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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 June 30, 2009.

or

 

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

Commission File Number: 001-31486

 

 

LOGO

WEBSTER FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   06-1187536

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

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

(203) 465-4364

(Registrant’s telephone number, including area code)

 

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

 

 

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

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

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

 

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

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

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

 

 

 


Table of Contents

INDEX

 

         Page No.

PART I – FINANCIAL INFORMATION

  

Item 1.

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

Item 2.

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

Item 3.

  Quantitative and Qualitative Disclosures about Market Risk    59

Item 4.

  Controls and Procedures    59

PART II - OTHER INFORMATION

  

Item 1.

  Legal Proceedings    60

Item 1A.

  Risk Factors    60

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds    60

Item 3.

  Defaults upon Senior Securities    60

Item 4.

  Submission of Matters to a Vote of Security Holders    60

Item 5.

  Other Information    61

Item 6.

  Exhibits    62
SIGNATURES    63
EXHIBIT INDEX    64

 

2


Table of Contents

PART I. – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS (Unaudited)

WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

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

   June 30,
2009
    December 31,
2008
 
     (unaudited)        

Assets:

    

Cash and due from depository institutions

   $ 254,638      $ 259,208   

Short-term investments

     8,216        22,154   

Investment securities:

    

Trading, at fair value

     —          77   

Available for sale, at fair value

     1,405,872        1,188,705   

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

     2,767,965        2,522,511   
                

Total investment securities

     4,173,837        3,711,293   

Loans held for sale

     113,936        24,524   

Loans, net

     11,304,703        11,952,262   

Federal Home Loan Bank and Federal Reserve Bank stock

     137,874        134,874   

Goodwill

     529,887        529,887   

Cash surrender value of life insurance

     285,064        279,807   

Premises and equipment, net

     179,625        185,928   

Other intangible assets, net

     31,126        34,039   

Deferred tax asset, net

     153,745        189,337   

Accrued interest receivable and other assets

     279,925        260,224   
                

Total assets

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

Liabilities:

    

Deposits

   $ 13,174,582      $ 11,884,890   

Federal Home Loan Bank advances

     663,123        1,335,996   

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

     1,015,099        1,570,971   

Long-term debt

     590,520        687,797   

Accrued expenses and other liabilities

     158,102        220,145   
                

Total liabilities

     15,601,426        15,699,799   
                

Equity:

    

Shareholders’ equity:

    

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

    

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

     56,400        224,900   

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

     392,298        391,426   

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

    

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

     679        566   

Paid in capital:

    

Warrant for common stock

     8,719        8,719   

Additional paid in capital

     815,893        722,962   

Retained earnings

     786,949        781,106   

Accumulated other comprehensive loss, net of taxes

     (66,872     (105,910

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

     (152,548     (149,650
                

Total Webster Financial Corporation shareholders’ equity

     1,841,518        1,874,119   

Noncontrolling interests

     9,632        9,619   
                

Total equity

     1,851,150        1,883,738   
                

Total liabilities and equity

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

See accompanying Notes to Condensed Consolidated Financial Statements.

 

3


Table of Contents

WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

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

(In thousands, except per share amounts)

   2009     2008     2009     2008  

Interest Income:

        

Loans including fees

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

Investments securities

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

Loans held for sale

     833        92        997        1,492   
                                

Total interest income

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

Interest Expense:

        

Deposits

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

Borrowings

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

Total interest expense

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

Net interest income

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

Provision for credit losses

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

Net interest income after provision for credit losses

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

Non-interest Income:

        

Deposit service fees

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

Loan related fees

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

Wealth and investment services

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

Mortgage banking activities

     3,433        104        4,039        844   

Increase in cash surrender value of life insurance

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

Impairment losses on investment securities

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

Net (loss) gain on the sale of investment securities

     (13,593     126        (9,135     249   

Gain on the exchange of trust preferred securities for common stock

     24,336        —          24,336        —     

Gain on early extinguishment of subordinated notes

     —          —          5,993        —     

Gain on Visa share redemption

     1,907        —          1,907        1,625   

Other income

     1,325        854        1,600        2,638   
                                

Total non-interest income

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

Non-interest Expenses:

        

Compensation and benefits

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

Occupancy

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

Furniture and equipment

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

Intangible assets amortization

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

Marketing

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

Outside services

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

FDIC deposit insurance assessment

     5,959        344        10,549        698   

FDIC special deposit insurance assessment

     8,000        —          8,000        —     

Goodwill impairment

     —          8,500        —          8,500   

Severance and other costs

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

Foreclosed and repossessed asset write-downs

     2,829        484        6,279        717   

Foreclosed and repossessed asset expenses

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

Other expenses

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

Total non-interest expenses

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

Loss from continuing operations before income tax (benefit) expense

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

Income tax (benefit) expense

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

Loss from continuing operations

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

Income (loss) from discontinued operations, net of tax

     313        (439     313        (2,563
                                

Consolidated net loss

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

Less: Net income (loss) attributable to noncontrolling interests

     —          1        13        (8
                                

Net loss attributable to Webster Financial Corporation

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

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

     48,361        (215     37,932        (431
                                

Net income (loss) applicable to common shareholders

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

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS, continued

 

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

Basic:

         

Income (loss) from continuing operations, per common share

   $ 0.30    $ (0.55   $ (0.10   $ (0.04

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

     0.01      (0.01     0.01        (0.05
                               

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

   $ 0.31    $ (0.56   $ (0.09   $ (0.09

Diluted:

         

Income (loss) from continuing operations, per common share

   $ 0.30    $ (0.55   $ (0.10   $ (0.04

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

     0.01      (0.01     0.01        (0.05
                               

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

   $ 0.31    $ (0.56   $ (0.09   $ (0.09

Dividends per common share

   $ 0.01    $ 0.30      $ 0.02      $ 0.60   

See accompanying Notes to Condensed Consolidated Financial Statements.

 

5


Table of Contents

WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

 

     Six months ended June 30, 2009  

(In thousands, except share and per
share data)

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

Balance, December 31, 2008

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

Cumulative effect of change in accounting principle

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

Comprehensive income (loss):

                  

Net loss

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

Other comprehensive loss, net of taxes

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

Comprehensive loss

                     7,796   

Dividends paid on common stock of $.01 per share

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

Dividends paid on Series A preferred stock $21.25 per share

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

Dividends incurred on Series B preferred stock $12.50 per share

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

Subsidiary preferred stock dividends

     —          —        —          (431     —          —          —        (431

Repurchase of 6,123 common shares

     —          —        —          —          (51     —          —        (51

Accretion of preferred stock discount

     872        —        —          (872     —          —          —        —     

Stock-based compensation expense

     —          —        1,246        —            —          —        1,246   

Restricted stock grants and expense

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

Conversion of Series A preferred stock

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

Extinguishment of Trust Preferred Securities

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

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

     —          —        (24     —          —          —          —        (24
                                                              

Balance, June 30, 2009

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

 

     Six months ended June 30, 2008  

(In thousands, except share and
per share data)

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

Balance, December 31, 2007

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

Comprehensive income:

                  

Net income (loss)

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

Other comprehensive loss, net of taxes

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

Comprehensive income

                     (34,396

Dividends paid on common stock of $.60 per share

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

Dividends paid on consolidated affiliate preferred stock

     —        —        —          (431     —          —          —          (431

Exercise of stock options, including excess tax benefits

     —        —        (73     —          513        —          —          440   

Repurchase of 11,447 common shares

     —        —        —          —          (349     —          —          (349

Stock-based compensation expense

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

Restricted stock grants and expense

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

Issuance of Series A preferred stock

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

EITF 06-4 Adoption

     —        —        —          (923     —          —          —          (923
                                                              

Balance, June 30, 2008

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

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     Six months ended June 30,  

(In thousands)

   2009     2008  

Operating Activities:

    

Net loss

   $ (42,673   $ (4,152

Income (loss) from discontinued operations, net of tax

     313        (2,563
                

Loss from continuing operations

     (42,986     (1,589

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

    

Provision for credit losses

     151,000        40,800   

Depreciation and amortization

     29,742        29,039   

Gain on early extinguishment of subordinated notes

     (4,504     —     

Gain on exchange of trust preferred securities for common stock

     (24,336     —     

Stock-based compensation

     4,481        4,519   

Foreclosed and repossessed asset write-downs

     6,279        925   

Write-down of fixed assets

     1,150        —     

Goodwill impairment

     —          8,500   

Impairment losses on investment securities

     27,110        56,177   

Net loss (gain) on the sale of investment securities

     9,135        (316

Decrease in trading securities

     76        60   

Increase in cash surrender value of life insurance

     (5,257     (5,204

Net (increase) decrease in loans held for sale

     (89,412     217,596   

Net increase in prepaid expenses and other assets

     (45,074     (9,691

Net decrease in accrued expenses and other liabilities

     (41,434     (18,500
                

Net cash (used for) provided by operating activities

     (24,030     322,316   
                

Investing Activities:

    

Net decrease in short-term investments

     13,938        2,116   

Purchases of securities, available for sale

     (688,091     (339,438

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

     99,085        21,083   

Proceeds from sales of securities, available for sale

     410,336        6,277   

Purchases of held-to-maturity securities

     (286,084     (75,163

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

     242,530        116,252   

Purchases of FHLB and FRB stock

     (3,000     (21,248

Net decrease (increase) in loans

     264,214        (341,820

Proceeds from sale of foreclosed properties

     11,789        5,855   

Net purchases of premises and equipment, net of sales proceeds

     (13,283     (15,730
                

Net cash provided by (used for) investing activities

     51,434        (641,816
                

Financing Activities:

    

Net increase (decrease) in deposits

     1,289,693        (277,591

Proceeds from FHLB advances

     9,420,286        28,275,925   

Repayments of FHLB advances

     (10,091,665     (27,906,974

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

     (554,912     37,322   

Repayment of long-term debt

     (15,928     —     

Issuance costs for Series B Preferred Stock

     (24     —     

Issuance of Series A Preferred Stock, net

     —          217,700   

Conversion of Series A Preferred Stock

     (58,975     —     

Cash dividends to common shareholders

     (1,055     (31,495

Cash dividends to preferred shareholders of consolidated affiliate

     (431     (431

Cash dividends paid to preferred shareholders

     (19,225     —     

Exercise of stock options

     —          440   

Common stock repurchased

     (51     (349
                

Net cash (used for) provided by financing activities

     (32,287     314,547   
                

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, continued

 

     Six months ended June 30,  

(In thousands)

   2009     2008  

Cash Flows from Discontinued Operations:

    

Operating activities

   $ 313      $ (2,141

Proceeds from sale of discontinued operations

     —          23,920   
                

Net cash provided by discontinued operations

     313        21,779   
                

Net change in cash and cash equivalents

     (4,570     16,826   

Cash and cash equivalents at beginning of period

     259,208        306,654   
                

Cash and cash equivalents at end of period

   $ 254,638      $ 323,480   
                

Supplemental disclosure of cash flow information:

    

Interest paid

   $ 147,672      $ 199,203   

Income taxes paid

     1,847        24,190   

Noncash investing and financing activities:

    

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

   $ 203,030      $ —     

Transfer of loans and leases, net to foreclosed properties

     21,253        15,478   

Issuance of loan to finance sale of subsidiary

     —          18,000   

Gain on early extinguishment of fair value hedge of subordinated debt

     1,489        —     

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

     1,632        900   

Extinguishment of junior subordinated notes through issuance of common stock

    

Carrying value of junior subordinated notes extinguished

     (63,773     —     

Fair value of common stock issued

     39,307        —     

Recognition of deferred gain on cash flow hedge

     (674     —     

Conversion of Series A Preferred Stock:

    

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

     (103,979     —     

Fair value of common stock issued

     45,187        —     

Sale transactions:

    

Fair value of noncash assets sold

   $ —        $ 40,833   

Fair value of liabilities extinguished

     —          7,117   

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

NOTE 1: Summary of Significant Accounting Policies

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

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

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

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

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

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

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

NOTE 2: New Accounting Standards

Recently Issued Accounting Standards

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

 

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

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

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

Recently Adopted Accounting Standards

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

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

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

 

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Financial Accounting Standards Board Staff Positions and Interpretations

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

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

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

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

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

NOTE 3: Subsequent Events

Capital Transaction

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

 

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

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

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

Other

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

NOTE 4: Investment Securities

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

 

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

(In thousands)

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

Trading:

                           

Municipal bonds and notes

              $ —                 $ 77
                                                                       

Available for Sale:

                           

Government Treasury Bills

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

Corporate bonds and notes (a)

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

Equity securities (b)

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

Mortgage-backed securities - GSE

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

Mortgage-backed securities - other

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

Total available for sale

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

Held-to-maturity:

                           

Municipal bonds and notes

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

Mortgage-backed securities - GSE

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

Mortgage-backed securities - other

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

Total held-to-maturity

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

Total Investment Securities

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

 

(a) Amortized cost is net of $105.9 million of credit related other-than-temporary impairments at June 30, 2009.
(b) Amortized cost is net of $25.4 million of other-than-temporary impairments at June 30, 2009.

 

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

 

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

(In thousands)

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

Available for Sale:

               

Corporate bonds and notes

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

Equity securities

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

Mortgage-backed securities-GSE

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

Mortgage-backed securities-other

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

Total available for sale

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

Held-to-maturity:

               

Municipal bonds and notes

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

Mortgage-backed securities-GSE

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

Mortgage-backed securities-other

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

Total held-to-maturity

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

Total investment securities

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

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

 

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

(In thousands)

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

Available for Sale:

               

Corporate bonds and notes

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

Equity securities

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

Mortgage-backed securities-GSE

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

Mortgage-backed securities-other

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

Total available for sale

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

Held-to-maturity:

               

Municipal bonds and notes

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

Mortgage-backed securities- other

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

Total held-to-maturity

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

Total investment securities

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

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

 

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

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

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

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

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

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

Corporate bonds and notes

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

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

 

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

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

Equity securities

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

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

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

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

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

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

 

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

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

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

 

     Available for Sale    Held-to-Maturity

(Dollars in thousands)

   Amortized
Cost
   Fair
Value
   Amortized
Cost
   Fair
Value

Securities Available for Sale

           

Due in one year or less

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

Due after one year through five years

     —        —        3,674      3,706

Due after five through ten years

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

Due after ten years

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

Totals

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

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

 

     Three Months ended June 30,  
     2009     2008  

(In thousands)

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

Trading securities:

              

Municipal bonds and notes

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

Other

     —        —          —          —        —          —     
                                              

Total trading

     —        —          —          145      (108     37   
                                              

Available for sale:

              

U.S. Government agency notes

     —        —          —          23      —          23   

Municipal bonds and notes

     —        —          —          —        —          —     

Corporate bonds and notes

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

Equity securities

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

Mortgage-backed securities

     —        —          —          —        —          —     
                                              

Total available for sale

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

Total

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

 

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

 

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     Six Months ended June 30,  
     2009     2008  

(In thousands)

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

Trading securities:

              

Municipal bonds and notes

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

Other

     —        —          —          18      —          18   
                                              

Total trading

     —        (1     (1     390      (457     (67
                                              

Available for sale:

              

U.S. Government agency notes

     —        —          —          23      —          23   

Municipal bonds and notes

     —        —          —          —        —          —     

Corporate bonds and notes

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

Equity securities

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

Mortgage-backed securities

     5,696      —          5,696        —        —          —     
                                              

Total available for sale

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

Total

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

 

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

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

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

 

(In thousands)

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

Balance of credit related OTTI at beginning of period

   $ 155,910      $ 173,496   

Additions for credit related OTTI not previously recognized

     23,610        23,610   

Reduction for securities sold

     (73,649     (73,649

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

     —          (17,586
                

Subtotal of additions

     (50,039     (67,625
                

Balance of credit-related OTTI at June 30, 2009

   $ 105,871      $ 105,871   
                

 

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

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

 

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NOTE 5: Loans, Net

A summary of loans, net follows:

 

     June 30, 2009    December 31, 2008

(Dollars in thousands)

   Amount     %    Amount     %

Residential mortgage loans:

         

1-4 family

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

Permanent - NCLC

     44,740      0.4      58,625      0.4

Construction

     27,765      0.2      42,138      0.3

Liquidating portfolio - construction loans

     6,540      0.1      18,735      0.2
                         

Total residential mortgage loans

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

Consumer loans:

         

Home equity loans

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

Liquidating portfolio - home equity loans

     249,086      2.2      283,645      2.3

Other consumer

     27,350      0.2      28,886      0.3
                         

Total consumer loans

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

Commercial loans:

         

Commercial non-mortgage

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

Asset-based loans

     624,075      5.4      753,143      6.2

Equipment financing

     985,430      8.5      1,022,718      8.4
                         

Total commercial loans

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

Commercial real estate:

         

Commercial real estate

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

Commercial construction

     184,256      1.6      165,610      1.3

Residential development

     144,337      1.2      161,553      1.3
                         

Total commercial real estate

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

Net unamortized premiums

     13,364      0.1      14,580      0.1

Net deferred costs

     38,368      0.3      42,517      0.4
                         

Total net unamortized premiums and deferred costs

     51,732      0.4      57,097      0.5
                         

Total loans

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

Less: allowance for loan losses

     (305,999        (235,329  
                         

Loans, net

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

Financial instruments with off-balance sheet risk

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

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

 

(In thousands)

   June 30,
2009
   December 31,
2008

Unused commercial letters and lines of credit

   $ 2,096,969    $ 2,196,514

Unused portion of home equity credit lines:

     

Continuing portfolio

     1,837,039      1,954,163

Liquidating portfolio

     16,226      21,792

Unadvanced portion of closed consumer construction loans

     13,066      14,611

Unadvanced portion of closed commercial construction loans

     172,727      262,234

Outstanding loan commitments

     91,745      85,291
             

Total financial instruments with off-balance sheet risk

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

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

 

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NOTE 6: Allowance for Credit Losses

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

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

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

 

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

(In thousands)

   2009     2008     2009     2008  

Continuing portfolio:

        

Beginning balance

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

Provision

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

Charge-offs:

        

Residential

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

Consumer

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

Commercial (a)

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

Residential development

     (2,350     —          (2,398     —     
                                

Total charge-offs

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

Recoveries

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

Net charge-offs

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

Ending balance - continuing portfolio

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

Liquidating portfolio:

        

Beginning balance

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

Provision

     10,673        —          22,539        —     

Charge-offs:

        

NCLC

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

Consumer (home equity)

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

Total charge-offs

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

Recoveries

     1,012        407        1,607        407   
                                

Net charge-offs

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

Ending balance - liquidating portfolio

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

Ending balance - allowance for loan losses

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

Reserve for unfunded credit commitments:(b)

        

Beginning balance

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

Provision

     —          —          300        —     

Reduction of provision previously recorded

     (762     —          (762     —     
                                

Ending balance reserve for unfunded commitments

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

Ending balance - allowance for credit losses

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

 

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

 

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NOTE 7: Goodwill and Other Intangible Assets

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

 

(In thousands)

   June 30,
2009
   December 31,
2008

Balances not subject to amortization:

     

Goodwill

   $ 529,887    $ 529,887

Balances subject to amortization:

     

Core deposit intangibles

     29,862      32,741

Other identified intangibles

     1,264      1,298
             

Total goodwill and other intangible assets

   $ 561,013    $ 563,926
             

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

 

(In thousands)

   June 30,
2009
   December 31,
2008

Retail Banking

   $ 516,560    $ 516,560

Other

     13,327      13,327
             

Total goodwill

   $ 529,887    $ 529,887
             

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

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

 

(In thousands)

    

For years ending December 31,

  

2009 (full year)

   $ 5,755

2010

     5,684

2011

     5,684

2012

     5,516

2013

     5,015

Thereafter

     6,385

 

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NOTE 8: Deposits

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

 

     June 30, 2009     December 31, 2008  

(In thousands)

   Amount    Percentage
of Total
    Amount    Percentage
of Total
 

Demand

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

Negotiable Order of Withdrawal (NOW)

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

Money market

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

Savings

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

Health savings accounts (HSA)

     636,749    4.8        530,681    4.5   

Retail certificates of deposit

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

Brokered deposits

     168,171    1.3        194,200    1.6   
                          

Total

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

Interest expense on deposits is summarized as follows:

 

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

(In thousands)

   2009    2008    2009    2008

NOW

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

Money market

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

Savings

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

HSA

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

Retail certificates of deposit

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

Brokered deposits

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

Total

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

NOTE 9: Federal Home Loan Bank Advances

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

 

     June 30, 2009    December 31, 2008

(In thousands)

   Total
Outstanding
    Callable    Total
Outstanding
   Callable

Fixed Rate:

          

0.07 % to 5.96 % due in 2009

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

4.16 % to 8.44 % due in 2010

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

3.19 % to 6.60 % due in 2011

     100,546        —        100,684      —  

4.00 % to 4.00 % due in 2012

     51,400        —        51,400      —  

2.40 % to 5.49 % due in 2013

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

0.00 % to 6.00 % due after 2014

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

Hedge accounting adjustments

     (119     —        —        —  

Unamortized premiums

     3,186        —        4,799      —  
                            

Total advances

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

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

 

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

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

 

(In thousands)

   June 30,
2009
   December 31,
2008

Securities sold under agreements to repurchase

   $ 868,402    $ 924,543

Federal Reserve term auction facility

     —        150,000

Federal funds purchased

     123,050      474,380

Treasury tax and loan

     13,987      5,748

Other

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

Unamortized premiums

     2,160      3,120
             

Total

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

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

 

(Dollars in thousands)

   June 30,
2009
    December 31,
2008
 

Quarter end balance

   $ 295,402      $ 251,543   

Quarter average balance

     281,508        262,563   

Highest month end balance during quarter

     295,402        261,581   

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

     0.16        0.18   

Weighted-average interest rate at end of period

     0.44     0.88

NOTE 11: Long-Term Debt

 

(In thousands)

   June 30,
2009
    December 31,
2008
 

Subordinated notes (due January 2013)

   $ 177,480      $ 200,000   

Senior notes (due April 2014)

     150,000        150,000   

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

    

Webster Capital Trust IV

     136,070        200,010   

Webster Statutory Trust I

     77,320        77,320   

People’s Bancshares Capital Trust II

     10,309        10,309   

Eastern Wisconsin Bancshares Capital Trust II

     2,070        2,070   

NewMil Statutory Trust I

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

Unamortized premiums, net

     (365     (399

Hedge accounting adjustments

     27,326        38,177   
                

Total long-term debt

   $ 590,520      $ 687,797   
                

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

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

 

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

NOTE 12: Fair Value Measurements

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

 

   

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

 

   

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

 

   

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

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

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

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

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

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

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

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

 

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

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

 

(In thousands)

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

Financial assets held at fair value:

           

Available for sale securities:

           

Government treasury bills

   $ 500    $ 500    $ —      $ —  

Corporate bonds and notes

     114,753      —        31,713      83,040

Equity securities

     14,659      14,659      —        —  

Mortgage-backed securities-GSE

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

Mortgage-backed securities-other

     80,612      —        80,612      —  
                           

Total securities

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

Derivatives instruments

     58,983      —        58,983      —  
                           

Total financial assets held at fair value

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

Financial liabilities held at fair value:

           

Derivative instruments

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

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

 

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

Level 3 - available for sale securities, beginning of period

   $ 69,355      $ 62,697   

Change in unrealized losses included in other comprehensive income

     32,154        38,374   

Realized loss on sale of available for sale securities

     (11,912     (11,912

Net other-than-temporary impairment charges (a)

     (6,024     (6,024

Purchases, sales, issuances and settlements, net

     (533     (95
                

Level 3 - available for sale securities, end of period

   $ 83,040      $ 83,040   
                

 

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

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

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

 

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Table of Contents

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

 

(In thousands)

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

Assets:

           

Impaired loans

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

Loans held for sale

     45,338      —        —        45,338

Servicing assets

     91      —        —        91

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

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

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

 

     June 30, 2009    December 31, 2008

(In thousands)

   Carrying
Amount
   Estimated
Fair Value
   Carrying
Amount
   Estimated
Fair Value

Assets:

           

Cash and due from depository institutions

   $ 254,638    $ 254,638    $