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Webster Financial 10-Q 2012

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
WBS-9.30.2012-10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
_______________________________________________________________________________
FORM 10-Q
_______________________________________________________________________________
x
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2012.
or
¨
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number: 001-31486
_______________________________________________________________________________
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.)
 
 
145 Bank Street (Webster Plaza), Waterbury, Connecticut
 
06702
(Address of principal executive offices)
 
(Zip Code)
(203) 578-2202
(Registrant’s telephone number, including area code)
 
(Former name, former address and former fiscal year, if changed since last report)
 _______________________________________________________________________________
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    þ  Yes    ¨  No
Indicate by check mark whether the registrant 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).    þ  Yes    ¨  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): 
Large accelerated filer
 
þ
 
Accelerated filer
 
¨
Non-accelerated filer
 
o  (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    þ  No
The number of shares of common stock, par value $.01 per share, outstanding as of October 31, 2012 was 87,922,522.



INDEX

 


i


PART I. – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 
(In thousands, except share data)
September 30,
2012
 
December 31,
2011
 
(Unaudited)
 
 
Assets:
 
 
 
Cash and due from banks
$
164,556

 
$
195,957

Interest-bearing deposits
79,763

 
96,062

Securities available for sale, at fair value
3,120,354

 
2,874,764

Securities held-to-maturity (fair value of $3,321,317 and $3,130,546)
3,142,160

 
2,973,727

Federal Home Loan Bank and Federal Reserve Bank stock, at cost
142,595

 
143,874

Loans held for sale
91,207

 
57,391

Loans and leases
11,727,652

 
11,225,404

Allowance for loan and lease losses
(186,089
)
 
(233,487
)
Loans and leases, net
11,541,563

 
10,991,917

Deferred tax asset, net
74,098

 
105,665

Premises and equipment, net
135,394

 
147,379

Goodwill
529,887

 
529,887

Other intangible assets, net
11,512

 
15,690

Cash surrender value of life insurance policies
414,797

 
307,039

Prepaid FDIC premiums
21,673

 
37,946

Accrued interest receivable and other assets
260,103

 
237,042

Total assets
$
19,729,662

 
$
18,714,340

Liabilities and Equity:
 
 
 
Deposits:
 
 
 
Non-interest-bearing
$
2,786,525

 
$
2,473,693

Interest-bearing
11,626,912

 
11,182,332

Total deposits
14,413,437

 
13,656,025

Securities sold under agreements to repurchase and other short-term borrowings
1,310,015

 
1,164,706

Federal Home Loan Bank advances
1,452,660

 
1,252,609

Long-term debt
335,678

 
552,589

Accrued expenses and other liabilities
234,194

 
242,637

Total liabilities
17,745,984

 
16,868,566

Shareholders’ equity:
 
 
 
Preferred stock, $.01 par value; Authorized - 3,000,000 shares:
 
 
 
Series A issued and outstanding - 28,939 shares
28,939

 
28,939

Common stock, $.01 par value; Authorized - 200,000,000 shares
 
 
 
Issued - 90,728,276 and 90,709,350 shares
907

 
907

Paid-in capital
1,145,392

 
1,145,346

Retained earnings
962,594

 
865,427

Less: Treasury stock, at cost (3,269,141 and 3,493,915 shares)
(124,877
)
 
(134,641
)
Accumulated other comprehensive loss, net
(29,277
)
 
(60,204
)
Total equity
1,983,678

 
1,845,774

Total liabilities and equity
$
19,729,662

 
$
18,714,340

See accompanying Notes to Condensed Consolidated Financial Statements.

1


WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
(In thousands, except per share data)
2012
 
2011
 
2012
 
2011
Interest Income:
 
 
 
 
 
 
 
Interest and fees on loans and leases
$
121,367

 
$
121,322

 
$
363,487

 
$
365,660

Taxable interest and dividends on securities
43,532

 
45,753

 
135,082

 
138,504

Non-taxable interest on securities
6,662

 
7,221

 
20,577

 
21,841

Loans held for sale
655

 
266

 
1,810

 
865

Total interest income
172,216

 
174,562

 
520,956

 
526,870

Interest Expense:
 
 
 
 
 
 
 
Deposits
14,543

 
18,930

 
45,701

 
63,540

Securities sold under agreements to repurchase and other short-term borrowings
5,594

 
4,384

 
15,388

 
11,723

Federal Home Loan Bank advances
3,943

 
3,551

 
12,933

 
10,201

Long-term debt
3,246

 
6,012

 
14,298

 
18,647

Total interest expense
27,326

 
32,877

 
88,320

 
104,111

Net interest income
144,890

 
141,685

 
432,636

 
422,759

Provision for loan and lease losses
5,000

 
5,000

 
14,000

 
20,000

Net interest income after provision for loan and lease losses
139,890

 
136,685

 
418,636

 
402,759

Non-interest Income:
 
 
 
 
 
 
 
Deposit service fees
24,728

 
27,074

 
71,810

 
78,509

Loan related fees
4,039

 
5,308

 
12,473

 
15,341

Wealth and investment services
7,186

 
6,486

 
21,656

 
20,662

Mortgage banking activities
6,515

 
1,324

 
14,522

 
3,811

Increase in cash surrender value of life insurance policies
2,680

 
2,642

 
7,758

 
7,751

Net loss on trading securities

 

 

 
(1,799
)
Net gain on sale of investment securities
810

 

 
3,347

 
3,823

Other income
2,521

 
1,857

 
8,252

 
6,698

Total non-interest income
48,479

 
44,691

 
139,818

 
134,796

Non-interest Expense:
 
 
 
 
 
 
 
Compensation and benefits
66,126

 
61,897

 
198,332

 
194,501

Occupancy
12,462

 
13,150

 
37,922

 
40,741

Technology and equipment
15,118

 
15,141

 
46,721

 
45,667

Intangible assets amortization
1,384

 
1,397

 
4,178

 
4,191

Marketing
4,529

 
4,144

 
13,723

 
13,916

Professional and outside services
2,790

 
3,125

 
8,869

 
8,368

Deposit insurance
5,675

 
4,472

 
17,107

 
16,171

Litigation

 
(254
)
 

 
232

Other expense
15,803

 
20,146

 
52,027

 
60,617

Total non-interest expense
123,887

 
123,218

 
378,879

 
384,404

Income from continuing operations before income tax expense
64,482

 
58,158

 
179,575

 
153,151

Income tax expense
19,489

 
15,927

 
54,404

 
44,152

Income from continuing operations
44,993

 
42,231

 
125,171

 
108,999

Income from discontinued operations, net of tax

 

 

 
1,995

Net income
44,993

 
42,231

 
125,171

 
110,994

Less: Net loss attributable to non controlling interests

 

 

 
(1
)
Net income attributable to Webster Financial Corporation
44,993

 
42,231

 
125,171

 
110,995

Preferred stock dividends
(615
)
 
(831
)
 
(1,845
)
 
(2,493
)
Net income available to common shareholders
$
44,378

 
$
41,400

 
$
123,326

 
$
108,502

Net income per common share:
 
 
 
 
 
 
 
Basic
 
 
 
 
 
 
 
Net income from continuing operations
$
0.51

 
$
0.48

 
$
1.41

 
$
1.22

Net income available to common shareholders
0.51

 
0.48

 
1.41

 
1.24

Diluted
 
 
 
 
 
 
 
Net income from continuing operations
0.48

 
0.45

 
1.34

 
1.15

Net income available to common shareholders
0.48

 
0.45

 
1.34

 
1.17


See accompanying Notes to Condensed Consolidated Financial Statements.

2


WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
 
 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
(In thousands, except per share data)
2012
 
2011
 
2012
 
2011
Net income
$
44,993

 
$
42,231

 
$
125,171

 
$
110,994

Other comprehensive income, net of taxes:
 
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
 
Net change in unrealized gain during the period
15,086

 
(9,875
)
 
31,346

 
4,380

Reclassification adjustment for realized gain included in net income
(810
)
 

 
(3,347
)
 
(3,823
)
Net change in non-credit related other-than-temporary impairment

 

 

 
746

Amortization of unrealized loss on securities transferred to held to maturity
14

 
27

 
92

 
77

Change in unrealized (loss) gain on derivative instruments
(708
)
 
(19,700
)
 
(220
)
 
(22,416
)
Defined benefit pension plans:
 
 
 
 
 
 
 
Amortization of net loss
1,007

 
406

 
3,021

 
1,217

Amortization of prior service cost
12

 
12

 
35

 
36

Current year actuarial gain

 

 

 
365

Other comprehensive income (loss)
14,601

 
(29,130
)
 
30,927

 
(19,418
)
Comprehensive income
59,594

 
13,101

 
156,098

 
91,576

Less: comprehensive loss attributable to non controlling interests

 

 

 
(1
)
Comprehensive income attributable to Webster Financial Corporation
$
59,594

 
$
13,101

 
$
156,098

 
$
91,577

See accompanying Notes to Condensed Consolidated Financial Statements.

3


WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited)
 
 
Nine months ended September 30, 2012
(In thousands, except share and per share data)
Preferred
Stock
 
Common
Stock
 
Paid-In
Capital
 
Retained
Earnings
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Loss, net
 
Non
Controlling
Interests
 
Total
Balance December 31, 2011
$
28,939

 
$
907

 
$
1,145,346

 
$
865,427

 
$
(134,641
)
 
$
(60,204
)
 
$

 
$
1,845,774

Net income

 

 

 
125,171

 

 

 

 
125,171

Other comprehensive income

 

 

 

 

 
30,927

 

 
30,927

Dividends declared on common stock of $0.25 per share

 

 

 
(21,906
)
 

 

 

 
(21,906
)
Dividends declared on Series A preferred stock $63.75 per share

 

 

 
(1,845
)
 

 

 

 
(1,845
)
Common stock warrants repurchased

 

 
(385
)
 

 

 

 

 
(385
)
Exercise of stock options

 

 
(1,711
)
 

 
2,567

 

 

 
856

Net shares acquired related to employee share-based compensation plans

 

 

 

 
(2,008
)
 

 

 
(2,008
)
Stock-based compensation expense

 

 
1,735

 
(4,253
)
 
9,205

 

 

 
6,687

Issuance of common stock

 

 
407

 

 

 

 

 
407

Balance September 30, 2012
$
28,939

 
$
907

 
$
1,145,392

 
$
962,594

 
$
(124,877
)
 
$
(29,277
)
 
$

 
$
1,983,678

 
 
Nine months ended September 30, 2011
(In thousands, except share and per share data)
Preferred
Stock
 
Common
Stock
 
Paid-In
Capital
 
Retained
Earnings
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Loss, net
 
Non
Controlling
Interests
 
Total
Balance December 31, 2010
$
28,939

 
$
907

 
$
1,160,690

 
$
741,870

 
$
(149,462
)
 
$
(13,709
)
 
$
9,644

 
$
1,778,879

Net income (loss)

 

 

 
110,995

 

 

 
(1
)
 
110,994

Other comprehensive loss

 

 

 

 

 
(19,418
)
 

 
(19,418
)
Dividends declared on common stock of $0.11 per share

 

 

 
(9,607
)
 

 

 

 
(9,607
)
Dividends declared on Series A preferred stock $63.75 per share

 

 

 
(647
)
 

 

 

 
(647
)
Subsidiary preferred stock dividends $0.6468 per share

 

 

 
(1,846
)
 

 

 

 
(1,846
)
Dissolution of joint venture

 

 

 

 

 

 
(66
)
 
(66
)
Common stock warrants repurchased

 

 
(16,246
)
 

 

 

 

 
(16,246
)
Exercise of stock options

 

 
(209
)
 

 
312

 

 

 
103

Net shares acquired related to employee share-based compensation plans

 

 
3

 

 
(1,345
)
 

 

 
(1,342
)
Stock-based compensation expense

 

 
712

 
(4,698
)
 
8,438

 

 

 
4,452

Issuance of common stock

 

 
197

 
(326
)
 
719

 

 

 
590

Balance September 30, 2011
$
28,939

 
$
907

 
$
1,145,147

 
$
835,741

 
$
(141,338
)
 
$
(33,127
)
 
$
9,577

 
$
1,845,846

See accompanying Notes to Condensed Consolidated Financial Statements.

4


WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
Nine months ended September 30,
(In thousands)
2012
 
2011
Operating Activities:
 
 
 
Net income
$
125,171

 
$
110,994

Income from discontinued operations, net of tax

 
1,995

Income from continuing operations
125,171

 
108,999

Adjustments to reconcile income from continuing operations to net cash provided by operating activities:
 
 
 
Provision for loan and lease losses
14,000

 
20,000

Deferred tax expense
14,192

 
20,884

Depreciation and amortization
81,632

 
59,673

Stock-based compensation
6,687

 
4,452

Excess tax benefits from stock-based compensation
(303
)
 
(278
)
(Gain) loss on sale and write-down of foreclosed and repossessed assets
(1,923
)
 
4,830

Loss on sale of premises and equipment
603

 
1,668

Loss (gain) on fair value adjustment of private equities
641

 
(1,488
)
Loss on fair value adjustment of derivative instruments
12

 
1,813

Net gain on the sale of investment securities
(3,347
)
 
(3,823
)
Net decrease in trading securities

 
11,554

Increase in cash surrender value of life insurance policies
(7,758
)
 
(7,751
)
Net (increase) decrease in loans held for sale
(20,020
)
 
23,958

Net (increase) decrease in accrued interest receivable and other assets
(16,850
)
 
1,768

Net (decrease) increase in accrued expenses and other liabilities
(3,682
)
 
7,199

Net cash provided by operating activities
189,055

 
253,458

Investing Activities:
 
 
 
Net decrease (increase) in interest-bearing deposits
16,299

 
(34,429
)
Purchases of available for sale securities
(1,009,181
)
 
(755,911
)
Proceeds from maturities and principal payments of available for sale securities
627,429

 
383,313

Proceeds from sales of available for sale securities
148,223

 
278,757

Purchases of held-to-maturity securities
(752,030
)
 
(423,830
)
Proceeds from maturities and principal payments of held-to-maturity securities
571,648

 
393,378

Sale of Federal Home Loan Bank and Federal Reserve Board stock
1,279

 

Net increase in loans
(586,375
)
 
(133,167
)
Purchase of life insurance
(100,000
)
 

Proceeds from the sale of foreclosed properties and repossessed assets
7,453

 
12,572

Proceeds from the sale of premises and equipment
1,406

 
3,881

Purchases of premises and equipment
(14,544
)
 
(19,708
)
Net cash used for investing activities
(1,088,393
)
 
(295,144
)
Financing Activities:
 
 
 
Net increase (decrease) in deposits
757,412

 
(22,851
)
Proceeds from Federal Home Loan Bank advances
2,826,265

 
748,934

Repayments of Federal Home Loan Bank advances
(2,625,500
)
 
(755,487
)
Net increase in securities sold under agreements to repurchase and other short-term borrowings
145,309

 
129,428

Repayment of long-term debt
(210,971
)
 
(22,689
)
Cash dividends paid to common shareholders
(21,906
)
 
(9,607
)
Cash dividends paid to preferred shareholders of consolidated subsidiary

 
(647
)
Cash dividends paid to preferred shareholders
(1,845
)
 
(1,846
)
Exercise of stock options
856

 
103

Excess tax benefits from stock-based compensation
303

 
278

Issuance of common stock
407

 
590

Common stock repurchased
(2,008
)
 
(1,342
)
Common stock warrants repurchased
(385
)
 
(16,246
)
Net cash provided by financing activities
867,937

 
48,618

Cash Flows from Discontinued Operations:
 
 
 
Operating activities

 
1,995

Net cash provided by discontinued operations

 
1,995

Net (decrease) increase in cash and due from banks
(31,401
)
 
8,927

Cash and due from banks at beginning of period
195,957

 
159,849

Cash and due from banks at end of period
$
164,556

 
$
168,776

Supplemental disclosure of cash flow information:
 
 
 
Interest paid
$
92,056

 
$
108,582

Income taxes paid
30,398

 
12,889

Noncash investing and financing activities:
 
 
 
Transfer of loans and leases, net to foreclosed properties and repossessed assets
$
5,474

 
$
8,088

Transfer of loans from portfolio to loans-held-for-sale
13,796

 
13,266


See accompanying Notes to Condensed Consolidated Financial Statements.

5


NOTE 1: Summary of Significant Accounting Policies
Nature of Operations. Webster Financial Corporation (collectively, with its consolidated subsidiaries, “Webster” or the “Company”), is a bank holding company and financial holding company under the Bank Holding Company Act of 1956, as amended, headquartered in Waterbury, Connecticut and incorporated under the laws of Delaware in 1986. At September 30, 2012, Webster Financial Corporation's principal asset was all of the outstanding capital stock of Webster Bank, National Association (“Webster Bank”).
Webster, through Webster Bank and various non-banking financial services subsidiaries, delivers financial services to individuals, families and businesses throughout southern New England and into Westchester County, New York. Webster provides business and consumer banking, mortgage lending, financial planning, trust and investment services through banking offices, ATMs, telephone banking, mobile banking and its Internet website (www.websterbank.com). Webster Bank offers, through its HSA Bank division, health savings accounts on a nationwide basis. Webster also offers equipment financing, commercial real estate lending, and asset-based lending.
Basis of Presentation. The Condensed Consolidated Financial Statements include the accounts of Webster Financial Corporation and all other entities in which it has a controlling financial interest. 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 (“GAAP”) and to general practices within the financial services industry.
The Company determines whether it has a controlling financial interest in an entity by first evaluating whether the entity is a voting interest entity or a variable interest entity (“VIE”) under GAAP. Voting interest entities are entities in which the total equity investment at risk is sufficient to enable the entity to finance itself independently and provides the equity holder with the obligation to absorb losses, the right to receive residual returns and the right to make decisions about the entity’s activities. The Company consolidates voting interest entities in which it has all or at least a majority of, the voting interest. VIEs are entities that lack one or more of the characteristics of a voting interest entity. A controlling financial interest in a VIE is present when the Company has both the power and ability to direct the activities of the VIE that most significantly impact the VIEs economic performance and an obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE.
The Company owns the common stock of trusts which have issued trust preferred securities. These trusts are VIEs in which the Company is not the primary beneficiary and therefore are not consolidated. The trusts’ only assets are junior subordinated debentures issued by the Company, which were acquired by the trusts using the proceeds from the issuance of the trust preferred securities and common stock. The junior subordinated debentures are included in long-term debt and the Company’s equity interests in the trusts are included in other assets in the Condensed Consolidated Balance Sheets. Interest expense on the junior subordinated debentures is reported in interest expense on long-term debt in the Condensed Consolidated Statements of Operations. See Note 9 – Long-Term Debt.
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 GAAP 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, 2011, included in Webster’s Annual Report on Form 10-K filed with the SEC on February 29, 2012 (the “2011 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.
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 loan and lease losses, the fair value of financial instruments, the deferred tax asset valuation allowance, the valuation of investments for other-than-temporary impairment (“OTTI”), the goodwill valuation and the status of contingencies are particularly subject to change.
Correction of Immaterial Error Related to Prior Periods. During the year ended December 31, 2011, the Company identified an error related to the accounting for certain Commercial loan origination and amendment fees. The Company determined that these fees were recognized immediately and not properly amortized over the term of the loan, as required by ASC Topic 310-20, Nonrefundable Fees and Other Costs. As a result, these fees were not recognized as Interest and Fees on Loans and

6


Leases but were recognized in Loan Related Fees, which is a component of other non-interest income in the Condensed Consolidated Statements of Operations. The Company reviewed the impact of this error on the prior periods in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 99, Materiality, and determined that the error was immaterial to previously reported amounts contained in its periodic reports. Accordingly, the Company has revised its Condensed Consolidated Statement of Shareholders’ Equity at September 30, 2011 and the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2011.
The effects of recording this immaterial correction are as follows:
 
 
At or for the three months ended
 
At or for the nine months ended
(In thousands, except per share data)
September 30, 2011
 
September 30, 2011
 
As Filed
 
As Revised
 
As Filed
 
As Revised
Retained earnings
$
839,816

 
$
835,741

 
$
839,816

 
$
835,741

Interest and fees on loans and leases
120,018

 
121,322

 
362,848

 
365,660

Net interest income
140,381

 
141,685

 
419,947

 
422,759

Loan related fees
6,823

 
5,308

 
18,071

 
15,341

Total non-interest income
46,206

 
44,691

 
137,526

 
134,796

Net income before taxes
58,369

 
58,158

 
153,069

 
153,151

Net income after taxes
42,379

 
42,231

 
108,886

 
108,999

Earnings per common share:
 
 
 
 
 
 
 
Basic
0.48

 
0.48

 
1.24

 
1.24

Diluted
0.45

 
0.45

 
1.17

 
1.17

Reclassifications. Certain items in prior financial statements have been reclassified to conform to current presentation. These reclassifications had no impact on the Company’s consolidated financial position, results of operations or net change in cash or cash equivalents. There have been no changes to the significant accounting policies that were disclosed in the Company’s 2011 Form 10-K.
Investment Securities. Investment securities are classified at the time of purchase as “available for sale”, or “held to maturity”. Classification is re-evaluated each quarter to ensure appropriate classification and to maintain consistency with corporate objectives. Debt securities held to maturity are those which Webster has the ability and intent to hold to maturity. Securities held to maturity are recorded at amortized cost. Amortized cost includes the amortization of premiums or accretion of discounts. Such amortization and accretion is included in interest income from securities. Securities classified as available for sale are recorded at fair value. Unrealized gains and losses, net of taxes, are calculated each reporting period and presented as a separate component of other comprehensive income (“OCI”). Securities transferred from available for sale to held to maturity are recorded at fair value at the time of transfer. The respective gain or loss is reclassified as a separate component of OCI and amortized as an adjustment to interest income over the remaining life of the security.
Investment securities are reviewed quarterly for OTTI. All securities classified as available for sale or held to maturity that are in an unrealized loss position are evaluated for OTTI. The evaluation considers several qualitative factors including the amount of the unrealized loss and the period of time the security has been in a loss position. If the Company intends to sell the security or, if it is more than likely the Company will be required to sell the security prior to recovery of its amortized cost basis, the security is written down to fair value and the loss is recorded in non-interest income in the Condensed Consolidated Statements of Operations. If the Company does not intend to sell the security and if it is more likely than not that the Company will not be required to sell the security prior to recovery of its amortized cost basis, only the credit component of any impairment charge of a debt security would be recognized as a loss in non-interest income in the Condensed Consolidated Statements of Operations. The remaining loss component would be recorded in OCI. A decline in the value of an equity security that is considered OTTI is recorded as a loss in non-interest income on the Condensed Consolidated Statements of Operations.
The specific identification method is used to determine realized gains and losses on sales of securities.
Loans. Loans are stated at the principal amounts outstanding, net of charged off amounts and unamortized premiums and discounts and net of deferred loan fees and/or costs which are recognized as a yield adjustment using the interest method. These yield adjustments are amortized over the contractual life of the related loans adjusted for estimated prepayments when applicable. Interest on loans is credited to interest income as earned based on the interest rate applied to principal amounts outstanding. Loans are placed on non-accrual status when timely collection of principal and interest in accordance with

7


contractual terms is doubtful. A loan is transferred to a non-accrual basis generally when principal or interest payments become 90 days delinquent, unless the loan is well secured and in process of collection, or sooner if management concludes circumstances indicate that the borrower may be unable to meet contractual principal or interest payments.
Accrual of interest is discontinued if the loan is placed on non-accrual status. Residential real estate and consumer loans are placed on non-accrual status at 90 days past due and a charge-off is recorded at 180 days if the loan balance exceeds the fair value of the collateral less costs to sell. All commercial, commercial real estate and equipment finance loans are subject to a detailed review by the Company’s credit risk team to determine accrual status. A charge off is recorded on a case-by-case basis when all or a portion of the loan is deemed to be uncollectible.
When a loan is put on non-accrual status, unpaid accrued interest is reversed and charged against interest income. If ultimate repayment of a non-accrual loan is expected, any payments received are applied in accordance with contractual terms. If ultimate repayment is not expected on commercial, commercial real estate and equipment finance loans, any payment received on a non-accrual loan is applied to principal until the unpaid balance has been fully recovered. Any excess is then credited to interest income when received. If the Company determines, through a current valuation analysis, that principal can be repaid on residential real estate and consumer loans, interest payments may be taken into income as received or on a cash basis. Loans are removed from non-accrual status when they become current as to principal and interest or demonstrate a period of performance under contractual terms and, in the opinion of management, are fully collectible as to principal and interest.
Allowance for Credit Losses. The allowance for credit losses includes the allowance for loan and lease losses and the reserve for unfunded credit commitments.
Allowance for Loan and Lease Losses (“ALLL”). The allowance for loan and lease losses is a reserve established through a provision for loan and lease losses charged to expense, and represents management’s best estimate of probable losses that may be incurred within the existing loan portfolio as of the balance sheet date. The level of the allowance reflects management’s view of trends in loan loss activity, current loan portfolio quality and present economic, political and regulatory conditions. Portions of the allowance may be allocated for specific loans; however, the entire allowance is available for any loan that is charged off. While management utilizes its best judgment based on the information available at the time, the ultimate adequacy of the allowance is dependent upon a variety of factors that are beyond the Company’s control, which include the performance of the Company’s loan portfolio, economic conditions, interest rate sensitivity and the view of the regulatory authorities regarding loan classifications.
The Company’s allowance for loan and lease losses consists of three elements: (i) specific valuation allowances established for probable losses on impaired loans; (ii) quantitative valuation allowances calculated using loan loss experience for like loans with similar characteristics and trends, adjusted, as necessary, to reflect the impact of current conditions; and (iii) qualitative factors determined based on general economic conditions and other qualitative risk factors both internal and external to the Company.
Loans are considered impaired when, based on current information and events, it is probable the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. Impairment is evaluated on a pooled basis for smaller-balance loans of a similar nature and on an individual loan basis depending on risk rating, accrual status and loan size, primarily for residential and consumer loans. Commercial, commercial real estate and equipment financing loans over a specific dollar amount and all troubled debt restructurings are evaluated individually for impairment. A loan identified as a troubled debt restructuring (“TDR”) is considered an impaired loan for the entire term of the loan, with few exceptions. If a loan is impaired, a specific valuation allowance may be established, and the loan is reported net, at the present value of estimated future cash flows using the loan’s original interest rate or at the fair value of collateral less cost to sell if repayment is expected from collateral liquidation. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Impaired loans, or portions thereof, are charged off when deemed uncollectible. Factors considered by management in determining impairment include payment status, collateral value, and the likelihood of collecting scheduled principal and interest payments. Consumer modified loans are analyzed for re-default probability which is factored into the impaired reserve calculation for ALLL. The current or weighted average (for multiple notes within a commercial borrowing arrangement) interest rate of the loan is used as the discount rate when the interest rate floats with a specified index. A change in terms or payments would be included in the impairment calculation.
Reserve for Unfunded Commitments. The reserve for unfunded commitments provides for probable losses inherent with funding the unused portion of legal commitments to lend. The unfunded reserve calculation includes factors that are consistent with ALLL methodology for funded loans using the loss given default, probability of default and a draw down factor applied to the underlying borrower risk and facility grades.

8


Troubled Debt Restructurings. A modified loan is considered a troubled debt restructuring (“TDR”) when two conditions are met: (1) the borrower is experiencing financial difficulties and (2) the modification constitutes a concession. The Company considers all aspects of the restructuring in determining whether a concession has been granted, including the debtor's ability to access market rate funds. In general, a concession exists when, the modified terms of the loan are more attractive to the borrower than standard market terms. Modified terms are dependent upon the financial position and needs of the individual borrower. The Company does not employ modification programs for temporary or trial periods. The most common types of modifications include covenant modifications, forbearance and/or other concessions. If the modification agreement is violated, the loan is reevaluated to determine if it should be handled by the Company’s Restructuring and Recovery group for resolution, which may result in foreclosure. Loans for which the borrower has been discharged under Chapter 7 bankruptcy are considered collateral dependent TDRs at the date of discharge.
The Company’s policy is to place all consumer loan TDRs on non-accrual status for a minimum period of six months. Commercial TDRs are evaluated on a case-by-case basis for determination of whether or not to place on non-accrual status. Loans qualify for return to accrual status once they have demonstrated performance with the restructured terms of the loan agreement for a minimum of six months. Initially, all TDRs are reported as impaired. Generally, TDRs are classified as impaired loans and TDRs for the remaining life of the loan. Impaired and TDR classification may be removed if the borrower demonstrates compliance with the modified terms for a minimum of six months and through one fiscal year-end and the restructuring agreement specifies a market rate of interest equal to that which would be provided to a borrower with similar credit at the time of restructuring. In the limited circumstances that a loan is removed from TDR classification it is the Company’s policy to continue to base its measure of loan impairment on the contractual terms specified by the loan agreement.
Recently Issued Accounting Standards Updates
ASU No. 2012-02, “Intangibles- Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment.” In August 2012, the FASB issued ASU No. 2012-02 to establish an optional two-step analysis for impairment testing of indefinite-lived intangibles other than goodwill. The requirements bring the accounting treatment for determining impairment charges on other intangible assets in conformity with the treatment of goodwill. The guidance is effective for the Company's interim and annual periods beginning on January 1, 2013 and will be applied retrospectively. The Company is currently evaluating the impact of the adoption of this accounting standards update on its financial statements and does not expect the application of this guidance to have a significant impact.
ASU No. 2011-12, “Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.” In December 2011, the FASB issued ASU No. 2011-12 which indefinitely defers the effective date for the part of ASU No. 2011-05 that would have required adjustments of items out of accumulated other comprehensive income to be presented on the components of both net income and other comprehensive income in the financial statements. In August 2012, the FASB solicited comments on a proposal to replace ASU No. 2011-05 relative to the issue raised by ASU No. 2011-12. The Company has deferred this presentation, as permitted, and continues to evaluate the impact of the adoption of this accounting standards update on its financial statements.
ASU No. 2011-11, “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities.” In December 2011, the FASB issued ASU No. 2011-11 to expand required disclosures of information related to the nature of an entity’s rights of setoff and related arrangements associated with its financial instruments and derivative instruments, in an effort to enhance comparability between financial statements prepared with GAAP and IFRS. The requirements include disclosure of net and gross positions in covered financial instruments and derivative instruments which are either (1) offset in accordance with ASC Sections 210-20-45 or 815-10-45, or (2) subject to an enforceable netting or other similar arrangement. The guidance is effective for the Company’s interim and annual periods beginning on January 1, 2013 and will be applied retrospectively. The Company is currently evaluating the impact of the adoption of this accounting standards update on its financial statements.



9



NOTE 2: Investment Securities
A summary of the amortized cost, carrying value, and fair value of Webster’s investment securities is presented below:

 
At September 30, 2012
 
 
 
Recognized in OCI
 
 
 
Not Recognized in OCI
 
 
(Dollars in thousands)
Amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Carrying
value
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Fair value
Available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury Bills
$
200

 
$

 
$

 
$
200

 
$

 
$

 
$
200

Agency collateralized mortgage obligations (“CMOs”) - GSE
1,445,317

 
29,168

 
(275
)
 
1,474,210

 

 

 
1,474,210

Corporate debt
111,857

 
6,281

 

 
118,138

 

 

 
118,138

Pooled trust preferred securities (a)
49,583

 

 
(21,330
)
 
28,253

 

 

 
28,253

Single issuer trust preferred securities
51,144

 

 
(9,724
)
 
41,420

 

 

 
41,420

Equity securities-financial institutions (b)
6,232

 
2,083

 
(20
)
 
8,295

 

 

 
8,295

Mortgage-backed securities (“MBS”) - GSE
1,042,266

 
27,579

 
(628
)
 
1,069,217

 

 

 
1,069,217

Commercial mortgage-backed securities (“CMBS”)
344,835

 
39,690

 
(3,904
)
 
380,621

 

 

 
380,621

Total available for sale
$
3,051,434

 
$
104,801

 
$
(35,881
)
 
$
3,120,354

 
$

 
$

 
$
3,120,354

Held-to-maturity:
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal bonds and notes
$
597,664

 
$

 
$

 
$
597,664

 
$
37,915

 
$
(178
)
 
$
635,401

Agency CMOs - GSE
567,941

 

 

 
567,941

 
19,323

 

 
587,264

MBS - GSE
1,760,261

 

 

 
1,760,261

 
103,840

 
(37
)
 
1,864,064

CMBS
200,101

 

 

 
200,101

 
17,926

 
(76
)
 
217,951

Private Label MBS
16,193

 

 

 
16,193

 
444

 

 
16,637

Total held-to-maturity
$
3,142,160

 
$

 
$

 
$
3,142,160

 
$
179,448

 
$
(291
)
 
$
3,321,317

Total investment securities
$
6,193,594

 
$
104,801

 
$
(35,881
)
 
$
6,262,514

 
$
179,448

 
$
(291
)
 
$
6,441,671


(a)
Amortized cost is net of $10.5 million of credit related other-than-temporary impairment at September 30, 2012.
(b)
Amortized cost is net of $21.3 million of other-than-temporary impairments at September 30, 2012.

10


 
At December 31, 2011
 
 
 
Recognized in OCI
 
 
 
Not Recognized in OCI
 
 
(Dollars in thousands)
Amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Carrying
value
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Fair value
Available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury Bills
$
200

 
$

 
$

 
$
200

 
$

 
$

 
$
200

Agency CMOs - GSE
1,916,372

 
27,211

 
(3,341
)
 
1,940,242

 

 

 
1,940,242

Pooled trust preferred securities (a)
52,606

 

 
(23,608
)
 
28,998

 

 

 
28,998

Single issuer trust preferred securities
51,027

 

 
(12,813
)
 
38,214

 

 

 
38,214

Equity securities-financial institutions (b) 
7,669

 
1,802

 
(24
)
 
9,447

 

 

 
9,447

MBS - GSE
502,389

 
25,079

 
(158
)
 
527,310

 

 

 
527,310

CMBS
319,200

 
22,395

 
(11,242
)
 
330,353

 

 

 
330,353

Total available for sale
$
2,849,463

 
$
76,487

 
$
(51,186
)
 
$
2,874,764

 
$

 
$

 
$
2,874,764

Held-to-maturity:
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal bonds and notes
$
646,358

 
$

 
$

 
$
646,358

 
$
30,960

 
$
(174
)
 
$
677,144

Agency CMOs - GSE
733,889

 

 

 
733,889

 
20,555

 

 
754,444

MBS - GSE
1,411,008

 

 

 
1,411,008

 
98,449

 

 
1,509,457

CMBS
158,451

 

 

 
158,451

 
6,588

 

 
165,039

Private Label MBS
24,021

 

 

 
24,021

 
441

 

 
24,462

Total held-to-maturity
$
2,973,727

 
$

 
$

 
$
2,973,727

 
$
156,993

 
$
(174
)
 
$
3,130,546

Total investment securities
$
5,823,190

 
$
76,487

 
$
(51,186
)
 
$
5,848,491

 
$
156,993

 
$
(174
)
 
$
6,005,310


(a)
Amortized cost is net of $10.5 million of credit related other-than-temporary impairment at December 31, 2011.
(b)
Amortized cost is net of $21.6 million of other-than-temporary impairments at December 31, 2011.
The amortized cost and fair value of debt securities at September 30, 2012, by contractual maturity, are set forth below:
 
 
Available for Sale
 
Held to Maturity
(Dollars in thousands)
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Due in one year or less
$
9,741

 
$