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Webster Financial 10-Q 2009

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 March 31, 2009.

or

 

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

Commission File Number: 001-31486

 

 

LOGO

WEBSTER FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   06-1187536
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)
Webster Plaza, Waterbury, Connecticut   06702
(Address of principal executive offices)   (Zip Code)

(203) 465-4364

(Registrant’s telephone number, including area code)

 

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

 

 

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

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

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

 

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

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

The number of shares of common stock, par value $.01 per share, outstanding as of April 30, 2009 was 52,838,930.

 

 

 


Table of Contents

INDEX

 

          Page No.

PART I – FINANCIAL INFORMATION

  

Item 1.

   Financial Statements (Unaudited)   
   Consolidated Balance Sheets    3
   Consolidated Statements of Operations    4
   Consolidated Statements of Equity and Comprehensive Income    6
   Consolidated Statements of Cash Flows    7
   Notes to Consolidated Financial Statements    9

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    31

Item 3.

   Quantitative and Qualitative Disclosures about Market Risk    50

Item 4.

   Controls and Procedures    50
PART II - OTHER INFORMATION   

Item 1.

   Legal Proceedings    51

Item 1A.

   Risk Factors    51

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds    51

Item 3.

   Defaults upon Senior Securities    51

Item 4.

   Submission of Matters to a Vote of Security Holders    51

Item 5.

   Other Information    51

Item 6.

   Exhibits    52
SIGNATURES    53
EXHIBIT INDEX    54

 

2


Table of Contents

PART I. – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (Unaudited)

 

(In thousands, except share and per share amounts)

   March 31,
2009
    December 31,
2008
 

Assets:

    

Cash and due from depository institutions

   $ 208,862     $ 259,208  

Short-term investments

     19,942       22,154  

Investment securities:

    

Trading, at fair value

     —         77  

Available for sale, at fair value

     1,097,229       1,188,705  

Held-to-maturity (fair value of $2,479,636 and $2,559,745)

     2,429,887       2,522,511  

Other securities

     134,874       134,874  
                

Total investment securities

     3,661,990       3,846,167  

Loans held for sale

     48,876       24,524  

Loans, net

     11,824,530       11,952,262  

Goodwill

     529,887       529,887  

Cash surrender value of life insurance

     282,399       279,807  

Premises and equipment

     182,629       185,928  

Assets held for disposition

     5,571       5,571  

Other intangible assets, net

     32,575       34,039  

Deferred tax asset, net

     199,531       189,337  

Accrued interest receivable and other assets

     259,942       254,653  
                

Total assets

   $ 17,256,734     $ 17,583,537  
                

Liabilities:

    

Deposits

   $ 12,694,759     $ 11,884,890  

Federal Home Loan Bank advances

     671,294       1,335,996  

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

     1,146,852       1,570,971  

Long-term debt

     661,968       687,797  

Accrued expenses and other liabilities

     216,734       220,145  
                

Total liabilities

     15,391,607       15,699,799  
                

Equity:

    

Shareholders’ equity:

    

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

    

Series A issued and outstanding - 224,900 shares

     224,900       224,900  

Series B issued and outstanding - 400,000 shares (net of discount; $8,138 and $8,574)

     391,862       391,426  

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

    

Issued - 56,607,177 shares

     566       566  

Paid in capital:

    

Warrant for common stock

     8,719       8,719  

Additional paid in capital

     727,000       722,962  

Retained earnings

     759,020       781,106  

Accumulated other comprehensive loss, net

     (105,196 )     (105,910 )

Less: Treasury stock, at cost; 3,776,766 and 3,723,527 shares

     (151,376 )     (149,650 )
                

Total Webster Financial Corporation shareholders’ equity

     1,855,495       1,874,119  

Noncontrolling interests

     9,632       9,619  
                

Total equity

     1,865,127       1,883,738  
                

Total liabilities and equity

   $ 17,256,734     $ 17,583,537  
                

See accompanying Notes to Consolidated Financial Statements.

 

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Table of Contents

WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

 

     Three months ended March 31,  

(In thousands, except per share amounts)

   2009     2008  

Interest Income:

    

Loans including fees

   $ 140,767     $ 191,272  

Investments securities

     50,827       39,332  

Loans held for sale

     164       1,400  
                

Total interest income

     191,758       232,004  
                

Interest Expense:

    

Deposits

     52,908       75,242  

Borrowings

     20,653       31,906  
                

Total interest expense

     73,561       107,148  
                

Net interest income

     118,197       124,856  

Provision for credit losses

     66,000       15,800  
                

Net interest income after provision for credit losses

     52,197       109,056  
                

Non-Interest Income:

    

Deposit service fees

     27,959       28,433  

Loan related fees

     6,482       6,858  

Wealth and investment services

     5,750       6,956  

Mortgage banking activities

     606       740  

Increase in cash surrender value of life insurance

     2,592       2,581  

Net gain on investment securities

     4,457       124  

Loss on write-down of investments to fair value

     —         (1,254 )

Gain on early extinguishment of subordinated notes

     5,993       —    

Visa share redemption

     —         1,625  

Other income

     276       1,784  
                

Total non-interest income

     54,115       47,847  
                

Non-interest Expenses:

    

Compensation and benefits

     56,469       63,443  

Occupancy

     14,295       13,682  

Furniture and equipment

     15,140       15,160  

Intangible assets amortization

     1,464       1,548  

Marketing

     3,106       3,643  

Outside services

     3,784       4,153  

FDIC deposit insurance assesment

     4,590       354  

Severance and other costs

     240       (650 )

Foreclosed and repossessed asset write-downs

     3,450       233  

Foreclosed and repossessed asset expenses

     1,179       280  

Other expenses

     14,301       14,058  
                

Total non-interest expenses

     118,018       115,904  
                

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

     (11,706 )     40,999  

Income tax (benefit) expense

     (593 )     14,303  
                

(Loss) income from continuing operations

     (11,113 )     26,696  

Loss from discontinued operations, net of tax

     —         (2,124 )
                

Consolidated net (loss) income

     (11,113 )     24,572  

Less: Net income (loss) attributable to noncontrolling interests

     13       (9 )
                

Net (loss) income attributable to Webster Financial Corporation

     (11,126 )     24,581  

Preferred stock dividends and accretion of preferred stock discount

     (10,431 )     (216 )
                

Net (loss) income applicable to common shareholders

   $ (21,557 )   $ 24,365  
                

See accompanying Notes to Consolidated Financial Statements.

 

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WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited), continued

 

     Three months ended March 31,  

(In thousands, except per share amounts)

   2009     2008  

Basic:

    

(Loss) income from continuing operations, per common share

   $ (0.41 )   $ 0.50  

(Loss) income from discontinued operations, net of tax per common share

     —         (0.04 )
                

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

   $ (0.41 )   $ 0.46  

Diluted:

    

(Loss) income from continuing operations, per common share

   $ (0.41 )   $ 0.50  

(Loss) income from discontinued operations, net of tax per common share

     —         (0.04 )
                

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

   $ (0.41 )   $ 0.46  

Dividends per share

   $ 0.01     $ 0.30  

See accompanying Notes to Consolidated Financial Statements.

 

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Table of Contents

WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY AND COMPREHENSIVE INCOME (Unaudited)

 

     Three months ended March 31, 2008  

(In thousands, except share and
per share data)

   Preferred
Stock
   Common
Stock
   Paid-in
Capital
    Retained
Earnings
    Treasury
Stock
    Accumulated
Other
Comprehensive
(Loss) Income
    Noncontrolling
interest
    Total  

Balance, December 31, 2007

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

Comprehensive income:

                  

Net income

     —        —        —         24,581       —         —         (9 )     24,572  

Other comprehensive loss, net of taxes

     —        —        —         —         —         (30,327 )     —         (30,327 )
                                                              

Comprehensive income

                     (5,755 )

Dividends paid on common stock of $.30 per share

     —        —        —         (15,747 )     —         —         —         (15,747 )

Dividends paid on consolidated affiliate preferred stock

     —        —        —         (216 )     —         —         —         (216 )

Exercise of stock options, including excess tax benefits

     —        —        (68 )     —         658       —         —         590  

Repurchase of 7,924 common shares

     —        —        —         —         (253 )     —         —         (253 )

Stock-based compensation expense

     —        —        721       —         —         —         —         721  

Restricted stock grants and expense

     —        —        1,345       —         314       —         —         1,659  

EITF 06-4 Adoption

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

Balance, March 31, 2008

   $ —      $ 566    $ 736,602     $ 1,191,315     $ (165,544 )   $ (46,223 )   $ 9,606     $ 1,726,322  
                                                              
     Three months ended March 31, 2009  

(In thousands, except share and
per share data)

   Preferred
Stock
   Common
Stock
   Paid-in
Capital
    Retained
Earnings
    Treasury
Stock
    Accumulated
Other
Comprehensive
(Loss) Income
    Noncontrolling
interest
    Total  

Balance, December 31, 2008

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

Comprehensive income (loss):

                  

Net loss

     —        —        —         (11,126 )     —         —         13       (11,113 )

Other comprehensive loss, net of taxes

     —        —        —         —         —         714       —         714  
                                                              

Comprehensive loss

                     (10,399 )

Dividends paid on common stock of $.01 per share

     —        —        —         (529 )     —         —         —         (529 )

Dividends paid on Series A preferred stock $21.25 per share

     —        —        —         (4,779 )     —         —         —         (4,779 )

Dividends incurred on Series B preferred stock $12.50 per share

     —        —        —         (5,000 )     —         —         —         (5,000 )

Subsidiary preferred stock dividends

     —        —        —         (216 )     —         —         —         (216 )

Repurchase of 6,123 common shares

     —        —        —         —         (36 )     —         —         (36 )

Accretion of preferred stock discount

     436      —        —         (436 )     —         —         —         —    

Stock-based compensation expense

     —        —        635       —           —         —         635  

Restricted stock grants and expense

     —        —        3,427       —         (1,690 )     —         —         1,737  

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

     —        —        (24 )     —         —         —         —         (24 )
                                                              

Balance, March 31, 2009

   $ 616,762    $ 566    $ 735,719     $ 759,020     $ (151,376 )   $ (105,196 )   $ 9,632     $ 1,865,127  
                                                              

See accompanying Notes to Consolidated Financial Statements.

 

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Table of Contents

WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 

     Three months ended March 31,  

(In thousands)

   2009     2008  

Operating Activities:

    

Net (loss) income

   $ (11,126 )   $ 24,581  

Loss from discontinued operations, net of tax

     —         (2,124 )
                

(Loss) income from continuing operations

     (11,126 )     26,705  

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

    

Provision for credit losses

     66,000       15,800  

Deferred tax benefit

     (10,423 )     (6,138 )

Depreciation and amortization

     14,060       13,929  

Gain on early extinguishment of subordinated notes

     (4,504 )     —    

Stock-based compensation

     2,373       2,380  

Net loss on sale of foreclosed properties

     390       4  

Write-down of foreclosed property

     3,450       233  

Loss on write-down of investments to fair value

     —         709  

Net loss (gain) on available for sale securities

     (4,458 )     316  

Decrease in trading securities

     77       1,291  

Increase in cash surrender value of life insurance

     (2,592 )     (2,581 )

Net (increase) decrease in loans held for sale

     (24,352 )     213,345  

Net increase in prepaid expenses and other assets

     (15,414 )     (63,168 )

Net increase in accrued expenses and other liabilities

     2,062       60,394  
                

Net cash provided by operating activities

     15,543       263,219  
                

Investing Activities:

    

Net decrease in short-term investments

     2,212       1,070  

Purchases of securities, available for sale

     (353,222 )     (178,432 )

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

     47,430       9,120  

Proceeds from sales of securities, available for sale

     402,309       1,514  

Purchases of held-to-maturity securities

     (2,675 )     (29,982 )

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

     95,031       45,234  

Purchases of other securities

     —         (6,251 )

Net decrease (increase) in loans

     49,335       (143,452 )

Proceeds from sale of foreclosed properties

     3,165       1,333  

Net purchases of premises and equipment proceeds sales

     (5,632 )     (8,623 )
                

Net cash provided by (used for) investing activities

     237,953       (308,469 )
                

Financing Activities:

    

Net increase (decrease) in deposits

     809,869       (210,866 )

Proceeds from FHLB advances

     9,329,810       15,454,000  

Net decrease in FHLB advances

     (9,993,703 )     (15,636,844 )

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

     (423,639 )     404,012  

Issuance costs for Series B preferred stock

     (24 )     —    

Repayment of long-term debt

     (15,928 )     —    

Cash dividends to common shareholders

     (529 )     (15,747 )

Cash dividends to preferred shareholders of consolidated affiliate

     (216 )     (216 )

Cash dividends paid to preferred shareholders

     (9,446 )     —    

Exercise of stock options

     —         590  

Common stock repurchased

     (36 )     (253 )
                

Net cash used for financing activities

     (303,842 )     (5,324 )
                

See accompanying Notes to Consolidated Financial Statements.

 

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WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited), continued

 

     Three months ended March 31,  

(In thousands)

   2009     2008  

Cash Flows from Discontinued Operations:

    

Operating activities

   $ —       $ 241  

Proceeds from sale of discontinued operations

     —         18,000  
                

Net cash provided by discontinued operations

     —         18,241  
                

Net change in cash and cash equivalents

     (50,346 )     (32,333 )

Cash and cash equivalents at beginning of period

     259,208       306,654  
                

Cash and cash equivalents at end of period

   $ 208,862     $ 274,321  
                

Supplemental disclosure of cash flow information:

    

Interest paid

   $ 76,798     $ 106,218  

Income taxes paid

     790       3,072  

Noncash investing and financing activities:

    

Transfer of loans and leases, net to foreclosed properties

   $ 10,331     $ 7,961  

Issuance of loan to finance sale of subsidiary

     —         18,000  

Gain on early extinguishment of fair value hedge of subordinated debt

     1,489       —    

Sale transactions:

    

Fair value of noncash assets sold

   $ —       $ 34,913  

Fair value of liabilities extinguished

     —         6,311  

See accompanying Notes to Consolidated Financial Statements.

 

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WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

NOTE 1: Summary of Significant Accounting Policies and Other Matters

The Consolidated Financial Statements include the accounts of Webster Financial Corporation (“Webster” or the “Company”) and its subsidiaries. The Consolidated Financial Statements and Notes thereto have been prepared in conformity with U.S. generally accepted accounting principles (GAAP) for 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 GAAP 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. The results of operations for the three months ended March 31, 2009 are not necessarily indicative of the results which may be expected for the year as a whole.

The preparation of the Consolidated Financial Statements in conformity with GAAP 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 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 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, 2008.

Recent Accounting Pronouncements

Statement of Financial Accounting Standards (SFAS)

In December 2007, the Financial Accounting Standards Board (FASB) issued revised 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. Webster adopted SFAS No. 141(R) on January 1, 2009. The adoption of SFAS No. 141(R) did not have an effect on Webster’s Consolidated Financial Statements.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statement - an amendment of ARB No. 51. 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. Webster adopted SFAS No. 160 effective January 1, 2009 and has applied the requirements of the standard retrospectively for the noncontrolling interest in Webster Preferred Mortgage LLC and Webster Preferred Capital Corporation for all periods presented in the accompanying Consolidated Financial Statements.

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. Webster adopted SFAS No. 161 on January 1, 2009. See Note 16 for the enhanced disclosures for Webster’s derivatives required by this statement.

FASB Staff Positions (FSP)

FSP No. EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities. (FSP No. EITF 03-6-1) provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. Webster adopted FSP No. EITF 03-6-1 on January 1, 2009. See Note 14 for additional information regarding Webster’s participating securities and calculation of earnings per share.

 

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FSP No. FAS 132(R)-1 Employers’ Disclosures about Postretirement Benefit Plan Asset. (FSP No. FAS 132 (R)-1) provides guidance related to an employer’s disclosures about plan assets of defined benefit pension or other post-retirement benefit plans. Under FSP 132 (R)-1, disclosures should provide users of financial statements with an understanding of how investment allocation decisions are made, the factors that are pertinent to an understanding of investment policies and strategies, the major categories of plan assets, the inputs and valuation techniques used to measure the fair value of plan assets, the effect of fair value measurements using significant unobservable inputs and valuation techniques used to measure the fair value of plan assets, the effect of fair value measurements using significant unobservable inputs on changes in plan assets for the period and significant concentrations of risk within plan assets. The disclosures required by FSP No. FAS 132 (R)-1 will be included in the Company’s financial statements for the year ended December 31, 2009.

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

FSP 142-3, Determination of the Useful Life of Intangible Assets (FSP No. FAS 142-3) amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, Goodwill and Other Intangible Assets. The intent of FSP No. FAS 142-3 is to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141(R) and other U.S. generally accepted accounting principles. The guidance for determining the useful life of a recognized intangible asset in accordance with FSP No. FAS 142-3 shall be applied prospectively to intangible assets acquired after the effective date. The disclosure requirements of FSP No. FAS 142-3 are required to be applied prospectively to all intangible assets recognized as of, and subsequent to, the effective date. FSP No. FAS 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Webster adopted FSP No. FAS 142-3 on January 1, 2009. The adoption of FSP No. FAS 142-3 had no affect on Webster’s Consolidated Financial Statements. See Note 5 for additional information regarding Webster’s assumptions for the valuation of the useful life of its intangible assets.

On April 9, 2009, the FASB finalized four FSPs regarding the accounting treatment for investments including mortgage-backed securities. These FSPs changed the method for determining if an other-than-temporary impairment (“OTTI”) exists and the amount of OTTI to be recorded through an entity’s income statement. The changes brought about by the FSPs provide greater clarity and reflect a more accurate representation of the credit and noncredit components of an OTTI event. The four FSPs are as follows:

 

   

FSP No. FAS 157-3 Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active clarifies the application of SFAS 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.

 

   

FSP No. FAS 157-4 Determining Fair Value When the Volume and Level of Activity for the Assets or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly provides guidelines for making fair value measurements more consistent with the principles presented in SFAS No. 157.

 

   

FSP No. FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments provides additional guidance designed to create greater clarity and consistency in accounting for and presenting impairment losses on securities.

 

   

FSP No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments” enhances consistency in financial reporting by increasing the frequency of fair value disclosures.

These staff positions are effective for financial statements issued for periods ending after June 15, 2009, with early application possible for the first quarter of 2009. The Company elected not to early adopt any of the above positions and will complete its evaluation of the impact of these standards on its results of operation and financial position in the second quarter of 2009.

 

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Emerging Issues Task Force (EITF) Issues

At its November 24, 2008 meeting, the FASB ratified the consensus reached by the Emerging Issues Task Force (EITF) in Issue No. 08-6, Equity Method Investment Accounting Considerations. The objective of EITF No. 08-6 is to clarify the accounting for certain transactions and impairment considerations involving equity method investments which were affected by the accounting for business combinations and the accounting for consolidated subsidiaries with the issuance of SFAS No. 141(R) and SFAS No. 160. EITF No. 08-6 is effective in fiscal years beginning on or after December 15, 2008, and interim periods within those fiscal years and shall be applied prospectively. Webster adopted the provisions of EITF No. 08-6 on January 1, 2009. The adoption of EITF No. 08-6 had no affect on Webster’s Consolidated Financial Statements.

Reclassifications

Certain financial statement balances previously reported are reclassified whenever necessary to conform to the current period’s presentation.

NOTE 2: Investment Securities

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

 

     March 31, 2009    December 31, 2008
     Par
Value
   Amortized
Cost
   Unrealized     Estimated
Fair
Value
   Par
Value
   Amortized
Cost
   Unrealized     Estimated
Fair
Value

(In thousands)

         Gains Losses              Gains Losses    

Trading:

                           

Municipal bonds and notes

              $ —                 $ 77
                                   

Available for Sale:

                           

Government Treasury Bills

   $ 200    $ 200    $ —      $ —       $ 200    $ 2,000    $ 1,998    $ 2    $ —       $ 2,000

Corporate bonds and notes

     360,583      160,137      15,740      (83,151 )     92,726      359,996      159,610      —        (66,092 )     93,518

Equity securities

     N/A      25,955      301      (7,002 )     19,254      N/A      30,925      2,024      (2,174 )     30,775

Mortgage-backed securities - GSE

     881,620      887,171      25,880      (64 )     912,987      970,905      972,323      16,592      (152 )     988,763

Mortgage-backed securities - other

     135,000      133,839      —        (61,777 )     72,062      135,000      133,814      —        (60,165 )     73,649
                                                                       

Total available for sale

   $ 1,377,403    $ 1,207,302    $ 41,921    $ (151,994 )   $ 1,097,229    $ 1,467,901    $ 1,298,670    $ 18,618    $ (128,583 )   $ 1,188,705
                                                                       

Held-to-maturity:

                           

Municipal bonds and notes

   $ 700,479    $ 696,800    $ 9,288    $ (20,227 )   $ 685,861    $ 703,944    $ 700,365    $ 9,627    $ (14,481 )   $ 695,511

Mortgage-backed securities - GSE

     1,664,780      1,666,849      61,453      —         1,728,302      1,749,399      1,751,679      43,912      —         1,795,591

Mortgage-backed securities - other

     66,247      66,238      —        (765 )     65,473      70,493      70,467      —        (1,824 )     68,643
                                                                       

Total held-to-maturity

   $ 2,431,506    $ 2,429,887    $ 70,741    $ (20,992 )   $ 2,479,636    $ 2,523,836    $ 2,522,511    $ 53,539    $ (16,305 )   $ 2,559,745
                                                                       

Other securities:

                           

Federal Home Loan Bank stock

   $ 93,159    $ 93,159    $ —      $ —       $ 93,159    $ 93,159    $ 93,159    $ —      $ —       $ 93,159

Federal Reserve Bank stock

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

Total other securities

   $ 134,874    $ 134,874    $ —      $ —       $ 134,874    $ 134,874    $ 134,874    $ —      $ —       $ 134,874
                                                                       

 

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Management evaluates all investment securities with an unrealized loss in value, whether caused by adverse interest rates, credit movements or some other factor to determine if the loss is other-than-temporary. The following table provides information on the gross unrealized losses and fair value of Webster’s investment securities with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment security category and length of time that individual investment securities have been in a continuous unrealized loss position at March 31, 2009.

 

     As of March 31, 2009  
     Less Than Twelve Months     Twelve Months or Longer     Total  

(In thousands)

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

Available for Sale:

               

Corporate bonds and notes

   $ 3,961    $ (11,250 )   $ 60,732    $ (71,901 )   $ 64,693    $ (83,151 )

Equity securities

     12,699      (4,861 )     2,314      (2,141 )     15,013      (7,002 )

Mortgage-backed securities-GSE

     28,988      (64 )     —        —         28,988      (64 )

Mortgage-backed securities-other

     38,780      (10,832 )     33,282      (50,945 )     72,062      (61,777 )
                                             

Total available for sale

   $ 84,428    $ (27,007 )   $ 96,328    $ (124,987 )   $ 180,756    $ (151,994 )
                                             

Held-to-maturity:

               

Municipal bonds and notes

   $ 301,749    $ (14,147 )   $ 68,663    $ (6,080 )   $ 370,412    $ (20,227 )

Mortgage-backed securities-other

     —        —         65,473      (765 )     65,473      (765 )
                                             

Total held-to-maturity

   $ 301,749    $ (14,147 )   $ 134,136    $ (6,845 )   $ 435,885    $ (20,992 )
                                             

Total investment securities

   $ 386,177    $ (41,154 )   $ 230,464    $ (131,832 )   $ 616,641    $ (172,986 )
                                             

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

 

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

(In thousands)

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

Available for Sale:

               

Corporate bonds and notes

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

Equity securities

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

Mortgage-backed securities-GSE

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

Mortgage-backed securities-other

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

Total available for sale

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

Held-to-maturity:

               

Municipal bonds and notes

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

Mortgage-backed securities- other

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

Total held-to-maturity

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

Total investment securities

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

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 March 31, 2009:

Corporate bonds and notes - The unrealized losses on the Company’s investment in corporate bonds and notes increased to $83.2 million at March 31, 2009 from $66.1 million at December 31, 2008. 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, including a liquidity spread premium to reflect the inactive and illiquid nature of the trust preferred securities market at this time. Recently, several rating agencies downgraded many of these trust preferred securities to below investment grade, reflecting the stress that the financial services sector has been under since the beginning of the economic downturn. As of the measurement date, management evaluates various factors for pooled trust preferred securities including actual and estimated deferral and default rates that are implied from the underlying

 

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performance of the issuers in the structure and discount rates that are implied from observable and unobservable inputs. Based on this analysis, management anticipates it will collect amounts due. The Company has the ability and intent to hold these investments until a recovery of the amortized cost basis, which may be at maturity. As a result, the Company does not consider these investments to be other-than-temporarily impaired at March 31, 2009.

Equity securities - The unrealized losses on the Company’s investment in equity securities increased to $7.0 million at March 31, 2009 from $2.2 million at December 31, 2008. This portfolio consists primarily of investments in the common and preferred stock of other financial institutions based in New England ($19.0 million of the total fair value and $7.0 million of the total unrealized losses at March 31, 2009) and perpetual preferred stock of government sponsored enterprises (GSE) ($0.3 million of the total fair value at March 31, 2009). When estimating the recovery period for equity securities in an unrealized loss position, management utilizes analyst forecasts, earnings assumptions and other company specific financial performance metrics. In addition, this assessment incorporates general market data, industry and sector cycles and related trends to determine a reasonable recovery period. The Company evaluated the near-term prospects of the issuers in relation to the severity and duration of the impairment. Based on that evaluation 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 March 31, 2009. For its investments in perpetual preferred stock, Webster evaluates these securities for other-than-temporary impairment using an impairment analysis that is applied to debt securities, which is consistent with SEC guidance. 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 March 31, 2009.

Mortgage-backed securities-GSE – The unrealized losses on the Company’s investment in GSE (agency) mortgage-backed securities decreased to $64,000 at March 31, 2009 from $152,000 at December 31, 2008. The contractual cash flows for these investments are performing as expected. As the decline in market value is attributable to changes in interest rates and not due to underlying credit deterioration, and because 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 March 31, 2009.

Mortgage-backed securities-other - The unrealized losses on the Company’s investment in mortgage-backed securities issued by entities other than GSEs increased to $61.8 million at March 31, 2009 from $60.2 million at December 31, 2008. The contractual cash flows for these investments are performing as expected. As the decline in market value is attributable to changes in interest rates and not due to underlying credit deterioration, and because 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 March 31, 2009.

The following summarizes by investment security type the basis for the conclusion that the applicable investment securities within the Company’s held-to-maturity portfolio were not other-than-temporarily impaired at March 31, 2009:

Municipal bonds and notes – The unrealized losses on the Company’s investment in municipal bonds and notes increased to $20.2 million at March 31, 2009 from $14.5 million at December 31, 2008. Approximately $6.1 million of the $20.2 million unrealized losses at March 31, 2009 had been in an unrealized loss position for twelve consecutive months or longer as compared to $3.9 million of the $14.5 million at December 31, 2008. These securities are primarily insured AA and A rated general obligation bonds with stable ratings. The $20.2 million unrealized loss was concentrated in 411 municipal bonds and notes with a fair value of $370.4 million.

Mortgage backed securities-other – The unrealized losses on the Company’s investment in mortgage backed securities decreased to $0.8 million at March 31, 2009 from $1.8 million at December 31, 2008. Approximately $0.8 million at March 31, 2009 had been in an unrealized loss position for twelve consecutive months or longer as compared to $1.8 million at December 31, 2008, a $1.0 million improvement. These securities carry AAA ratings or Agency implied AAA credit ratings and are currently performing as expected. The $0.8 million unrealized loss was concentrated in three securities with a total fair value of $65.5 million.

There were no significant credit downgrades on these held-to-maturity securities during the first quarter of 2009, and they 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 amortized cost basis. Management expects that recovery of these temporarily impaired securities will occur over the weighted-average estimated remaining life of these securities.

 

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The following table is a summary of the impact of the recognition of other-than-temporary impairments and net realized gains and losses on sales of securities.

 

     Three Months ended March 31,  
     2009     2008  

(In thousands)

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

Trading securities:

              

Municipal bonds and notes

   $ —      $ (1 )     (1 )   $ 227    $ (349 )     (122 )

Futures and options contracts

     —        —         —         18      —         18  
                                              

Total trading

     —        (1 )     (1 )     245      (349 )     (104 )
                                              

Available for sale:

              

U.S. Government agency notes

     —        —         —         —        —         —    

Municipal bonds and notes

     —        —         —         —        —         —    

Corporate bonds and notes

     —        —         —         286      (58 )     228  

Equity securities

     206      (1,444 )     (1,238 )     —        (545 )     (545 )

Mortgage-backed securities

     5,696      —         5,696       —        —         —    
                                              

Total available for sale

     5,902      (1,444 )     4,458       286      (603 )     (317 )
                                              

Total

   $ 5,902    $ (1,445 )   $ 4,457     $ 531    $ (952 )   $ (421 )
                                              

 

(a) Other-than-temporary impairment charges for equity securities were $0.5 million for the three months ended March 31, 2008. There were no impairment charges for the three months ended March 31, 2009.
(b) Losses for the three months ended March 31, 2008 excluded other-than-temporary impairments of direct investments of $0.7 million. Direct investments are included in other assets in the accompanying Consolidated Balance Sheets. There were no other-than-temporary impairments of direct investments for the three months ended March 31, 2009.

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

 

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NOTE 3: Loans, Net

A summary of loans, net follows:

 

     March 31, 2009    December 31, 2008

(Dollars in thousands)

   Amount     %    Amount     %

Residential mortgage loans:

         

1-4 family

   $ 3,080,842     25.4    $ 2,939,025     24.2

Permanent - NCLC

     49,513     0.4      58,625     0.4

Construction

     30,703     0.3      42,138     0.3

Liquidating portfolio - construction loans

     13,174     0.1      18,735     0.2
                         

Total residential mortgage loans

     3,174,232     26.2      3,058,523     25.1
                         

Consumer loans:

         

Home equity loans

     2,918,213     24.1      2,952,366     24.2

Liquidating portfolio - home equity loans

     266,913     2.2      283,645     2.3

Other consumer

     27,294     0.2      28,886     0.3
                         

Total consumer loans

     3,212,420     26.5      3,264,897     26.8
                         

Commercial loans:

         

Commercial non-mortgage

     1,737,342     14.4      1,795,738     14.7

Asset-based loans

     660,352     5.5      753,143     6.2

Equipment financing

     1,003,126     8.3      1,022,718     8.4
                         

Total commercial loans

     3,400,820     28.2      3,571,599     29.3
                         

Commercial real estate:

         

Commercial real estate

     1,921,318     15.9      1,908,312     15.7

Commercial construction

     176,146     1.5      165,610     1.3

Residential development

     155,914     1.3      161,553     1.3
                         

Total commercial real estate

     2,253,378     18.7      2,235,475     18.3
                         

Net unamortized premiums

     13,937     0.1      14,580     0.1

Net deferred costs

     40,672     0.3      42,517     0.4
                         

Total net unamortized premiums and deferred costs

     54,609     0.4      57,097     0.5
                         

Total loans

     12,095,459     100.0      12,187,591     100.0
                         

Less: allowance for loan losses

     (270,929 )        (235,329 )  
                     

Loans, net

   $ 11,824,530        $ 11,952,262    
                     

Financial instruments with off-balance sheet risk

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

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

 

     March 31,    December 31,

(In thousands)

   2009    2008

Unused commercial letters and lines of credit

   $ 2,089,432    $ 2,196,514

Unused portion of home equity credit lines:

     

Continuing portfolio

     1,888,267      1,954,163

Liquidating portfolio

     16,903      21,792

Unadvanced portion of closed construction loans

     10,753      14,611

Unadvanced portion of closed commercial construction loans

     244,228      262,234

Outstanding loan commitments

     60,044      85,291
             

Total financial instruments with off-balance sheet risk

   $ 4,309,627    $ 4,534,605
             

The interest rates for outstanding loan commitments are generally established shortly before closing. The interest rates on home equity lines of credit adjust with changes in the prime rate. At March 31, 2009, the fair value of financial instruments with off-balance sheet risk is considered insignificant to the financial statements taken as a whole.

 

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NOTE 4: Allowance for Credit Losses

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

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

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

 

     Three months ended March 31,  

(In thousands)

   2009     2008  

Continuing portfolio:

    

Beginning balance

   $ 201,926     $ 147,680  

Provision

     54,134       15,800  

Charge-offs:

    

Residential

     (2,964 )     (1,481 )

Consumer

     (6,541 )     (3,696 )

Commercial (a)

     (10,605 )     (11,439 )

Residential development

     (48 )     —    
                

Total charge-offs

     (20,158 )     (16,616 )

Recoveries

     1,460       827  
                

Net charge-offs

     (18,698 )     (15,789 )
                

Ending balance - continuing portfolio

   $ 237,362     $ 147,691  
                

Liquidating portfolio:

    

Beginning balance

   $ 43,903     $ 49,906  

Provision

     11,866       —    

Charge-offs:

    

NCLC

     (2,086 )     (4,341 )

Consumer (home equity)

     (9,911 )     (3,448 )
                

Total charge-offs

     (11,997 )     (7,789 )

Recoveries

     595       —    
                

Net charge-offs

     (11,402 )     (7,789 )
                

Ending balance - liquidating portfolio

   $ 44,367     $ 42,117  
                

Ending balance - total allowance for credit losses

   $ 281,729     $ 189,808  
                

Components:

    

Allowance for loan losses

   $ 270,929     $ 180,308  

Reserve for unfunded credit commitments (b)

     10,800       9,500  
                

Allowance for credit losses

   $ 281,729     $ 189,808  
                

 

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

 

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NOTE 5: Goodwill and Other Intangible Assets

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

 

     March 31,    December 31,

(In thousands)

   2009    2008

Balances not subject to amortization:

     

Goodwill

   $ 529,887    $ 529,887

Balances subject to amortization:

     

Core deposit intangibles

     31,295      32,741

Other identified intangibles

     1,280      1,298
             

Total goodwill and other intangible assets

   $ 562,462    $ 563,926
             

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

 

     March 31,    December 31,

(In thousands)

   2009    2008

Retail Banking

   $ 516,560    $ 516,560

Other

     13,327      13,327
             

Total goodwill

   $ 529,887    $ 529,887
             

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

Amortization of intangible assets for the three months ended March 31, 2009, totaled $1.5 million. Estimated annual amortization expense of current intangible assets with finite useful lives, absent any impairment or change in estimated useful lives, is summarized below.

 

(In thousands)

    

For years ending December 31,

  

2009 (full year)

   $ 5,755

2010

     5,684

2011

     5,684

2012

     5,516

2013

     5,015

Thereafter

     6,385

 

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NOTE 6: Income Taxes

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at March 31, 2009 and December 31, 2008 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.

 

     March 31,     December 31,  

(In thousands)

   2009     2008  

Deferred tax assets:

    

Allowance for credit losses

   $ 110,564     $ 96,064  

Net operating loss carry forwards

     45,573       44,751  

Net unrealized loss on securities available for sale

     38,525       38,488  

Compensation and employee benefit plans

     33,086       33,745  

Impairment losses on securities available for sale

     82,015       82,057  

Other

     22,058       21,128  
                

Total deferred tax assets

     331,821       316,233  

Valuation allowance

     (82,534 )     (78,826 )
                

Deferred tax assets, net of valuation allowance

     249,287       237,407  
                

Deferred tax liabilities:

    

Deferred loan costs

     15,789       16,451  

Premises and equipment

     3,454       2,508  

Equipment financing leases

     20,364       19,127  

Purchase accounting and fair-value adjustments

     5,780       6,308  

Other

     4,369       3,676  
                

Total deferred tax liabilities

     49,756       48,070  
                

Deferred tax asset, net

   $ 199,531     $ 189,337  
                

Due to realization uncertainties, a valuation allowance exists for the full amount of the Company’s net state deferred tax assets applicable to Connecticut, including its net operating loss carry forwards. That amount represents approximately $70.0 million of the $82.5 million total valuation allowance at March 31, 2009. The remaining $12.5 million is attributable to securities losses characterized as capital in nature, and for which deductibility has been limited for U.S. tax purposes.

Management believes it is more likely than not that Webster will realize its net deferred tax assets (“DTAs”) based upon its historical and anticipated future levels of pre-tax income. As of December 31, 2008, an extensive analysis of the realizability of Webster’s DTAs was performed under SFAS No. 109, Accounting for Income Taxes. Webster continues to evaluate its DTAs and, while it’s possible that a valuation allowance may be necessary in the future should economic conditions worsen significantly from those forecasted, management does not currently anticipate the recognition of such an allowance to occur. There can, however, be no absolute assurance that any specific level of future income will be generated, or that the Company’s DTAs will ultimately be realized.

For more information on Webster’s income taxes, see Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this report and pages 97-100 of Webster’s 2008 Annual Report on Form 10-K.

 

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NOTE 7: Deposits

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

 

     March 31, 2009     December 31, 2008  

(In thousands)

   Amount    Percentage
of Total
    Amount    Percentage
of Total
 

Demand

   $ 1,530,335    12.1 %   $ 1,493,296    12.6 %

Negotiable Order of Withdrawal (NOW)

     1,319,107    10.4       1,271,569    10.7  

Money market

     1,794,943    14.1       1,356,360    11.4  

Savings

     2,576,058    20.3       2,361,169    19.9  

Health savings accounts (HSA)

     616,819    4.9       530,681    4.5  

Retail certificates of deposit

     4,638,977    36.5       4,677,615    39.3  

Brokered deposits

     218,520    1.7       194,200    1.6  
                          

Total

   $ 12,694,759    100.0 %   $ 11,884,890    100.0 %
                          

Interest expense on deposits is summarized as follows:

 

     Three months ended
March 31,

(In thousands)

   2009    2008

NOW

   $ 547    $ 1,088

Money market

     5,676      11,657

Savings

     6,815      8,629

HSA

     2,673      2,806

Certificates of deposit

     35,557      48,668

Brokered deposits

     1,640      2,394
             

Total

   $ 52,908    $ 75,242
             

NOTE 8: Federal Home Loan Bank Advances

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

 

     March 31, 2009    December 31, 2008

(In thousands)

   Total
Outstanding
   Callable    Total
Outstanding
   Callable

Fixed Rate:

           

5.05 % to 5.96 % due in 2009

   $ 127,616    $ 123,000    $ 792,616    $ 123,000

4.16 % to 8.44 % due in 2010

     235,078      135,000      235,099      135,000

3.19 % to 6.60 % due in 2011

     100,615      —        100,684      —  

4.00 % to 4.00 % due in 2012

     51,400      —        51,400      —  

1.21 % to 5.49 % due in 2013

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

0.00 % to 6.00 % due after 2014

     3,595      —        2,398   
                           
     667,304      307,000      1,331,197      307,000

Unamortized premiums

     3,990      —        4,799      —  
                           

Total advances

   $ 671,294    $ 307,000    $ 1,335,996    $ 307,000
                           

Webster Bank National Association (Webster Bank) had additional borrowing capacity from the FHLB of approximately $1.8 billion at March 31, 2009 and $1.6 billion at December 31, 2008. Advances are secured by a blanket lien against certain qualifying assets, principally residential mortgage loans. At March 31, 2009 and December 31, 2008, Webster Bank had unencumbered investment securities available to secure additional borrowings. If these securities had been used to secure FHLB advances, borrowing capacity at March 31, 2009 and December 31, 2008 would have been increased by an additional $1.1 billion and $0.9 billion, respectively. At March 31, 2009 and December 31, 2008, Webster Bank was in compliance with applicable FHLB collateral requirements.

 

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NOTE 9: 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)

   March 31,
2009
   December 31,
2008

Securities sold under agreements to repurchase

   $ 857,612    $ 924,543

Federal Reserve term auction facility

     200,000      150,000

Federal funds purchased

     63,000      474,380

Treasury tax and loan

     9,399      5,748

Other

     14,200      13,180
             
     1,144,211      1,567,851

Unamortized premiums

     2,641      3,120
             

Total

   $ 1,146,852    $ 1,570,971
             

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

 

(Dollars in thousands)

   March 31,
2009
   December 31,
2008

Quarter end balance

   $ 284,612    $ 251,543

Quarter average balance

     264,109      262,563

Highest month end balance during quarter

     284,612      261,581

Weighted-average maturity (in months)

     0.21      0.18

NOTE 10: Long-Term Debt

 

(In thousands)

   March 31,
2009
    December 31,
2008
 

Subordinated notes (due January 2013)

   $ 177,480     $ 200,000  

Senior notes (due April 2014)

     150,000       150,000  

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

    

Webster Capital Trust IV

     200,010       200,010  

Webster Statutory Trust I

     77,320       77,320  

People’s Bancshares Capital Trust II

     10,309       10,309  

Eastern Wisconsin Bancshares Capital Trust II

     2,070       2,070  

NewMil Statutory Trust I

     10,310       10,310  
                
     627,499       650,019  

Unamortized premiums, net

     (281 )     (399 )

Hedge accounting adjustments

     34,750       38,177  
                

Total long-term debt

   $ 661,968     $ 687,797  
                

On March 10, 2009, the Company announced the commencement of a fixed price cash tender offer, which expired on March 18, 2009, for any and all of Webster Bank’s outstanding 5.875% Subordinated Notes due in 2013. The consideration paid per $1,000 of principal was $800 plus all accrued and unpaid interest. Holders tendered $22.5 million of the outstanding principal of the subordinated debt for a total payment of $18.3 million including $0.2 million of accrued interest, resulting in a $4.3 million gain. In connection with the tender offer, the Company terminated $25 million of the fair value hedge associated with the subordinated notes. The termination of that portion of the swap resulted in a net gain of $1.9 million. The pro-rata share of the gain not directly related to the debt redemption was $188,480 which was deferred and is being amortized over the remaining life of the subordinated notes. A total gain of $6.0 million was recognized in the accompanying Consolidated Statement of Operations for the three months ended March 31, 2009.

 

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NOTE 11: Fair Value Measurements

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

 

   

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

 

   

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

 

   

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

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

Securities Available for Sale. Equity securities and government treasury bills are reported at fair value utilizing Level 1 inputs based upon quoted market prices. Other securities and certain preferred equity securities classified as available for sale are reported at fair value utilizing Level 2 inputs. For these securities, Webster obtains fair value measurements from various sources and utilizes matrix pricing to calculate fair value. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. Any investment security not valued based upon the methods previously discussed are considered Level 3. The Level 3 fair values are determined using unobservable inputs and included pooled trust preferred securities transferred to Level 3 in the third quarter of 2008. The market for pooled trust preferred securities has been relatively inactive for several quarters as secondary trading in these securities has dropped to a fraction of the levels experienced prior to the current financial market disruption. There has been no new issuance of pooled trust preferred securities since 2007 and few market participants willing or able to transact in these securities. The uncertainty in evaluating the credit risk in these securities required the Company to consider and weigh various inputs. The Company considered fair values obtained from third parties derived from 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.

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

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

Impaired Loans. Certain impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from the collateral. When the fair value of the collateral is based on an observable market price or certain appraised values, Webster records the impaired loan using Level 2 inputs. For all other impairments, Webster records the impairment using Level 3 inputs. Loans totaling $142.4 million were deemed impaired at March 31, 2009 and $16.0 million of the allowance for loan loss was allocated upon identification of impaired loans during the three months ended March 31, 2009.

Loans Held for Sale. Loans held for sale are required to be carried at the lower of cost or fair value. Under SFAS No. 157, market value is to represent fair value. As of March 31, 2009, Webster had $48.9 million of loans held for sale. Management obtains quotes or bids on all or part of these loans directly from the purchasing financial institutions which are considered to be Level 2 inputs. At March 31, 2009, $31.6 million of loans held for sale were recorded at cost and $17.3 million of loans held for sale were recorded at fair value.

Servicing Assets. Servicing assets are carried at cost and are subject to impairment testing. Fair value is estimated utilizing market based assumptions for loan prepayment speeds, servicing costs, discount rates and other economic factors which are considered to be Level 3 inputs. Where the carrying value exceeds fair value, a valuation allowance is established through a charge to non-interest 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 $85,792 as a component of mortgage banking activities in the accompanying Consolidated Statements of Operations for the three months ended March 31, 2009.

 

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The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of March 31, 2009, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

 

(In thousands)

   Balance as of
March 31, 2009
   Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
   Significant Other
Observable Inputs
(Level 2)
   Significant
Unobservable Inputs

(Level 3)

Financial assets held at fair value:

           

Available for sale securities:

           

Government treasury bills

   $ 200    $ 200    $ —      $ —  

Corporate bonds and notes

     92,726      —        23,371      69,355

Equity securities

     19,254      17,754      1,500      —  

Mortgage-backed securities-GSE

     912,987      —        912,987      —  

Mortgage-backed securities-other

     72,062      —        72,062      —  
                           

Total securities

     1,097,229      17,954      1,009,920      69,355

Derivatives instruments

     78,494      —        78,494      —  
                           

Total financial assets held at fair value

   $ 1,175,723    $ 17,954    $ 1,088,414    $ 69,355
                           

Financial liabilities held at fair value:

           

Derivative instruments

   $ 48,062    $ —      $ 48,062    $ —  
                           

The following table shows a reconciliation of the beginning and ending balances for Level 3 assets for the three months ended March 31, 2009:

 

Level 3 available for sale securities, beginning of period

   $ 62,697

Unrealized losses included in other comprehensive income

     6,457

Purchases, sales, issuances and settlements, net

     201
      

Level 3 available for sale securities, end of period

   $ 69,355
      

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

The following table summarizes financial assets and financial liabilities measured at fair value on a non-recurring basis as of March 31, 2009, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

 

(In thousands)

   Balance as of
March 31, 2009
   Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
   Significant Other
Observable Inputs

(Level 2)
   Significant
Unobservable Inputs
(Level 3)

Assets:

           

Impaired loans

   $ 126,427    $ —      $ —      $ 126,427

Loans held for sale

     17,332      —        17,332      —  

Servicing assets

     2,144      —        —        2,144

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

During the first quarter of 2009, certain foreclosed assets, upon initial recognition, were remeasured and reported at fair value through a charge-off to the allowance for loan losses based upon the fair value of the foreclosed asset. The fair value of a foreclosed asset, upon initial recognition, is estimated using Level 2 inputs based on observable market data or Level 3 inputs based on customized discounting criteria. Foreclosed assets measured at fair value upon initial recognition totaled $12.5 million (utilizing Level 2 valuation inputs) during the three months ended March 31, 2009. In connection with the measurement and initial recognition of the foregoing foreclosed assets, the Company recognized charge-offs of the allowance for loan losses totaling $2.2 million. Foreclosed assets remeasured at fair value during the three months ended March 31, 2009 totaled $17.2 million. In connection with the remeasurement the Company recognized write-downs of $3.4 million in the accompanying Consolidated Statement of Operations for the three months ended March 31, 2009.

 

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NOTE 12: Shareholders’ Equity

Accumulated other comprehensive income (loss) is comprised of the following components:

 

(In thousands)

   March 31,
2009
    December 31,
2008
 

Unrealized loss on available for sale securities, net of tax

   $ (71,548 )   $ (71,530 )

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

     (978 )     (1,039 )

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

     (28,293 )     (28,823 )

Unrealized loss on cash flow hedge

     (7,120 )     (7,441 )

Deferred gain on hedge accounting transactions

     2,743       2,923  
                

Total

   $ (105,196 )   $ (105,910 )
                

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

 

     Three months ended March 31,  
     2009     2008  

(In thousands)

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

Other comprehensive income (loss):

            

Net unrealized (loss) gain on securities available for sale

   $ (107 )   $ 89     $ (18 )   $ (46,381 )   $ 16,023     $ (30,358 )

Amortization of deferred hedging gain

     (277 )     97       (180 )     (168 )     59       (109 )

Amortization of unrealized loss on securities transferred to held to maturity

     93       (32 )     61       197       (69 )     128  

Unrealized gain on cash flow hedge

     494       (173 )     321       —         —         —    

Amortization of net actuarial loss and prior service cost

     815       (285 )     530       18       (6 )     12  
                                                

Total other comprehensive income (loss)

   $ 1,018     $ (304 )   $ 714     $ (46,334 )   $ 16,007     $ (30,327 )
                                                

 

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NOTE 13: Regulatory Matters

Capital guidelines issued by the Federal Reserve Board and the Office of the Comptroller of Currency of the United States (“OCC”) require Webster and its banking subsidiary to maintain certain minimum ratios, as set forth below. At March 31, 2009, Webster and Webster Bank, were deemed to be “well capitalized” under the regulations of the Federal Reserve Board and the OCC, respectively, and in compliance with the applicable capital requirements.

The following table provides information on the capital ratios:

 

     Actual     Capital Requirements     Well Capitalized  

(In thousands)

   Amount    Ratio     Amount    Ratio     Amount    Ratio  

At March 31, 2009

               

Webster Financial Corporation

               

Total risk-based capital

   $ 1,900,557    14.0 %   $ 1,083,492    8.0 %   $ 1,354,365    10.0 %

Tier 1 capital

     1,623,385    12.0       541,746    4.0       812,619    6.0  

Tier 1 leverage capital ratio

     1,623,385    9.5       684,220    4.0       855,275    5.0  

Webster Bank, N.A.

               

Total risk-based capital

   $ 1,603,500    12.0 %   $ 1,071,933    8.0 %   $ 1,339,917    10.0 %

Tier 1 capital

     1,328,116    9.9       535,967    4.0 %     803,950    6.0  

Tier 1 leverage capital ratio

     1,328,116    7.8       681,295    4.0 %     851,619    5.0  

At December 31, 2008

               

Webster Financial Corporation

               

Total risk-based capital

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

Tier 1 capital

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

Tier 1 leverage capital ratio

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

Webster Bank, N.A.

               

Total risk-based capital

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

Tier 1 capital

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

Tier 1 leverage capital ratio

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

 

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NOTE 14: (Loss) Earnings Per Share

SFAS No. 128, “Earnings per Share (as amended)”, provides the two-class method earnings allocation formula that determines earnings per share for each class of stock according to dividends declared and participation rights in undistributed earnings. In June 2008, the FASB issued FASB Staff Position No. EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (“FSP EITF 03-6-1”), which clarifies that share-based payment awards that entitle their holders to receive nonforfeitable dividends before vesting should be considered participating securities. As participating securities, these instruments should be included in the earnings allocation in computing basic earnings per share under the two-class method described in SFAS No. 128. The FSP requires all prior period earnings per share data presented to be adjusted retrospectively to conform with the provisions of this pronouncement. FSP EITF 03-6-1 which is effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those years. Accordingly, the Company has adopted this EITF effective January 1, 2009.

The following table presents undistributed and distributed earnings allocated to shareholders.

 

     Three Months Ended
March 31,
 
     2009     2008  

Net (loss) income applicable to common shareholders

   $ (21,557 )   $ 24,365  

Add: Loss from discontinued operations, net of tax

     —         (2,124 )
                

(Loss) income from continuing operations applicable to common shareholders

   $ (21,557 )   $ 26,489  

Less:

    

Dividends paid - common shareholders

   $ 521     $ 15,609  

Dividends paid - participating shares

     6       115  
                

Undistributed (loss) income from continuing operations

   $ (22,084 )   $ 10,765  

(Loss) income from continuing operations available to common shareholders

    

Distributed earnings to common shareholders

   $ 521     $ 15,609  

Allocation of undistributed (losses) earnings to common shareholders

     (22,084 )     10,685  
                

Total (loss) income from continuing operations available to common shareholders

   $ (21,563 )   $ 26,294  

Loss from discontinued operations available to common shareholders

    

Distributed earnings to common shareholders

   $ —       $ —    

Allocation of undistributed loss from discontinued operations available to common shareholders

     —         (2,108 )
                

Total loss from discontinued operations available to common shareholders

   $ —       $ (2,108 )

Undistributed earnings available to common shareholders is calculated by dividing weighted average shares outstanding by the total of weighted shares outstanding plus weighted average of unvested participating securities multiplied by undistributed earnings. The weighted average number of unvested participating securities for the three months ended March 31, 2009 and 2008 is 575,000 and 389,000 respectively. The weighted average number of participating securities at March 31, 2009 was deemed to be anti-dilutive and therefore has been excluded from the calculation of basic and dilutive loss per share for the three months ended March 31, 2009.

The following table shows weighted average shares outstanding and diluted shares outstanding.

 

(In thousands)

   March 31,
2009
   March 31,
2008

Weighted average shares outstanding:

   52,102    52,390

Add: dilutive effects of stock options

   —      127
         

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

   52,102    52,517
         

Options to purchase 2.3 million and 0.2 million shares that were outstanding at March 31, 2009 and 2008, respectively, were excluded from the calculation of diluted earnings per share because the options’ exercise price was greater than the average market price of the shares.

 

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

 

     Three Months Ended
March 31,
 
     2009     2008  

Basic:

    

(Loss) income from continuing operations available to common shareholders

   $ (21,563 )   $ 26,294  

Shares outstanding (average)

     52,102       52,390  
                

Basic (loss) earnings per common share from continuing operations

   $ (0.41 )   $ 0.50  
                

(Loss) from discontinued operations available to common shareholders

   $ —       $ (2,108 )

Shares outstanding (average)

     —         52,390  
                

Basic (loss) per common share from discontinued operations

   $ —       $ (0.04 )
                

Basic (loss) earnings per common share

   $ (0.41 )   $ 0.46  
                

Diluted:

    

(Loss) Income from continuing operations available to common shareholders

   $ (21,563 )   $ 26,294  

Diluted shares (average)

     52,102       52,517  
                

Diluted earnings per common share from continuing operations

   $ (0.41 )   $ 0.50  
                

(Loss) from discontinued operations available to common shareholders

   $ —       $ (2,108 )

Diluted shares (average)

     —         52,517  
                

Diluted (loss) earnings per common share from discontinued operations

   $ —       $ (0.04 )
                

Diluted (loss) earnings per common share

   $ (0.41 )   $ 0.46  
                

Upon adoption, basic and diluted income per common share for the first quarter of 2008 decreased by $.01 for continuing operations. Basic income and dilutive income per share was unchanged for discontinued operations.

A total of 3,557,701 and 1,982,656 shares at March 31, 2009 and 2008, respectively, represented by non-participating stock options granted, 8,277,354 and 3,282,276 shares represented by convertible preferred stock and warrants, respectively, at March 31, 2009 are not included in the above calculations as they are anti-dilutive to the loss.

NOTE 15: Business Segments

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

The Corporate and reconciling amounts include the Company’s Treasury unit, the results of discontinued operations, noncontrolling interests and the amounts required to reconcile profitability metrics to GAAP reported amounts. For further discussion of Webster’s business segments, see pages 42-46 and Note 22, “Business Segments”, on pages 125-127 of Webster’s 2008 Annual Report on Form 10-K.

 

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The following tables present the operating results and total assets for Webster’s reportable segments for the three months ended March 31, 2009 and 2008. The results for the three months ended March 31, 2009 incorporate the allocation of the increase in the provision for credit losses and income tax benefit to each of Webster’s business segments, resulting in a reduction in the income tax expense (benefit).

Three months ended March 31, 2009

 

(In thousands)

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

Net interest income

   $ 35,791    $ 44,318     $ 32,119    $ 2,982     $ 115,210    $ 2,987     $ 118,197  

Provision for credit losses

     9,491      1,957       4,889      —         16,337      49,663       66,000  
                                                     

Net interest income after provision

     26,300      42,361       27,230      2,982       98,873      (46,676 )     52,197  

Non-interest income

     8,515      27,671       1,991      3,138       41,315      12,800       54,115  

Non-interest expense

     26,084      71,331       15,599      6,495       119,509      (1,491 )     118,018  
                                                     

Income (loss) from continuing operations before income taxes

     8,731      (1,299 )     13,622      (375 )     20,679      (32,385 )     (11,706 )

Income tax expense (benefit)

     442      (64 )     690      (19 )     1,049      (1,642 )     (593 )
                                                     

Consolidated net income (loss)

     8,289      (1,235 )     12,932      (356 )     19,630      (30,743 )     (11,113 )

Less noncontrolling interest

     —        —         13      —         13      —         13  
                                                     

Net income (loss) attributable to Webster Financial Corporation

   $ 8,289    $ (1,235 )   $ 12,919    $ (356 )   $ 19,617    $ (30,743 )   $ (11,126 )
                                                     

Total assets at period end

   $ 4,844,939    $ 1,605,281     $ 6,496,177    $ 24,128     $ 12,970,525    $ 4,286,209     $ 17,256,734  
                                                     

Three months ended March 31, 2008

 

(In thousands)

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

Net interest income

   $ 34,777    $ 56,227    $ 32,231     $ 3,730     $ 126,965     $ (2,109 )   $ 124,856  

Provision for credit losses

     4,306      1,236      3,438       —         8,980       6,820       15,800  
                                                      

Net interest income after provision

     30,471      54,991      28,793       3,730       117,985       (8,929 )     109,056  

Non-interest income

     8,629      29,864      3,799       2,317       44,609       3,238       47,847  

Non-interest expense

     21,619      69,989      17,956       6,511       116,075       (171 )     115,904  
                                                      

Income (loss) from continuing operations before income taxes

     17,481      14,866      14,636       (464 )     46,519       (5,520 )     40,999  

Income tax expense (benefit)

     6,130      5,213      5,053       (162 )     16,234       (1,931 )     14,303  
                                                      

Income (loss) from continuing operations

     11,351      9,653      9,583       (302 )     30,285       (3,589 )     26,696  

Loss from discontinued operations

     —        —        —         —