulators, as well as the federal government, have enacted legislation to provide stability to the current financial market. See Note 19 for additional information regarding actions taken by Webster in response to enacted federal legislation.

NOTE 2: Sale Transactions

On February 1, 2008, Webster completed the sale of Webster Insurance to USI Holdings Corporation. In connection with the sale, Webster Bank entered into a joint marketing arrangement with USI to provide expanded products and services to their respective clients. The sale resulted in the recording of a loss of $2.2 million, net of tax, in the first quarter of 2008. A total of $40.4 million of assets held for disposition were transferred to the buyer as well as $6.3 million of liabilities.

On April 22, 2008, Webster announced that a definitive agreement had been reached to sell Webster Risk Services, a third-party workers’ compensation administrator. A $0.2 million loss, net of tax, was recorded upon completion of the sale on June 30, 2008.

The activities related to Webster Insurance and Webster Risk Services have been reported separately, with current and prior period amounts reclassified as assets and liabilities held for disposition in the Consolidated Balance Sheets and operating results reclassified as discontinued operations in the Consolidated Statements of Operations. Related prior period disclosures in the Notes to Consolidated Interim Financial Statements have also been revised to incorporate the effect of the discontinued operations. Excluding the $2.4 million loss, net of taxes, on the sale of Webster Insurance and Webster Risk Services, the operating results from discontinued operations for both the three and nine months ended September 30, 2008 was a loss of $0.5 million, net of taxes, and $0.7 million, net of taxes, respectively. Although the sales of Webster Insurance and Webster Risk Services were completed by June 30, 2008, $0.5 million in settlement expenses were incurred during the three months ended September 30, 2008 which have been reflected as loss from discontinued operations in the accompanying Consolidated Statement of Operations.

 

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NOTE 3: Investment Securities

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

 

    September 30, 2008   December 31, 2007
    Amortized
Cost (c)
  Unrealized     Estimated
Fair Value
  Amortized
Cost (c)
  Unrealized     Estimated
Fair Value

(In thousands)

    Gains   Losses         Gains   Losses    

Trading:

               

Municipal bonds and notes

        $ 1,197         $ 2,340
                       

Available for Sale:

               

Government Treasury Bills (a)

  $ 1,988   $ 6   $ —       $ 1,994   $ —     $ —     $ —       $ —  

Corporate bonds and notes (b)

    282,704     373     (97,887 )     185,190     350,209     2,672     (20,583 )     332,298

Equity securities

    40,588     4,259     (7,050 )     37,797     78,354     1,763     (4,944 )     75,173

Mortgage-backed securities

    626,073     1,582     (28,518 )     599,137     230,116     1,831     (54 )     231,893
                                                   

Total available for sale

  $ 951,353   $ 6,220   $ (133,455 )   $ 824,118   $ 658,679   $ 6,266   $ (25,581 )   $ 639,364
                                                   

Held-to-maturity:

               

Municipal bonds and notes

  $ 693,188   $ 1,815   $ (48,271 )   $ 646,732   $ 635,103   $ 10,580   $ (2,470 )   $ 643,213

Mortgage-backed securities

    1,338,477     2,082     (23,560 )     1,316,999     1,472,124     2,748     (23,519 )     1,451,353
                                                   

Total held-to-maturity

  $ 2,031,665   $ 3,897   $ (71,831 )   $ 1,963,731   $ 2,107,227   $ 13,328   $ (25,989 )   $ 2,094,566
                                                   

Other securities:

               

Federal Home Loan Bank stock

  $ 93,159   $ —     $ —       $ 93,159   $ 69,249   $ —     $ —       $ 69,249

Federal Reserve Bank stock

    41,715     —       —         41,715     41,713     —       —         41,713
                                                   

Total other securities

  $ 134,874   $ —     $ —       $ 134,874   $ 110,962   $ —     $ —       $ 110,962
                                                   

 

(a) Par value of available for sale Government Treasury Bills at September 30, 2008 was $2.0 million

 

(b) Par value of available for sale corporate bonds and notes at September 30, 2008 and December 31, 2007 was $387.3 million and $390.2 million, respectively.

 

(c) Includes write-downs for other-than-temporary impairments, as applicable.

Management evaluates all investment securities with an unrealized loss in value, whether caused by adverse interest rates, credit movements or some other factor to determine if the loss is other-than-temporary. The following table provides information on the gross unrealized losses and fair value of Webster’s investment securities with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment security category and length of time that individual investment securities have been in a continuous unrealized loss position at September 30, 2008.

 

     As of September 30, 2008  
     Less Than Twelve Months     Twelve Months or Longer     Total  

(In thousands)

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

Available for Sale:

               

U.S. Government agency Bonds

   $ —        —         —        —         —        —    

Corporate bonds and notes

   $ 115,178    $ (83,811 )   $ 22,361    $ (14,076 )   $ 137,539    $ (97,887 )

Equity securities

     4,761      (7,048 )     6,901      (2 )     11,662      (7,050 )

Mortgage-backed securities

     410,425      (28,518 )     —        —         410,425      (28,518 )
                                             

Total available for sale

   $ 530,364    $ (119,377 )   $ 29,262    $ (14,078 )   $ 559,626    $ (133,455 )
                                             

Held-to-maturity:

               

Municipal bonds and notes

   $ 548,972    $ (44,779 )   $ 28,279    $ (3,492 )   $ 577,251    $ (48,271 )

Mortgage-backed securities

     402,103      (5,209 )     536,452      (18,351 )     938,555      (23,560 )
                                             

Total held-to-maturity

   $ 951,075    $ (49,988 )   $ 564,731    $ (21,843 )   $ 1,515,806    $ (71,831 )
                                             

Total investment securities

   $ 1,481,439    $ (169,365 )   $ 593,993    $ (35,921 )   $ 2,075,432    $ (205,286 )
                                             

 

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The following table provides information on the gross unrealized losses and fair value of Webster’s investment securities with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment security category and length of time that individual investment securities have been in a continuous unrealized loss position at December 31, 2007.

 

     As of December 31, 2007  
     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

   $ 284,385    $ (19,686 )   $ 4,504    $ (897 )   $ 288,889    $ (20,583 )

Equity securities

     47,001      (4,764 )     639      (180 )     47,640      (4,944 )

Mortgage-backed securities

     70,819      (54 )     —        —         70,819      (54 )
                                             

Total available for sale

   $ 402,205    $ (24,504 )   $ 5,143    $ (1,077 )   $ 407,348    $ (25,581 )
                                             

Held-to-maturity:

               

Municipal bonds and notes

   $ 143,177    $ (2,210 )   $ 19,118    $ (260 )   $ 162,295    $ (2,470 )

Mortgage-backed securities

     —        —         1,034,467      (23,519 )     1,034,467      (23,519 )
                                             

Total held-to-maturity

   $ 143,177    $ (2,210 )   $ 1,053,585    $ (23,779 )   $ 1,196,762    $ (25,989 )
                                             

Total investment securities

   $ 545,382    $ (26,714 )   $ 1,058,728    $ (24,856 )   $ 1,604,110    $ (51,570 )
                                             

The following summarizes, by investment security type, the basis for the conclusion that the applicable investment securities within the Company’s available for sale portfolio were not other-than-temporarily impaired at September 30, 2008:

Corporate bonds and notes - The unrealized losses on the Company’s investment in corporate bonds and notes increased to $97.9 million at September 30, 2008 from $20.6 million at December 31, 2007, after the other-than-temporary impairment charges of $24.5 million and $66.1 million for the three and nine months ended September 30, 2008, respectively. This portfolio consists of various trust preferred securities, both pooled and single issuer, that are investment grade, below investment grade and unrated. The decline in market value is attributable primarily to changes in interest rates. Therefore; the Company continues to believe it will collect all scheduled payments. The Company also has the ability and intent to hold these investments until a recovery of amortized cost, which may be at maturity. As a result, the Company does not consider these investments to be other-than-temporarily impaired at September 30, 2008.

Equity securities - The unrealized losses on the Company’s investment in equity securities increased to $7.1 million at September 30, 2008 from $4.9 million at December 31, 2007, after the other-than-temporary impairment charges of $9.0 million and $21.6 million for the three and nine months ended September 30, 2008, respectively. This portfolio consists primarily of investments in the common and perpetual preferred stock of other financial institutions ($36.8 million of the total fair value and $7.1 million of the total unrealized losses) and perpetual preferred stock of government sponsored enterprises ($1.0 million of the total fair value at September 30, 2008). Estimating the recovery period for equity securities in an unrealized loss position includes analyst forecasts, earnings assumptions and other company specific financial performance metrics. In addition, this assessment incorporates general market data, industry and sector cycles and related trends to determine a reasonable recovery period. The Company evaluated the near-term prospects of the issuers in relation to the severity and duration of the impairment. Based on that evaluation and the Company’s ability and intent to hold the investments for a reasonable period of time sufficient for a forecasted recovery of amortized cost, the Company does not consider these investments to be other-than-temporarily impaired at September 30, 2008. For its investments in perpetual preferred stock, Webster analyzed these securities for other-than-temporary impairment using an impairment model that is applied to debt securities, which is consistent with recent SEC guidance. Based on this analysis, Webster determined that there was no deterioration in the credit of one specific issuer; therefore, Webster did not consider that investment to be other-than-temporarily impaired at September 30, 2008. Investments in certain government sponsored enterprises, that were perpetual preferred stocks, were determined to be other-than-temporarily impaired under the debt impairment model (See discussion above and the discussion that follows for additional information on other-than-temporary charges recognized for the three and nine months ended September 30, 2008).

Mortgage-backed securities - The unrealized losses on the Company’s investment in mortgage-backed securities increased to $28.5 million at September 30, 2008 from $54,000 at December 31, 2007. There were no other-than-temporary impairment charges for mortgage-backed securities for the three and nine months ended September 30, 2008. The contractual cash flows for these investments are performing as expected. As the decline in market value is attributable to changes in interest rates and not due to underlying credit deterioration, and because the Company has the ability and intent to hold these investments until a recovery of amortized cost, which may be at maturity, the Company does not consider these investments to be other-than-temporarily impaired at September 30, 2008.

 

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The following summarizes by investment security type the basis for the conclusion that the applicable investment securities’ within the Company’s held-to-maturity portfolio were not other-than-temporarily impaired at September 30, 2008:

Municipal bonds and notes – The unrealized losses on the Company’s investment in municipal bonds and notes increased to $48.3 million at September 30, 2008 from $2.5 million at December 31, 2007. Approximately $3.5 million of the $48.3 million unrealized losses at September 30, 2008 had been in an unrealized loss position for twelve consecutive months or longer as compared to $0.3 million of the $2.5 million at December 31, 2007. These securities are primarily insured AAA and AA rated general obligation bonds with stable ratings. The $3.5 million unrealized loss was concentrated in 46 municipal bonds and notes with a fair value of $28.3 million.

Mortgage backed securities – The unrealized losses on the Company’s investment in mortgage backed securities of $23.6 million at September 30, 2008 remained relatively consistent with the $23.5 million in unrealized losses at December 31, 2007. Approximately $18.4 million of the $23.6 million at September 30, 2008 had been in an unrealized loss position for twelve consecutive months or longer as compared to $23.5 million of the $23.5 million at December 31, 2007, a $5.1 million improvement. These securities carry AAA ratings or Agency implied AAA credit ratings and are currently performing as expected. The $18.4 million unrealized loss was concentrated in seven securities with a total fair value of $536.5 million.

There were no significant credit downgrades during the third quarter of 2008, and these securities are currently performing as anticipated. 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.

The following table shows the impact of the recognition of other-than-temporary impairments and net realized gains and losses on the sale of securities from the available for sale portfolio for the three and nine months ended September 30, 2008 and 2007.

 

     Three months ended September 30,     Nine months ended September 30,  

(In thousands)

   2008     2007     2008     2007  

Corporate bonds and notes

        

Gross gains

   $ —       $ —       $ 309     $ 49  

Gross losses (a)

     (24,482 )     (889 )     (66,160 )     —    
                                

Net gains (losses) on corporate bonds and notes

     (24,482 )     (889 )     (65,851 )     49  
                                

Equity securities

        

Gross gains

     201       1,691       281       2,949  

Gross losses (b)

     (11,557 )     (203 )     (24,262 )     (381 )
                                

Net gains (losses) on equity securities

     (11,356 )     1,488       (23,981 )     2,568  
                                

Net gains (losses) on investment securities

   $ (35,838 )   $ 599     $ (89,832 )   $ 2,617  
                                

 

(a) Other-than-temporary impairment charges were $24.5 million and $66.1 million for the three and nine months ended September 30, 2008. There were no impairment losses for the three and nine months ended September 30, 2007.

 

(b) Other-than-temporary impairment charges were $9.0 million and $21.6 million for the three and nine months ended September 30, 2008, respectively. There were no impairment charges for the three and nine months ended September 30, 2007.

The following summarizes, by investment security type, the basis for the conclusion that the applicable investment securities within the Company’s available for sale portfolio were other-than-temporarily impaired at September 30, 2008:

Corporate bonds and notes:

Trust preferred securities - the other-than-temporary impairment charges for these securities for the three and nine months ended September 30, 2008 was $13.5 million and $50.9 million, respectively. Approximately $9.1 million was due to an unexpected disruption in expected cash flows due to the increase in the amount of participants in the pool electing to defer interest payments for the three months ended September 30, 2008. Based on information received from the securities’ underwriters and the trustees, it is expected that these securities will resume payments in 2009 and/or 2010. Approximately $4.4 million of the impairment charges were due to management’s determination that the best estimate of cash flows that a market participant would use in determining the current fair value of the beneficial interest was adversely impacted. Accordingly, these securities were determined to be other-than-temporarily impaired and were written down to fair value as of September 30, 2008.

Income notes - the other-than-temporary impairment charge for these securities was $11.0 million and $15.2 million for the three and nine months ended September 30, 2008, respectively, due to management’s determination that based on the best estimate of cash flows that a market participant would use in determining the current fair value of the beneficial interest, there was an implied adverse change in expected cash flows; accordingly, these securities were determined to be other-than-temporarily impaired and were written down to fair value as of September 30, 2008.

 

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Equity securities – the other-than-temporary impairment charge for these securities was $9.0 million and $21.6 million for the three and nine months ended September 30, 2008, respectively. Of that amount, $8.0 million and $8.9 million, respectively, represents impairment charges taken on Fannie Mae and Freddie Mac preferred stock for the three and nine months ended September 30, 2008, respectively. The conclusion that the above equity securities were other-than-temporarily impaired was based on management’s review of these securities and their prospects for a near term recovery.

To the extent that changes in interest rates, credit movements and other factors that influence the fair value of investments occur, the Company may be required to record additional impairment charges for other-than-temporary impairment in future periods.

NOTE 4: Loans, Net

A summary of loans, net follows:

 

     September 30, 2008    December 31, 2007

(Dollars in thousands)

   Amount     %    Amount     %

Residential mortgage loans:

         

1-4 family

   $ 3,456,953     26.9    $ 3,440,056     27.5

Construction

     58,924     0.5      106,553     0.9

Liquidating portfolio

         

Construction

     25,409     0.2      83,253     0.7

1-4 family

     16,039     0.1      —       —  
                         

Total residential mortgage loans

     3,557,325     27.7      3,629,862     29.1
                         

Commercial loans:

         

Commercial non-mortgage

     1,801,913     13.9      1,736,644     13.9

Asset-based loans

     868,177     6.7      793,023     6.4

Equipment financing

     992,190     7.7      970,857     7.8
                         

Total commercial loans

     3,662,280     28.3      3,500,524     28.1
                         

Commercial real estate:

         

Commercial real estate

     1,957,623     15.3      1,635,385     13.1

Commercial construction

     193,814     1.5      185,983     1.5

Residential development

     217,564     1.7      242,039     1.9
                         

Total commercial real estate

     2,369,001     18.5      2,063,407     16.5
                         

Consumer loans:

         

Home equity loans

     2,893,534     22.5      2,844,094     22.8

Liquidating portfolio-home equity loans

     295,823     2.3      340,662     2.7

Other consumer

     30,198     0.2      32,498     0.3
                         

Total consumer loans

     3,219,555     25.0      3,217,254     25.8
                         

Net unamortized premiums

     15,133     0.1      18,055     0.1

Net deferred costs

     43,095     0.4      46,841     0.4
                         

Total net unamortized premiums and deferred costs

     58,228     0.5      64,896     0.5
                         

Total loans

     12,866,389     100.0      12,475,943     100.0
                         

Less: allowance for loan losses

     (189,169 )        (188,086 )  
                     

Loans, net

   $ 12,677,220        $ 12,287,857    
                     

In 2007, Webster discontinued indirect residential construction lending and indirect home equity lending outside of its primary market area. At December 31, 2007, these two indirect out of market loan portfolios totaling $424.0 million ($340.7 million of indirect home equity products and $83.3 million of residential construction products) were placed into liquidating portfolios and are currently being managed by a designated credit team. At September 30, 2008, the liquidating portfolios had declined to $337.3 million ($295.8 million of indirect home equity, $25.4 million of residential construction and $16.1 million of 1-4 family residential mortgages).

 

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Financial instruments with off-balance sheet risk

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

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

 

(In thousands)

   September 30,
2008
   December 31,
2007

Unused commercial letters and lines of credit

   $ 2,431,687    $ 2,350,367

Unused portion of home equity credit lines

     

Continuing portfolio

     1,988,630      1,994,279

Liquidating portfolio

     26,168      65,000

Unadvanced portion of closed loans

     290,391      452,321

Outstanding loan commitments

     57,680      114,356
             

Total financial instruments with off-balance sheet risk

   $ 4,794,556    $ 4,976,323
             

The interest rates for outstanding loan commitments are generally established shortly before closing. The interest rates on home equity lines of credit adjust with changes in the prime rate. At September 30, 2008, the fair value of financial instruments with off-balance sheet risk is considered insignificant to the financial statements taken as a whole.

NOTE 5: Allowance for Credit Losses

Significant disruption and volatility in the domestic and global financial and capital markets have continued through the third quarter of 2008, and along with turmoil in the mortgage market have led to a significant credit and liquidity crisis. These market conditions were attributable to a variety of factors; in particular the fallout associated with subprime mortgage loans (a type of lending never actively pursued by Webster). The disruption has been exacerbated by the continued value declines in the real estate and housing markets. Webster is not immune to some negative consequences arising from overall economic weakness and, in particular, a sharp downturn in the housing market, both locally and nationally. Decreases in real estate values could adversely affect the value of property used as collateral for loans. Adverse changes in the economy may have a negative effect on the ability of Webster’s borrowers to make timely loan payments, which would have an adverse impact on the Company’s earnings. A further increase in loan delinquencies would decrease net interest income and increase loan losses, causing potential increases in the provision and allowance for credit losses.

The allowance for credit losses is maintained at a level 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.

 

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

 

     Three months ended September 30,     Nine months ended September 30,  

(In thousands)

   2008     2007     2008     2007  

Continuing portfolio:

        

Beginning balance

   $ 161,497     $ 152,750     $ 147,680     $ 154,994  

Provision

     29,883       15,250       70,683       22,500  

Charge-offs

        

Commercial (a)

     (13,837 )     (1,609 )     (28,689 )     (5,337 )

Equipment financing

     (998 )     (266 )     (2,160 )     (865 )

Commercial real estate

     —         (117 )     (378 )     (117 )

Residential development

     (161 )     —         (3,872 )     —    

Residential

     (1,624 )     (433 )     (4,140 )     (3,300 )

Consumer

     (4,643 )     (2,582 )     (11,124 )     (7,751 )
                                

Total charge-offs

     (21,263 )     (5,007 )     (50,363 )     (17,370 )

Recoveries

     714       1,018       2,831       3,887  
                                

Net loan charge-offs

     (20,549 )     (3,989 )     (47,532 )     (13,483 )
                                

Ending balance - continuing portfolio

   $ 170,831     $ 164,011     $ 170,831     $ 164,011  
                                

Liquidating portfolio:(b)

        

Beginning balance

   $ 32,871     $ N/A     $ 49,906     $ N/A  

Provision

     15,617       N/A       15,617       N/A  

Charge-offs

        

NCLC

     (14,025 )     N/A       (22,569 )     N/A  

Consumer (home equity)

     (6,767 )     N/A       (15,665 )     N/A  
                                

Total charge-offs

     (20,792 )     N/A       (38,234 )     N/A  

Recoveries

     142       N/A       549       N/A  
                                

Net loan charge-offs

     (20,650 )     N/A       (37,685 )     N/A  
                                

Ending balance - liquidating portfolio

   $ 27,838       N/A     $ 27,838       N/A  
                                

Ending balance - total allowance for credit losses

   $ 198,669     $ 164,011     $ 198,669     $ 164,011  
                                

Components:

        

Allowance for loan losses

   $ 189,169     $ 154,532     $ 189,169     $ 154,532  

Reserve for unfunded credit commitments (d)

     9,500       9,479       9,500       9,479  
                                

Allowance for credit losses

   $ 198,669     $ 164,011     $ 198,669     $ 164,011  
                                

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

     1.29 %     0.13 %     0.90 %     0.15 %

Allowance for loan losses as a percentage of total loans

     1.47       1.24       1.47       1.24  

Allowance for credit losses as a percentage of total loans

     1.54       1.32       1.54       1.32  

 

(a) All Business & Professional Banking loans, both commercial and commercial real estate, are considered commercial for purposes of reporting charge-offs and recoveries.

 

(b) In 2007 Webster discontinued indirect residential construction lending and indirect home equity lending outside of its primary market area. Webster placed these two portfolios into a liquidating portfolio and disclosed this as a separate category from its continuing portfolio. Comparable information for the liquidating portfolio for the three and nine month periods ended September 30, 2007 is therefore not available as the portfolio was established in the fourth quarter of 2007.

 

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

 

(d) Reserve for unfunded credit commitments is reported as a component of accrued expenses and other liabilities in the accompanying Consolidated Balance Sheets.

 

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NOTE 6: 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)

   September 30,
2008
   December 31,
2007

Balances not subject to amortization:

     

Goodwill

   $ 718,525    $ 728,038
             

Balances subject to amortization:

     

Core deposit intangibles

     34,187      38,612

Other identified intangibles

     1,314      1,365
             

Total other intangible assets

     35,501      39,977
             

Total goodwill and other intangible assets

   $ 754,026    $ 768,015
             

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

 

(In thousands)

   September 30,
2008
   December 31,
2007

Commercial Banking

   $ 6,681    $ 6,681

Retail Banking

     516,332      516,332

Consumer Finance

     149,391      149,391

Other

     46,121      55,634
             

Total goodwill

   $ 718,525    $ 728,038
             

Webster tests its goodwill for impairment annually in its third quarter. The estimated fair values of the Company’s reporting units with goodwill were calculated using both market and income approaches. Based upon the annual impairment testing performed, there was no impairment indicated for Webster’s goodwill with the exception of its insurance premium financing reporting unit. The fair value of this reporting unit was determined using both market and income approaches. Webster then determined the implied fair value of the reporting unit’s goodwill as compared to its carried balance. Based upon this comparison Webster reduced the carrying value of goodwill by $1.0 million through a charge to third quarter earnings. This charge had no effect on Webster’s cash balances or liquidity. In addition, as goodwill and other intangible assets are not included in the calculation of regulatory capital, the regulatory ratios of Webster and Webster Bank, N.A., were not affected by this non-cash charge.

Accounting principles generally accepted in the U.S. require additional testing if events or circumstances indicate that impairment may exist. A continuing period of market disruption, or further market capitalization to book value deterioration, will result in the requirement to continue to perform testing for impairment between annual assessments. Management will continue to monitor the relationship of the Company’s market capitalization to its book value, which management attributes primarily to financial services industry-wide factors and to evaluate the carrying value of goodwill. To the extent that additional testing results in the identification of impairment, the Company may be required to record additional charges for the impairment of goodwill. For the three and nine months ended September 30, 2008, Webster reduced the carrying value of the goodwill associated with its insurance premium financing reporting unit by $1.0 million and $9.5 million, respectively.

Amortization of intangible assets for the three and nine months ended September 30, 2008, totaled $1.5 million and $4.5 million, respectively. Estimated annual amortization expense of current intangible assets with finite useful lives, absent any impairment or change in estimated useful lives, is summarized below.

 

(In thousands)

    

For years ending December 31,

  

2008 (full year)

   $ 5,939

2009

     5,754

2010

     5,684

2011

     5,684

2012

     5,516

Thereafter

     11,400

 

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NOTE 7: Income Taxes

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at September 30, 2008 and December 31, 2007 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.

 

(In thousands)

   September 30,
2008
    December 31,
2007
 

Deferred tax assets:

    

Allowance for credit losses

   $ 77,231     $ 76,955  

Net operating loss and tax credit carry forwards

     42,583       34,190  

Compensation and employee benefit plans

     23,379       17,423  

Net unrealized loss on securities available for sale

     44,532       6,760  

Impairment losses on securities available for sale

     35,017       —    

Other

     18,011       15,422  
                

Total deferred tax assets

     240,753       150,750  

Valuation allowance

     (64,035 )     (41,374 )
                

Deferred tax assets, net of valuation allowance

     176,718       109,376  
                

Deferred tax liabilities:

    

Deferred loan costs

     16,706       19,918  

Premises and equipment

     4,559       3,454  

Equipment financing leases

     17,874       16,202  

Purchase accounting and fair-value adjustments

     5,846       7,341  

Other

     4,105       4,335  
                

Total deferred tax liabilities

     49,090       51,250  
                

Deferred tax assets, net

   $ 127,628     $ 58,126  
                

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.

Additionally, as a result of the capital-loss limitations and realization uncertainties, a $9.5 million valuation allowance has been established during the first nine months of 2008 for that portion of securities losses treated as capital for U.S. corporation income tax purposes and in excess of available capital gains. $8.6 million of that valuation allowance at September 30, 2008 was recognized as a reduction in the income tax benefit applicable to continuing operations ($7.9 million in the third quarter), and $0.9 million was recognized as an increase in the accumulated other comprehensive loss, net at September 30, 2008. As more fully described below, approximately $3.8 million of that valuation allowance will be recognized in the fourth quarter as a reduction of income tax expense applicable to continuing operations.

The $22.6 million increase in the valuation allowance for the first nine months of 2008 (from $41.4 million at December 31, 2007, to $64.0 million at September 30, 2008) consists of approximately $13 million for net state deferred tax assets (primarily Connecticut), for which a full valuation allowance has been recognized, and the $9.5 million for securities losses discussed above.

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.

As a result of the October 3, 2008, enactment of the Emergency Economic Stabilization Act of 2008, Webster will recognize a $3.8 million tax benefit in the fourth quarter related to a provision of that legislation permitting banks to treat losses on Fannie Mae and Freddie Mac preferred stock as ordinary instead of capital for U.S. corporation income tax purposes.

At September 30, 2008, Webster’s total amount of unrecognized tax benefits (“UTBs”), determined under the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109 (“FIN 48”), was $7.5 million. If recognized, $4.5 million of that amount would impact the effective tax rate. During the nine months ended September 30, 2008, Webster’s UTBs decreased by $3.2 million as a result of settlements with taxing authorities.

Additionally, Webster recognizes interest and, where applicable, penalties related to UTBs as a component of income tax expense. During the nine months ended September 30, 2008, Webster recognized $0.9 million of interest and penalties and, at September 30, 2008, had accrued interest and penalties related to UTBs of $1.7 million.

 

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Webster has determined it is reasonably possible that its UTBs could decrease within the next 12 months by an amount in the range of $0.5 million to $2.8 million, as a result of potential settlements with state taxing authorities.

NOTE 8: Deposits

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

 

     September 30, 2008     December 31, 2007  

(In thousands)

   Amount    Percentage
of Total
    Amount    Percentage
of Total
 

Demand

   $ 1,509,319    12.8 %   $ 1,538,083    12.5 %

NOW

     1,225,253    10.3       1,314,899    10.6  

Money market

     1,591,599    13.4       1,828,656    14.8  

Savings

     2,318,014    19.6       2,259,747    18.3  

Health savings accounts (HSA)

     515,397    4.4       403,858    3.3  

Retail certificates of deposit

     4,492,767    38.0       4,772,624    38.6  

Brokered deposit

     180,026    1.5       236,291    1.9  
                          

Total

   $ 11,832,375    100.0 %   $ 12,354,158    100.0 %
                          

Interest expense on deposits is summarized as follows:

 

     Three months ended
September 30,
   Nine months ended
September 30,

(In thousands)

   2008    2007    2008    2007

NOW

   $ 645    $ 1,685    $ 2,517    $ 5,104

Money market

     9,098      20,508      29,096      55,031

Savings

     7,228      9,786      23,416      25,884

HSA

     2,688      2,854      8,115      7,964

Retail certificates of deposit

     36,511      55,605      124,094      164,367

Brokered deposit

     1,561      4,046      5,790      13,447
                           

Total

   $ 57,731    $ 94,484    $ 193,028    $ 271,797
                           

NOTE 9: Federal Home Loan Bank Advances

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

 

     September 30, 2008    December 31, 2007

(In thousands)

   Total
Outstanding
   Callable    Total
Outstanding
    Callable

Fixed Rate:

          

1.00 % to 1.81 % due in 2008

   $ 469,000    $ —      $ 613,956     $ 67,000

2.52 % to 5.96 % due in 2009

     342,616      123,000      142,616       123,000

4.16 % to 8.44 % due in 2010

     235,118      135,000      235,175       135,000

3.19 % to 6.60 % due in 2011

     100,752      —        947       —  

4.00 % to 4.00 % due in 2012

     51,400      —       

2.82 % to 5.49 % due in 2013

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

0.00 % to 6.00 % due after 2013

     2,415      —        2,464       —  
                            
     1,350,301      307,000      1,044,158       374,000

Unamortized premiums

     5,630      —        8,310       —  

Hedge accounting adjustments

     —        —        (240 )     —  
                            

Total advances

   $ 1,355,931    $ 307,000    $ 1,052,228     $ 374,000
                            

Webster Bank had additional borrowing capacity from the FHLB of approximately $1.2 billion at both September 30, 2008 and December 31, 2007. Advances are secured by a blanket security agreement against certain qualifying assets, principally residential mortgage loans. At September 30, 2008 and December 31, 2007, Webster Bank had unencumbered investment securities available to secure additional borrowings. If these securities had been used to secure FHLB advances, borrowing capacity at September 30, 2008 and December 31, 2007 would have been increased by an additional $503.9 million and $449.6 million, respectively. At September 30, 2008 Webster Bank was in compliance with the FHLB collateral requirements.

 

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On October 21, 2008 Webster announced that it is in the process of evaluating the securitization of part of its residential loan portfolio in the fourth quarter for approximately $500 million. To the extent the securitization is completed before year end, Webster would reduce total loans and increase unencumbered investment securities available to secure additional borrowings. If these securities were to be combined with existing unencumbered securities, Webster’s borrowing capacity would be increased by an additional $1.0 billion as of December 31, 2008.

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

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

 

(In thousands)

   September 30,
2008
   December 31,
2007
 

Securities sold under agreements to repurchase

   $ 832,293    $ 754,792  

Federal funds purchased

     697,554      348,820  

Treasury tax and loan

     155,000      130,000  

Other

     280      9  
               
     1,685,127      1,233,621  

Unamortized premiums

     3,601      5,110  

Hedge accounting adjustments

     —        (719 )
               

Total

   $ 1,688,728    $ 1,238,012  
               

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

 

(Dollars in thousands)

   September 30,
2008
    December 31,
2007
 

Quarter end balance

   $ 259,293     $ 268,766  

Quarter average balance

     297,201       285,499  

Highest month end balance during quarter

     364,738       298,537  

Weighted-average maturity (in months)

     0.18       8.50  

Weighted-average interest rate at end of period

     1.34 %     2.53 %

NOTE 11: Fair Value Measurements

Effective January 1, 2008, Webster adopted the provisions of SFAS No. 157, “Fair Value Measurements”, for financial assets and financial liabilities. In accordance with FASB Staff Position (FSP) No. 157-2, “Effective Date of FASB Statement No. 157,” Webster will delay application of SFAS No. 157 for non-financial assets and non-financial liabilities, until January 1, 2009. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosures about fair value measurements.

SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.

SFAS No. 157 requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable,

 

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meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, SFAS No. 157 establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

 

   

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

 

   

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

 

   

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

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to all of Webster’s financial assets and financial liabilities carried at fair value effective January 1, 2008.

In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect credit quality as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. Webster’s valuation methodologies may produce a fair value calculation that may not be indicative of future fair values. Certain financial instruments may not be actively traded in observable markets and therefore the guidance requires the use of alternative techniques based on unobservable inputs to determine fair value and classifies such items as Level 3. While management believes Webster’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

In October, 2008, the FASB issued FSP No. 157-3 “Determining the Fair Value of a Financial Asset When the Market for that Asset Is Not Active.” The FSP clarifies the application of SFAS 157 in a market that is not active and provides an example to illustrate key consideration in determining the fair value of a financial asset when the market for that financial asset is not active.

Securities Available for Sale. Equity securities and government treasury bills are reported at fair value utilizing Level 1 inputs based upon quoted market prices. Other securities and certain preferred equity securities classified as available for sale are reported at fair value utilizing Level 2 inputs. For these securities, Webster obtains fair value measurements from various sources and utilizes matrix pricing to calculate fair value. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. Any investment security not valued based upon the methods previously discussed are considered Level 3. The Level 3 fair values are determined using unobservable inputs and included pooled trust preferred securities transferred to Level 3 in the third quarter of 2008. The market for pooled trust preferred securities has very low demand due to imbalances in liquidity that exist in the market place (inactive market). The uncertainty in evaluating the credit risk in these securities, required the Company to consider and weigh various inputs. The Company considered fair values from brokers derived from inputs observable and unobservable inputs. To the extent observable inputs were used, they were adjusted significantly to account for an inactive market. The Company also considered fair value derived from the Company’s own assumptions as to expected cash flows and approximate risk-adjusted discount rates and default rates. Webster recorded other-than-temporary impairment charges of $33.5 million and $87.8 million, respectively, for the three and nine months ended September 30, 2008 reducing the amortized cost of the related available for sale securities. The other-than-temporary charges did not result in a change to the fair value reported in the accompanying Consolidated Balance Sheets.

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

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

Loans Held for Sale. Loans held for sale are required to be measured at the lower of cost or fair value. Under SFAS No. 157, market value is to represent fair value. As of September 30, 2008, Webster had $3.2 million of loans held for sale. Management obtains quotes or bids on all or part of these loans directly from the purchasing financial institutions. At September 30, 2008, $3.0 million of loans held for sale were recorded at cost and $0.2 million of loans held for sale were recorded at fair value. Webster recorded a mark to market recovery of $9,649 and $0.2 million, respectively, to mortgage banking activities in the accompanying Consolidated Statements of Operations for the three and nine months ended September 30, 2008.

 

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Impaired Loans. Certain impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from the collateral. When the fair value of the collateral is based on an observable market price or certain appraised values, Webster records the impaired loan using Level 2 inputs. For all other impairments, Webster records the impairment using Level 3 inputs. Loans totaling $50.2 million were deemed impaired at September 30, 2008 and an allowance for loan loss allocation of $5.5 million was made upon identification of impaired loans during the nine months ended September 30, 2008.

Servicing Assets. Servicing assets are carried at cost and are subject to impairment testing. Fair value is estimated utilizing market based assumptions for loan prepayment speeds, servicing costs, discount rates and other economic factors. Where the carrying value exceeds fair value a valuation allowance is established through a charge to non-interest income and subsequently adjusted for changes in fair value. For those servicing assets that experienced a change in fair value, Webster reduced its valuation allowance and recorded a valuation allowance recovery of $55,298 and $0.4 million, respectively, as a component of mortgage banking activities in the accompanying Consolidated Statements of Operations for the three and nine months ended September 30, 2008.

The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of September 30, 2008, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

 

(In thousands)

   Balance as of
September 30, 2008
   Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
   Significant Other
Observable
Inputs (Level 2)
   Significant
Unobservable
Inputs (Level 3)

Financial assets held at fair value:

           

Trading securities

   $ 1,197    $ —      $ 1,197    $ —  

Available for sale securities:

           

Government treasury notes

     1,994      1,994      —        —  

Corporate bonds and notes

     185,190      —        83,387      101,803

Equity securities

     37,797      24,564      13,233      —  

Mortgage backed securities

     599,137      —        599,137      —  
                           

Total securities

     825,315      26,558      696,954      101,803

Derivatives instruments

     20,515      —        20,515      —  
                           

Total financial assets held at fair value

   $ 845,830    $ 26,558    $ 717,469    $ 101,803
                           

Financial liabilities held at fair value:

           

Derivative instruments

   $ 9,734    $ —      $ 9,734    $ —  
                           

The following table shows a reconciliation of the beginning and ending balances for Level 3 assets:

 

     Three months
ended
September 30,
2008
    Nine months
ended
September 30,
2008
 

Level 3 securities available for sale, beginning of period

   $ —       $ —    

Transfers into Level 3

     169,511       169,511  

Impairment charges included in earnings

     (24,481 )     (24,481 )

Unrealized losses included in other comprehensive income

     (43,227 )     (43,227 )
                

Level 3 securities available for sale, end of period

   $ 101,803     $ 101,803  
                

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

 

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The following table summarizes financial assets and financial liabilities measured at fair value on a non-recurring basis as of September 30, 2008, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

 

(In thousands)

   Balance as of
September 30, 2008
   Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
   Significant Other
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)

Assets:

           

Impaired loans

   $ 44,680    $ —      $ —      $ 44,680

Loans held for sale

     206      —        206      —  

Servicing assets

     349      —        —        349

Non-financial assets and non-financial liabilities measured at fair value on a non-recurring basis include reporting units measured at fair value in the first step of goodwill impairment tests. Non-financial assets and non-financial liabilities measured at fair value in the second step of a goodwill impairment test, and other intangible assets and other non-financial long-lived assets measured at fair value for impairment assessment. As stated above, SFAS No. 157 will be applicable to these fair value measurements beginning January 1, 2009. Effective January 1, 2008, Webster adopted the provisions of SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115.” SFAS No. 159 permits Webster to choose to measure eligible items at fair value at specified election dates. Unrealized gains and losses on items for which the fair value measurement option has been elected are reported in earnings at each subsequent reporting date. The fair value option (i) may be applied instrument by instrument, with certain exceptions, thus Webster may record identical financial assets and liabilities at fair value or by another measurement basis permitted under generally accepted accounting principles, (ii) is irrevocable (unless a new election date occurs) and (iii) is applied only to entire instruments and not to portions of instruments. Adoption of SFAS No. 159 on January 1, 2008 did not have a significant impact on Webster’s Consolidated Interim Financial Statements as Webster did not elect to report any additional financial assets or financial liabilities at fair value.

NOTE 12: Shareholders’ Equity

In June 2008, Webster issued 225,000 shares of 8.50% Series A Non-Cumulative Perpetual Convertible Preferred Stock, par value $0.01 per share (Series A Preferred Stock). Dividends on the Series A Preferred Stock will be payable quarterly in arrears, when, as and if authorized and declared by Webster’s board of directors, at an annual rate of 8.50% on the liquidation preference of $1,000 per share. The dividend payment dates will be the fifteenth day of each March, June, September and December, commencing on September 15, 2008. Dividends on the Preferred Stock will be non-cumulative. With certain limited exceptions, if Webster has not paid or set aside for payment full quarterly dividends on the Series A Preferred Stock for a particular dividend period, Webster may not declare or pay dividends on, or redeem, purchase or acquire, its common stock or other junior securities during the next succeeding dividend period. Webster paid dividends of $5.0 million on September 15, 2008 for the dividend period then ended.

Each share of Series A Preferred Stock may be converted at any time, at the option of the holder, into 36.8046 shares of Webster’s common stock plus cash in lieu of fractional shares, subject to adjustment under certain circumstances. On or after June 15, 2013, if the closing price of Webster’s common stock exceeds 130% of the then-applicable conversion price for 20 trading days during any 30 consecutive trading day period, including the last trading day of such period, ending on the trading day preceding the date Webster gives notice of conversion, Webster may at its option cause some or all of the Series A Preferred Stock to be automatically converted into Webster common stock at the then prevailing conversion rate. If Webster exercises its right to cause the automatic conversion of Series A Preferred Stock on June 30, 2013, it will still pay any accrued dividends payable on June 15, 2013 to the applicable holders of record.

The shares of Series A Preferred Stock are not subject to the operation of a sinking fund and have no participation rights. The holders of this series have no general voting rights. If any quarterly dividend payable on this series is in arrears for six or more dividend periods (whether consecutive or not), the holders of this series, voting together as a single class with holders of any and all other series of voting preferred stock then outstanding ranking equally as for payment of dividends and upon which equivalent voting rights have been conferred and are exercisable, will be entitled to vote for the election of two additional members of Webster’s board of directors subject to certain limitations. These voting rights and the terms of any preferred stock directors terminate when Webster has paid in full dividends on this series for at least four consecutive dividend periods following the dividend arrearage.

 

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Accumulated other comprehensive loss is comprised of the following components:

 

(In thousands)

   September 30,
2008
    December 31,
2007
 

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

   $ (83,595 )   $ (12,344 )

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

     (1,121 )     (1,388 )

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

    

Net actuarial loss

     (5,133 )     (5,135 )

Prior service cost

     (353 )     (388 )

Unrealized gain on derivatives held and unamortizatized deferred hedging gain

     4,021       3,359  
                

Accumulated other comprehensive loss

   $ (86,181 )   $ (15,896 )
                

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 September 30, 2008, 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 September 30, 2008

               

Webster Financial Corporation

               

Total risk-based capital

   $ 1,784,678    13.2 %   $ 1,079,327    8.0 %   $ 1,349,159    10.0 %

Tier 1 capital

     1,454,061    10.8       539,664    4.0       809,496    6.0  

Tier 1 leverage capital ratio

     1,454,061    8.7       668,059    4.0       835,074    5.0  

Webster Bank, N.A.

               

Total risk-based capital

   $ 1,561,607    11.7 %   $ 1,068,031    8.0 %   $ 1,335,039    10.0 %

Tier 1 capital

     1,234,335    9.3       534,016    4.0       801,023    6.0  

Tier 1 leverage capital ratio

     1,234,335    7.5       662,567    4.0       828,209    5.0  

At December 31, 2007

               

Webster Financial Corporation

               

Total risk-based capital

   $ 1,665,578    11.4 %   $ 1,169,375    8.0 %   $ 1,461,719    10.0 %

Tier 1 capital

     1,282,680    8.8       584,687    4.0       877,031    6.0  

Tier 1 leverage capital ratio

     1,282,680    8.0       645,295    4.0       806,619    5.0  

Webster Bank, N.A.

               

Total risk-based capital

   $ 1,596,068    11.1 %   $ 1,154,343    8.0 %   $ 1,442,929    10.0 %

Tier 1 capital

     1,215,246    8.4       577,172    4.0       865,757    6.0  

Tier 1 leverage capital ratio

     1,215,246    7.6       637,486    4.0       796,858    5.0  

 

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NOTE 14: (Loss) Earnings Per Share

The following table presents the computation of basic and diluted earnings per share (“EPS”):

 

     Three months ended
September 30,
   Nine months ended
September 30,
 

(In thousands, except per share data)

   2008     2007    2008     2007  

(Loss) income from continuing operations

   $ (16,236 )   $ 34,575    $ (18,248 )   $ 105,527  

Preferred stock dividends

     (4,994 )     —        (4,994 )     —    
                               

Net (loss) income applicable to common shareholder

     (21,230 )     34,575      (23,242 )     105,527  
                               

(Loss) income from discontinued operations

     (518 )     393      (3,081 )     (56 )
                               

Net (loss) income

   $ (21,748 )   $ 34,968    $ (26,323 )   $ 105,471  
                               

Weighted average common shares outstanding - basic

     52,032       53,735      52,017       55,166  

Dilutive effect of stock-based compensation

     —         524      —         587  

Dilutive effect of preferred stock

     —         —        —         —    
                               

Weighted average common and common equivalent shares - diluted

     52,032       54,259      52,017       55,753  
                               

Basic EPS:

         

(Loss) income from continuing operations

   $ (0.31 )   $ 0.64    $ (0.35 )   $ 1.91  

Preferred stock dividends

     (0.10 )     —        (0.10 )     —    
                               

(Loss) income from continuing operations applicable to common shares

     (0.41 )     0.64      (0.45 )     1.91  
                               

(Loss) income from discontinued operations

     (0.01 )     0.01      (0.06 )     —    
                               

Net (loss) income

   $ (0.42 )   $ 0.65    $ (0.51 )   $ 1.91  
                               

Diluted EPS:

         

(Loss) income from continuing operations

   $ (0.41 )   $ 0.64    $ (0.45 )   $ 1.89  

Loss from discontinued operations

     (0.01 )     —        (0.06 )     —    
                               

Net (loss) income

   $ (0.42 )   $ 0.64    $ (0.51 )   $ 1.89  
                               

At the three and nine month period ending September 30, 2008 and 2007, options to purchase 2,800,000 and 2,059,323, 1,239,095 and 1,090,223 shares of common stock at exercise prices ranging from $21.88 to $51.31, $25.50 to $51.31, $43.26 to $51.31 and $45.55 to $51.31, respectively, were not considered in the computation of potential common shares for purposes of diluted EPS, since the exercise prices of the options were greater than the average market price of Webster’s common stock for the respective periods.

When computing diluted earnings per share, all potential common stock, including stock options, restricted stock and convertible preferred stock, are anti-dilutive to the earnings per common share calculation. Therefore, for the three and nine months ended September 30, 2008, the dilutive effect of these items has not been considered for diluted EPS purposes.

 

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NOTE 15: Business Segments

Webster has four business segments for purposes of reporting segment results. These segments are Commercial Banking, Retail Banking, Consumer Finance and Other. Commercial Banking includes middle market, asset-based lending and commercial real estate. Retail Banking includes retail banking, business and professional banking and investment services. Consumer Finance includes residential mortgage, consumer lending and mortgage banking activities. Other includes equipment financing, investment planning, insurance premium financing, and HSA Bank. The Corporate and reconciling amounts include the Company’s Treasury unit, Government Finance, the results of discontinued operations and the amounts required to reconcile profitability metrics to GAAP reported amounts. For further discussion of Webster’s business segments, see Note 21, “Business Segments”, on pages 103-105 of Webster’s 2007 Annual Report on Form 10-K.

The following tables present the operating results and total assets for Webster’s reportable segments for the three and nine months ended September 30, 2008 and 2007. The results for the three and nine months ended September 30, 2008 incorporate the allocation of the increase in the provision for loan losses, other-than-temporary impairment charges, goodwill impairment charges and income tax benefit to each of Webster’s business segments resulting in an increase in the net income of certain business segments as compared to the comparable periods in 2007. For the three and nine months ended September 30, 2008, Webster realized an income tax benefit for the effects of the increase in the provision for loan losses and the other-than-temporary impairment of certain available for sale securities. The results for Other include the $1.0 million and $9.5 million goodwill impairment charge for the insurance premium financing subsidiary for the three and nine months ended September 30, 2008. The impact of this charge was not allocated across all reporting segments.

 

Three months ended September 30, 2008                

(In thousands)

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

Net interest income

   $ 27,677    $ 53,828    $ 28,466    $ 10,018     $ 119,989    $ 9,192     $ 129,181  

Provision for credit losses

     6,128      1,586      3,973      1,398       13,085      32,415       45,500  
                                                    

Net interest income after provision

     21,549      52,242      24,493      8,620       106,904      (23,223 )     83,681  

Non-interest income

     4,756      32,711      3,099      6,393       46,959      (31,210 )     15,749  

Non-interest expense

     15,660      69,368      16,900      13,402       115,330      2,214       117,544