This excerpt taken from the WBS 10-Q filed Nov 7, 2008.
Recent Economic Developments
There have been historical disruptions in the financial system during the past year and many lenders and financial institutions have reduced or ceased to provide funding to borrowers, including other lending institutions. The availability of credit, confidence in the entire financial sector, and volatility in financial markets has been adversely affected. The Federal Reserve Bank has been providing vast amounts of liquidity into the banking system to compensate for weaknesses in short-term borrowing markets and other capital markets. A reduction in the Federal Reserves activities or capacity could reduce liquidity in the markets, thereby increasing funding costs to Webster or reducing the availability of funds to Webster to finance its existing operations.
In response to the financial crises affecting the overall banking system and financial markets, on October 3, 2008, the Emergency Economic Stabilization Act of 2008 (EESA), was enacted. Under the EESA, the United States Treasury Department (the Treasury) has the authority to, among other things, purchase mortgages, mortgage backed securities and certain other financial instruments from financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial markets.
On October 3, 2008 the Troubled Asset Relief Program (TARP) was signed into law. The TARP gave the Treasury authority to deploy up to $750 billion into the financial system with an objective of improving liquidity in capital markets. On October 24, 2008, the Treasury announced plans to direct $250 billion of this authority into preferred stock investments in banks. The general terms of this preferred stock program are as follows for a participants bank: pay 5% dividends on the Treasurys preferred stock for the first five years and 9% dividends thereafter; cannot increase common stock dividends for three years while Treasury is an investor; the Treasury receives warrants entitling the Treasury to buy participating banks common stock equal to 15% of the Treasurys total investment in the participating bank; and participating bank executives must agree to certain compensation restrictions, and restrictions on the amount of executive compensation which is tax deductible and other detailed terms and conditions. The term of this Treasury preferred stock program could reduce investment returns to participating banks shareholders by restricting dividends to common shareholders, diluting existing shareholders interests, and restricting capital management practices. Although Webster exceeds all applicable regulatory capital requirements and is well capitalized, Webster submitted an application for participation in the TARP capital purchase program and on November 6, 2008 received preliminary approval for $400 million of capital.
Federal and state governments could pass additional legislation responsive to current credit conditions. For example, Webster could experience higher credit losses because of federal or state legislation or regulatory action that reduces the amount Websters borrowers are otherwise contractually required to pay under existing loan contracts. Also, Webster could experience higher credit losses because of federal or state legislation or regulatory action that limits Websters ability to foreclose on property or other collateral or makes foreclosure less economically feasible.
The Federal Deposit Insurance Corporation (FDIC) insures deposits at FDIC insured financial institutions up to certain limits. The FDIC charges insured financial institutions premiums to maintain the Deposit Insurance Fund. Assessment rates set by the FDIC effective January 1, 2007 range from 5 to 43 basis points. The Federal Deposit Insurance Reform Act of 2005 also provided a credit to insured institutions based on the amount of their insured deposits at year-end 1996 which will offset the premiums assessed. Webster Banks credit of $12.6 million was used in part to offset its 2007 and 2008 deposit insurance assessment. As of September 30, 2008, Websters remaining credit balance was $1.0 million. Webster expects to utilize the remaining credit in the fourth quarter of 2008. After exhausting the credit, Webster will be subject to an increased deposit premium expense in the fourth quarter 2008 and into future periods.
Current economic conditions have increased expectations for bank failures, in which case the FDIC would take control of failed banks and ensure payment of deposits up to insured limits using the resources of the Deposit Insurance Fund. In such case, the FDIC may increase premium assessments to maintain adequate funding of the Deposit Insurance Fund, including requiring riskier institutions to pay a larger share of the premiums. An increase in premium assessments will increase Websters expenses. The EESA included a provision for an increase in the amount of deposits insured by the FDIC to $250,000 until December 2009. On October 14, 2008, the FDIC announced a new program, the Temporary Liquidity Guarantee Program, that provides unlimited deposit insurance on funds in noninterest-bearing transaction deposit accounts not otherwise covered by the existing deposit insurance limit of $250,000. All eligible institutions will be covered under the program for the first 30 days without incurring any costs. After the initial period, participating institutions will be assessed a 10 basis point surcharge on the additional insured deposits. Webster has elected to participate in the Temporary Liquidity Guarantee Program and incur the surcharge as a cost of participation. The behavior of depositors in regard to the level of FDIC insurance could cause Websters existing customers to reduce the amount of deposits held at Webster, and or could cause new customers to open deposit accounts. The level and composition of Websters deposit portfolio directly impacts Websters funding cost and net interest margin.
The actions described above, together with additional actions announced by the Treasury and other regulatory agencies continue to develop. It is not clear at this time what impact EESA, TARP, other liquidity and funding initiatives of the Treasury and other bank regulatory agencies that have been previously announced, and any additional programs that may be initiated in the future will have on the financial markets and the financial services industry. The extreme levels of volatility and limited credit availability currently being experienced could continue to effect the U.S. banking industry and the broader U.S. and global economies, which will have an affect on all financial institutions, including Webster.